1. It is always perilous for a startup to put all its eggs in one BigCorp basket. In most cases, even when success ensues, the startup will get squeezed on things like pricing and they will continually face the risk of termination of the arrangement, leaving them vulnerable if the company's survival is tied to that deal. What is unusual here - and what so seriously increased the risk to this startup even much more than the norm - is the unusually blatant way in which Best Buy connived to steal the trade secrets. It is blatant in what was done because even by the low standards of much of corporate America it is pretty depraved to knowingly scheme to trick a young company into giving over its valuable company jewels while planning along to steal them. It is also blatant in how it was done because only really small-minded executives lack the good sense to refrain from implementing a plan to use contract assurances as a ruse by which to "take a peek under the hood" of the startup's technology, to promise to put up a "brick wall" between the team evaluating the technology and others simultaneously working on a comparable internal development effort only to wind up sending the trade secret information "across the wall" within a week of receiving it, to make a record of acknowledging an extremely high risk of litigation after doing a crude termination of the relationship, and then to use the trade secret information wholesale while simply deleting the name of the startup from it.
2. The founders may or may not have come out OK but they certainly did better given that the VCs stepped up to take the added risk of pursuing the suit than they would have otherwise. Without the VC action, the best they would have had a right to get would have been their pro rata share of whatever might have been left after the likely scant proceeds raised from a distress sale of the company's assets were applied to satisfy the VC's liquidation preferences (in other words, very likely zero). With the VC action, however, after the company sold its assets, its capitalization structure would have remained intact and the $27M from the lawsuit would go to pay remaining liquidation preferences, likely leaving a decent sum to be paid out pro rata to all shareholders, including founders (or, if the liquidation preferences were non-participating and the value of the VC's participation interest exceeded the value of any liquidation preference, then all of the $27M would be distributed pro rata to the shareholders, meaning that the founders would have gotten even more). The only question here is how the litigation funding was handled. If the VC's inserted some unfair mechanism by which the litigation funding was done so as to severely dilute the interests of the founders (akin to a down round), then the founders might have gotten a bad result. From all appearances, however, this did not happen and the founders should therefore be pretty happy with the result. It is a rare case where investors go out and hire Kirkland & Ellis and take the risk of paying them "hundreds of thousands of dollars," all for the purpose of trying to salvage a terrible situation. I would say 99% of VCs I know would have simply walked away from this and that it truly did take guts to take the hard path.
3. I was struck by the comment that, slow and plodding as the U.S. court system is, it generally works well when it plays out as it should. This is very true and is for me borne out by over three decades of experience with the courts. Litigation is frustrating beyond belief and one has to be almost insane to step gratuitously into it: it is costly, slow, unpredictable, and it is guaranteed only of one thing, to rob you of your peace of mind as you endure the process. Yet the adversarial process, when handled skillfully, tends to ferret out the truth and judges and juries do normally want to try to do right. This means that a wanton malefactor such as Best Buy here had better watch out if it meets a determined adversary who is willing to play out the fight and expose its wrongs. I call this "slamming it to them" and it works more often than not if the process plays out in full. It is only sad that the overwhelming number of litigants cannot afford to take the huge risks needed to be incurred to bring it to that state. In this sense, the system is robust and excellent but only for the relatively few who can manage its pitfalls.
4. The Latin-derived word "insidious" best captures the spirit of the wrongs committed here. This derives from a word meaning "to sit" and connotes "lying in wait" to harm the innocent. We can all succumb to temptations to do wrong on this or that occasion but it takes someone really loathsome to do what Best Buy's executives did here. And not just the wrongs but the utter failures to acknowledge them once caught red-handed. This can only mean that Best Buy was animated by a "might makes right" approach to this whole episode. Yes, large corporations do get away with this sort of thing all too often but it remains morally repulsive and it is inordinately refreshing when the day of comeuppance does arrive as it did here. Something to cheer about indeed.
Re: your point #3, I have developed this opinion of the US court system over time. It's really well-designed for big disputes, where the stakes are high enough that the cost of the process itself is small in comparison. In those situations, it's really great at getting down to what really happened between the two parties. But it doesn't necessarily scale down so well.
I think arbitration was supposed to be the mechanism that was intended to bring dispute resolution to smaller conflicts, but it's mostly turned into a farce unfortunately.
The article doesn't seem to indicate so, but shouldn't the Best Buy executives who took this decision (and against whom there seems to be incriminating email evidence), be punished in some way as well?
