12 ms·
Why First Round Capital funded a lawsuit
- joonix 14y agoSeriously, 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.
- at-fates-hands 14y agoThey do and trust me, you'd be surprised, probably even shocked to know what goes on at their corporate HQ. I worked there for almost a year and can attest this type of behavior is pretty common.
- gknoy 14y agoIs that shocked, or "shocked"? Then again, the purpose of a legal department is (unless I misunderstand it) to _advise_, and if the boss decides to do something Tremendously Stupid, it's hard to blame the lawyers. Unless, of course, they said they thought it would be fine. (Which I can't imagine they would have done.)
- zaidf 14y agoSome might say that it is in the lawyers' interest at some level that their bosses go against legal advice and open themselves up to lawsuits because when that lawsuit comes in, guess which department stays employed? Now, I think most lawyers operate in good faith and go to great extremes to convince their client of taking the best option but I can see lawyers give up after a certain stage thinking alright whatever, why am I complaining, this just means I'll have enough work for next 2 years because of my client's stupid decision.
- otoburb 14y agoUsing that logic, it may be in the law profession's best interest, but certainly not for the Best Buy lawyers who were aware of this. Exposing yourself to detrimental litigation where the odds of you winning are low will probably result in you (the lawyer giving the poor advice) being let go and a new set of in-house counsel coming in to fix the mess.
- zaidf 14y agoWoah, no one said anything about lawyers that give poor advice. I was talking about lawyers who give solid advice ... to stubborn clients who choose to go against their lawyer's (solid) advice.
- deleted 14y ago[deleted]
- at-fates-hands 14y agoNo, it was shocked. Here's a little diddy. Best Buy brought in a bunch of people after Target got sued for $6 million for not having an accessible website for blind people. Since Best Buy's site was very poor shape in this regard, they were hiring developers, managers, practically an entire team just to work on this issue. First project I'm assigned, I notice a bunch of these errors and start outlining them and attaching how much time it will take to fix. Once the project launched, guess which ones got axed from the list of requirements in the first meeting? After two more projects like this, I just gave up trying. I was told it cost too much and it wasn't an important issue. To say it was a confusing place to work is an understatement.
- malachismith 14y agothis 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!
- huhtenberg 14y agoDon't know why they didn't settle, but + $140M in revenues - $22 million in favor of TechForward - $5 million in punitive damages - X million in lawyers fees Best Buy still did alright if you ask me.
- tptacek 14y agoBest Buy's gross margins hover around 25%, and that's before all the rest of their overhead kicks in. Best Buy probably took a bath here.
- ww520 14y agoIs their gross margin just revenue - whole_sale_cost? If that's the case, they also have cost in labor, real estate, marketing, and others. After all those, the lawsuit would have put them in red.
- a5seo 14y agoGood. Screw them. Now the evil a-hole caption will hang over their logo in my mind forever. Probably others on HN. Even if this damages their brand in only a small way, it's a real cost.
- tptacek 14y agoIf you really want to screw Best Buy the way the rest of the market is screwing them (that is: to death), then, next time you want to buy a big-ticket electronic product, go to Best Buy to try it out. Then buy it on Amazon like everyone else does.
- tripzilch 14y agoI agree this is the best way to buy electronics :) (except over here it's a different large electronics chain and smaller online retailers instead of Amazon) For an extra slap in the face, a friend of mine even used one of their on-display Macs to place the order in that very store :) (while he did take some precautions against keyloggers, I'd be a bit more hesitant myself, to enter such data into a public computer). Their problem is that smart customers need to go online anyway, because the specs on the cards in the store are always incomplete (or even incorrect) so you can never quite compare two items. (and then it turns out that their cheapest model runs at nearly the same wattage as their expensive "energy saver" model ...) (that was for monitors btw)
- shawn-butler 14y agoMediocre? Not possible, they had two geniuses revolutionize the workplace! Seriously ROWE [0] is the biggest excuse for people not doing real work I have ever witnessed. [0] http://en.wikipedia.org/wiki/ROWE http://en.wikipedia.org/wiki/ROWE
- enjo 14y agoI've implemented versions of ROWE in two different companies and the results have been excellent. Not sure what your experience has been, but mine is most definitely different.