Else, from Best Buy's perspective, this is still potentially a net win if they made $140 million and had to pay out $27 million. And more importantly, the actual net benefit of following such a strategy (assuming BB has done this to other small companies as well) is likely much higher if the other victim firms weren't able to fight the lawsuit against BB.
Punishing the executives will hopefully be a deterrent to other executives.
I was struck by the comment that, slow and plodding as the U.S. court system is, it generally works well when it plays out as it should. This is very true and is for me borne out by over three decades of experience with the courts.
The system works as long as you have unlimited finances and a whole lot of time. This story reminded me of the "Bionic Wrench" fight between Dan Brown and Sears (which is not going as easy).
With regards to 1, while it is very perilous so many companies start this way. At some point, any enterprise b2b company is going to have a small number of clients, of which any one makes up a large percentage of their bottom line.
On your point 4, Perhaps I'm biased, but the entire IT industry is "insidious" by design. The technology infrastructure is what allows nearly endless traps like these to be set for those who try to cooperate with their clients wishes. It's a lose-lose for those trying to win big clients.
Seriously, does Best Buy not have a legal department? How could those people think it was OK to discuss stealing their idea in easily discoverable email, then actually steal it? And then, when the lawsuit comes, not even settle, but go to trial, when there's mounds of evidence that dooms Best Buy? Someone is not doing their job there.
Best Buy is one of those companies that is just all-around mediocre, in every regard.
this was simple calculus. big companies do it all the time. their legal department, their leverage... their money -- against the lack of all three (by comparison) possessed by a small company. it's not that they didn't know what was going on or the risk - it's just that they assumed that it wouldn't matter. this is why it's so great that FRC fought the whole way. about time!
Great. So First Round Capital is pushing idea that they stood with David against Goliath and won teaching a lesson to Big Co. Did the entrepreneurs see any of the money?
In my experience with senior executives at $10B+ companies making these decisions, it's not a case of knowing the difference, or not caring, it's more a case of, at that level, the concept of "Right" and "Wrong" are immature concepts that aren't relevant. Executives that have reached that level, frequently take an almost purely game-theoretic position in any decisions they make, where they do a risk-assesment, consult their attorneys, determine what their exposure is, and then simply make a decision that is going to yield the greatest NPV (Net Present Value) inclusive of those risks.
The problem at Best Buy is their GC did a poor job of training the company on the importance of not leaving behind discoverable material. That's the real lesson that I'm sure Best Buy's CEO took away from this who event.
Don't be too surprised if Best Buy shifts to 90 day retention on email.
Yes, you are exceptionally cynical. Cheating is not a reasonable strategy over the long run. It's no small coincidence that it's Best Buy, a notoriously mediocre company, that had cheaters at the helm. This would be less likely at a better company.
The question of Best Buy settling has come up. Most settlements involve a clause that prohibits either party from disclosing the terms of the settlement. Since the primary objective of First Round taking on the law suit was to 'teach big businesses a lesson.' A settlement would have been counterproductive for them, even if it would have resulted in a substantially higher payout or significantly decreased legal costs. First Round wanted blood to be shed publicly.
> I also learned that our justice system, while slow and imperfect, does work.
How does this follow, when this story clearly demonstrates that the average company is not able to get their justice, unless they get VC funding for the lawsuit?
In my eyes, this demonstrates the exact opposite: In the US, most companies cannot afford to get justice when faced with a large corporation doing whatever it wants.
It's great that these guys got funding and did finally win in the end, but to me it underlines all the companies that probably do get screwed by large corporations because they cannot afford spending hundreds of thousands of dollars on lawyers.
What use is a confidentiality agreement if the only power it gives you is to spend hundreds of thousands of dollars to make the other party stop ignoring it?
In which case, some people might get the idea to come up with a whole lot more fun and creative ways to spend hundreds of thousands of dollars to make Best Buy stop ignoring a contract. Now substitute "fun" with "quicker and more definitive", and you get something the justice system is supposed to prevent, and one of the reasons why it should not only function for those with sufficient wealth.
Assuming standard liquidation preferences and a relatively small(?) amount of capital raise given first-round involvement, it's most likely that the founders probably saw a few million bucks each.
So if I'm reading this correctly, the VC makes $27m and the original founders and team who worked an entire year on the project make $0. Is this correct?