- Eliezer 14y agoWhat do you mean? It worked perfectly well for Best Buy; they paid out far less in the judgment than they stole in revenue.
- davidtyleryork 14y agoYeah, sadly this lawsuit is just "cost of doing business" for Best Buy. They earned $140m in the first year, they only had a % chance of paying out for a lawsuit, and the lawsuit was worth less than 20% of the $140m earned. They just profited over $113m (plus the benefit of money now vs. money later) from destroying a startup Business as usual in America nowadays :/
- tptacek 14y agoNo, to both of you. No no no. Best Buy didn't "earn" 140MM; according to this story, they achieved 140MM of revenue. Revenue for Best Buy is the price tag on consumer electronics. Bust Buy doesn't pull those consumer electronics out of its butt; it pays vendors to acquire those goods, marks them up, and sells them to customers. Best Buy is a public company and is required to account for this difference, which is its gross margin. Best Buy's gross margin hovers around 25%. If it all this suit cost Best Buy were the damages and penalties we already know about, then they are already close to wiped out on the deal (27MM vs. ~35MM, less legal). But that still doesn't capture it, because Best Buy spent money to clone this startup's offering and also to run the company and keep the lights on in the stores, which are expenses not captured in Best Buy's gross margin. Incidentally, the 22MM figure also didn't get pulled out of some judge's butt. If you read the jury's finding, it's the amount of unjust enrichment Best Buy achieved by misusing Techforward's property. In the very worst case scenario, virtually every penny of profit from this program was redirected from Best Buy to the winners of the lawsuit. But it's even more likely that Best Buy took a bath even beyond the imputed profits we're talking about.
- gwern 14y agoThat's a good point - revenue is not profit - but I'm not sure it is it a conclusive point. First, why would you assume the final estimate of revenue which came out of the sausage system of the legal system, with Best Buy's lawyers presumably heavily incentivized to knock down the estimate at every point in every way possible, is remotely accurate? An economics book on cartels and their prosecution I read (_Global Price Fixing_) noted dryly that the estimates of illicit revenues and hence profits in the cases were nowhere near what an outside would calculate especially in the case of the vitamin cartels. (A more picayune point is that a small profit or a loss to Best Buy in one case doesn't mean that its practices are not a net expected profit; indeed, if they weren't losing an occasional case, they probably aren't taking enough risks to make the most possible profit.)
- MediaSquirrel 14y agoAssuming 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.
- robertgaal 14y agoCould 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?
- silentmars 14y agoWhen there is a lawsuit, one of the pre-trial phases is called "discovery". During this phase, both parties can compel the other party to hand over documents and information relevant to the lawsuit.
- alanctgardner2 14y agoLikely it was a subpoena compelling them to provide the emails. I believe in Apple v Samsung there was a matter of Samsung failing to retain some emails which were relevant. In that case, the jurors were instructed to treat the deleted emails as incriminating. Edit: I was on my mobile and I couldn't confirm this. In fact, as the peer comment said, when it refers to the litigants the process is discovery. A subpoena is required to compel a third party to testify or provide documents. Discovery is normally just a give and take, unless one party objects and the court intercedes.
- makomk 14y agoActually, I believe in the end the court didn't give any kind of jury instruction about the deleted e-mails in Apple vs Samsung. Apple's contention was that Samsung should've anticipated that they were about to be sued and retained any relevant e-mails even before the lawsuit had been filed, and the judge sided with Apple on this until it turned out Apple hadn't bothered to retain their own e-mails from that period either despite having actual firm knowlege they were going to file a lawsuit.
- patdennis 14y agoThrough a process called discovery. Here you go: http://en.wikipedia.org/wiki/Discovery_(law) http://en.wikipedia.org/wiki/Discovery_(law)
- rayiner 14y ago
- freshhawk 14y agoAm I exceptionally cynical because reaction to this quote: "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."?