By my estimate (http://news.ycombinator.com/item?id=4879046), they should have seen a reasonable payout. As was explained in the blog post, TechForward sold all the company's assets except the lawsuit. So the original shareholdings should all be in place, minus whatever additional equity they had to sell to the investors to get the small amount of additional money needed for the lawsuit.
Does anyone have any idea (anecdotal or broad) how often this happens in startups dealing with large companies? Was the Best Buy case the exception or the rule? Pretty egregious.
This isn't firsthand, but I would suspect it to be the exception, not the rule.
When there is a real risk of this kind of thing happening, you would expect VSs and lawyers to advice startups against going into the deal. Otherwise, they're not doing (part of) their job.
The VC who wrote the article made a point that an unusual level of reassurance was needed before the technology sharing took place.
I wonder what role an NDA played. Any ideas? I know in startup-land NDAs are non-existent, but in my past life as a product manager for a medium sized company, the biz dev guys would always have an NDA signed before letting the company get too close with a new partner. Maybe new-world startups should have NDAs when working with old-world big cos (where NDAs are common and prevalent, and maybe even respected)? No idea here, just hoping to hear some enlightened thoughts.
The article mentions they did have an NDA, which is undoubtably what ultimately allowed them to prevail. Requiring an NDA for every silly detail of your startup is self-limiting. Giving out critical, "special-sauce" details without proper legal backing is corporate suicide.
Could someone explain the process of how those emails were handed over? Is Best Buy obligated to do so, or was it a private investigation of some sort?
I think the really painful part of this is that, realistically, most start-ups won't go anywhere without an exceptional level of trust (I'm talking very early stage) as founders need to trust potential investors, early customers, etc. You're stuck in this space where you look at big companies and don't expect them to trust each other but, as the little guy, are left with no choice.
As you grow, somewhere you cross that line where you have to start being on the defensive. It's different for everyone but you know, one day, it'll happen.
In this case, and probably in most, it caught them off guard. You can only hope to be prepared when you get bit for the first time but witnessing cases like this really hurts when you're trying to build a start-up and extending that level of trust to just about everyone...
I've gone through something similar to this, but since we were nowhere near to a deal being done we weren't getting into trade secrets. The whole thing turned out to be just my psychopath competitor trying to get info or some dirt on me because he knows I know how incompetent he is, the technical problems with his product, etc.
There's a celebratory tone to this article that I find misplaced given the company failed and was sold as an asset to a 3rd party. I'm sure the VC feels vindicated to have covered their money and taught Best Buy a lesson. To the founders though they clearly built something great (BB generated $140 mil in revenue from their approach) and lost their company well before there was a legal resolution that could have saved them. I expect this outcome makes them feel better but I'm suspect it feels like too little too late.
Moving the assets of the company into another and leaving only the lawsuit behind is a neat idea, isolating all the legal risks within the old shell company. Kudos to the lawyers.
One of the points that this should highlight for you if you are an entrepreneur talking to lots of people is that NDA's are only of value if you have enough money to defend them. I say this from first-hand experience. Someone with deep pockets can violate agreements such as NDA if they know full-well that you don't have the resources to sue them (or sue and survive the process).
Question: what's the story with the processes Best Buy developed that were pirated from TechForward? Does this mean they can't use them? Or can they? How does one prevent Best Buy from re-developing something similar going forward? After all, it won't take long for BB to make back their $27 million "investment."
Very interesting read. This sort of thing is pretty much the bread and butter of corporate litigation, though you usually don't get to read the details like this if you aren't involved in the suit.
Thank god for it too--if people stopped trying to screw each other over all the time, I might have to find another line of work!
[+] [-] grellas|13 years ago|reply
1. It is always perilous for a startup to put all its eggs in one BigCorp basket. In most cases, even when success ensues, the startup will get squeezed on things like pricing and they will continually face the risk of termination of the arrangement, leaving them vulnerable if the company's survival is tied to that deal. What is unusual here - and what so seriously increased the risk to this startup even much more than the norm - is the unusually blatant way in which Best Buy connived to steal the trade secrets. It is blatant in what was done because even by the low standards of much of corporate America it is pretty depraved to knowingly scheme to trick a young company into giving over its valuable company jewels while planning along to steal them. It is also blatant in how it was done because only really small-minded executives lack the good sense to refrain from implementing a plan to use contract assurances as a ruse by which to "take a peek under the hood" of the startup's technology, to promise to put up a "brick wall" between the team evaluating the technology and others simultaneously working on a comparable internal development effort only to wind up sending the trade secret information "across the wall" within a week of receiving it, to make a record of acknowledging an extremely high risk of litigation after doing a crude termination of the relationship, and then to use the trade secret information wholesale while simply deleting the name of the startup from it.
2. The founders may or may not have come out OK but they certainly did better given that the VCs stepped up to take the added risk of pursuing the suit than they would have otherwise. Without the VC action, the best they would have had a right to get would have been their pro rata share of whatever might have been left after the likely scant proceeds raised from a distress sale of the company's assets were applied to satisfy the VC's liquidation preferences (in other words, very likely zero). With the VC action, however, after the company sold its assets, its capitalization structure would have remained intact and the $27M from the lawsuit would go to pay remaining liquidation preferences, likely leaving a decent sum to be paid out pro rata to all shareholders, including founders (or, if the liquidation preferences were non-participating and the value of the VC's participation interest exceeded the value of any liquidation preference, then all of the $27M would be distributed pro rata to the shareholders, meaning that the founders would have gotten even more). The only question here is how the litigation funding was handled. If the VC's inserted some unfair mechanism by which the litigation funding was done so as to severely dilute the interests of the founders (akin to a down round), then the founders might have gotten a bad result. From all appearances, however, this did not happen and the founders should therefore be pretty happy with the result. It is a rare case where investors go out and hire Kirkland & Ellis and take the risk of paying them "hundreds of thousands of dollars," all for the purpose of trying to salvage a terrible situation. I would say 99% of VCs I know would have simply walked away from this and that it truly did take guts to take the hard path.
3. I was struck by the comment that, slow and plodding as the U.S. court system is, it generally works well when it plays out as it should. This is very true and is for me borne out by over three decades of experience with the courts. Litigation is frustrating beyond belief and one has to be almost insane to step gratuitously into it: it is costly, slow, unpredictable, and it is guaranteed only of one thing, to rob you of your peace of mind as you endure the process. Yet the adversarial process, when handled skillfully, tends to ferret out the truth and judges and juries do normally want to try to do right. This means that a wanton malefactor such as Best Buy here had better watch out if it meets a determined adversary who is willing to play out the fight and expose its wrongs. I call this "slamming it to them" and it works more often than not if the process plays out in full. It is only sad that the overwhelming number of litigants cannot afford to take the huge risks needed to be incurred to bring it to that state. In this sense, the system is robust and excellent but only for the relatively few who can manage its pitfalls.
4. The Latin-derived word "insidious" best captures the spirit of the wrongs committed here. This derives from a word meaning "to sit" and connotes "lying in wait" to harm the innocent. We can all succumb to temptations to do wrong on this or that occasion but it takes someone really loathsome to do what Best Buy's executives did here. And not just the wrongs but the utter failures to acknowledge them once caught red-handed. This can only mean that Best Buy was animated by a "might makes right" approach to this whole episode. Yes, large corporations do get away with this sort of thing all too often but it remains morally repulsive and it is inordinately refreshing when the day of comeuppance does arrive as it did here. Something to cheer about indeed.
[+] [-] rayiner|13 years ago|reply
I think arbitration was supposed to be the mechanism that was intended to bring dispute resolution to smaller conflicts, but it's mostly turned into a farce unfortunately.
[+] [-] tsycho|13 years ago|reply
Else, from Best Buy's perspective, this is still potentially a net win if they made $140 million and had to pay out $27 million. And more importantly, the actual net benefit of following such a strategy (assuming BB has done this to other small companies as well) is likely much higher if the other victim firms weren't able to fight the lawsuit against BB.
Punishing the executives will hopefully be a deterrent to other executives.
[+] [-] naner|13 years ago|reply
The system works as long as you have unlimited finances and a whole lot of time. This story reminded me of the "Bionic Wrench" fight between Dan Brown and Sears (which is not going as easy).
[+] [-] debacle|13 years ago|reply
[+] [-] IheartApplesDix|13 years ago|reply
[+] [-] joonix|13 years ago|reply
Best Buy is one of those companies that is just all-around mediocre, in every regard.
[+] [-] at-fates-hands|13 years ago|reply
I worked there for almost a year and can attest this type of behavior is pretty common.
[+] [-] Eliezer|13 years ago|reply
[+] [-] huhtenberg|13 years ago|reply
[+] [-] malachismith|13 years ago|reply
[+] [-] shawn-butler|13 years ago|reply
Seriously ROWE [0] is the biggest excuse for people not doing real work I have ever witnessed.
[0] http://en.wikipedia.org/wiki/ROWE
[+] [-] daveying99|13 years ago|reply
[+] [-] freshhawk|13 years ago|reply
"I had (naively) assumed that senior-level employees of a $50B company would know right from wrong"
was to think "that's not naive, that's flat out stupid. Of course they know the difference, they just don't care."?
[+] [-] ghshephard|13 years ago|reply
The problem at Best Buy is their GC did a poor job of training the company on the importance of not leaving behind discoverable material. That's the real lesson that I'm sure Best Buy's CEO took away from this who event.
Don't be too surprised if Best Buy shifts to 90 day retention on email.
[+] [-] javert|13 years ago|reply
[+] [-] aaronjg|13 years ago|reply
[+] [-] samt|13 years ago|reply
[+] [-] tripzilch|13 years ago|reply
How does this follow, when this story clearly demonstrates that the average company is not able to get their justice, unless they get VC funding for the lawsuit?
In my eyes, this demonstrates the exact opposite: In the US, most companies cannot afford to get justice when faced with a large corporation doing whatever it wants.
It's great that these guys got funding and did finally win in the end, but to me it underlines all the companies that probably do get screwed by large corporations because they cannot afford spending hundreds of thousands of dollars on lawyers.
What use is a confidentiality agreement if the only power it gives you is to spend hundreds of thousands of dollars to make the other party stop ignoring it?
In which case, some people might get the idea to come up with a whole lot more fun and creative ways to spend hundreds of thousands of dollars to make Best Buy stop ignoring a contract. Now substitute "fun" with "quicker and more definitive", and you get something the justice system is supposed to prevent, and one of the reasons why it should not only function for those with sufficient wealth.
[+] [-] MediaSquirrel|13 years ago|reply
[+] [-] antr|13 years ago|reply
There is more than one takeaway in this story.
[+] [-] wpietri|13 years ago|reply
By my estimate (http://news.ycombinator.com/item?id=4879046), they should have seen a reasonable payout. As was explained in the blog post, TechForward sold all the company's assets except the lawsuit. So the original shareholdings should all be in place, minus whatever additional equity they had to sell to the investors to get the small amount of additional money needed for the lawsuit.
[+] [-] harryh|13 years ago|reply
[+] [-] eridius|13 years ago|reply
[+] [-] jblow|13 years ago|reply
[+] [-] tbrooks|13 years ago|reply
[+] [-] kunle|13 years ago|reply
[+] [-] javert|13 years ago|reply
When there is a real risk of this kind of thing happening, you would expect VSs and lawyers to advice startups against going into the deal. Otherwise, they're not doing (part of) their job.
The VC who wrote the article made a point that an unusual level of reassurance was needed before the technology sharing took place.
[+] [-] malachismith|13 years ago|reply
[+] [-] abbasmehdi|13 years ago|reply
Edit: clarity.
[+] [-] SoftwareMaven|13 years ago|reply
[+] [-] robertgaal|13 years ago|reply
[+] [-] tobyjsullivan|13 years ago|reply
As you grow, somewhere you cross that line where you have to start being on the defensive. It's different for everyone but you know, one day, it'll happen.
In this case, and probably in most, it caught them off guard. You can only hope to be prepared when you get bit for the first time but witnessing cases like this really hurts when you're trying to build a start-up and extending that level of trust to just about everyone...
[+] [-] praxeologist|13 years ago|reply
http://venturebeat.com/2012/02/27/a-classic-startup-horror-s...
I've gone through something similar to this, but since we were nowhere near to a deal being done we weren't getting into trade secrets. The whole thing turned out to be just my psychopath competitor trying to get info or some dirt on me because he knows I know how incompetent he is, the technical problems with his product, etc.
[+] [-] jusben1369|13 years ago|reply
[+] [-] bickfordb|13 years ago|reply
[+] [-] ww520|13 years ago|reply
[+] [-] chamakits|13 years ago|reply
[+] [-] robomartin|13 years ago|reply
[+] [-] paborden|13 years ago|reply
[+] [-] unreal37|13 years ago|reply
[+] [-] rayiner|13 years ago|reply
Thank god for it too--if people stopped trying to screw each other over all the time, I might have to find another line of work!