- javert 14y agoYes, 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.
- AlexandrB 14y ago> Cheating is not a reasonable strategy over the long run. That might depend on what you mean by cheating. Microsoft did pretty well back in the day with their anti-competitive practices. Likewise, Intel managed to kill AMD.
- javert 14y ago"anti-competitive practices" is an anti-concept (look that term up in an epistemology book if you don't know it). Microsoft didn't initiate force or fraud against anyone; therefore, they weren't cheating. In the long run, had they continued those practices, Linux and Apple (or some other competitor in the marketplace) likely would have risen farther/faster. Forcing everyone to use IE was not a viable strategy back when that was a death sentence for computer security. AFAIK AMD is alive and well.
- _delirium 14y agoMicrosoft was cheating; your strange Randian views are neither the law, nor philosophically defensible. In the real world, abusing monopoly power is cheating, both legally and ethically.
- daveying99 14y agoGreat. 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?
- alexatkeplar 14y agoI was thinking the same thing. Without knowing whether the founders agreed with the Board decisions to a) share the models with Best Buy and b) pursue an ultimately ruinous legal claim, it's hard to know if First Round were part of the solution or part of the problem...
- saraid216 14y agoThe way it's phrased makes it sound like the Board was the reluctant party, rather than the founders.
- wpietri 14y agoThe way they describe the deal structure, my guess is yes. The entrepreneurs held stock in TechForward, which sold its assets to a third party but kept the lawsuit. Total investment was only $5.7 million (per Crunchbase), but the lawsuit payout is $27 million. The investors put in more money (hundreds of thousands) at unknown terms, but my guess is that this means a modest number of millions for each of the two founders.
- 14y ago
- tubbo 14y agoNow I feel even less bad about using their store as a glorified showroom...as I take barcode pictures, find better prices online, and leave without buying a fuckin thing. :)
- IheartApplesDix 14y agoThis exceptional story of business street justice (is there any other kind?) is a nice little look into the real world of consultation, startups and big business. It's not a surprising or groundbreaking story, but you don't usually see this kind of perspective due to settlement terms. Just nice to see how things are really run as apposed to the political spin you often see in Washington and other places that specialize in growth hacking, and I think it also shows how the economic incentive can get in the way of the incentive for real technological innovation, especially when incentives are so diametrically opposed in these two "cooperating" entities. How could they have written their contract so that their profit motive aligns like a positive sum instead of a zero sum?
- antr 14y agoSo 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? There is more than one takeaway in this story.
- jblow 14y agoYeah, I was mildly sympathetic until it got to the part where they said in passing "oh, unfortunately, we just sort of liquidated the company."
- eridius 14y agoI doubt you're reading that correctly.
- wpietri 14y agoHow do you get that? By my estimate (http://news.ycombinator.com/item?id=4879046 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 14y agoYou are almost certainly not reading this correctly.
- tbrooks 14y agoYou're forgetting the legal cost AND the risk of not getting paid the VC took.
- kunle 14y agoDoes 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.
- malachismith 14y agoThe exception - but only in severity.
- javert 14y agoThis 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.
- rayiner 14y agoVery 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!
- bickfordb 14y agoMinor nit: according to Google Finance the market cap of Best Buy is $4B not $50B. Revenue is around $50B.
- pclark 14y agoDoes the financing come from the funds operating budget, or what?
- ww520 14y agoMoving 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.
- swang 14y agoWhat risk does a dissolved company have? The article seems to state that the only real 'risk' was that the VC company spent their own money to fight this, not knowing whether they would win.
- ww520 14y agoWell they might be counter-sued or asked to pay for both parties' legal fees.
- shawn-butler 14y agoI'm pretty sure the lawyers did the same thing with BeOS when it was acquired by Palm. [0] They sold the IP/copyrights and Be retained the lawsuit against Microsoft which eventually settled for US $23 million. [0]: http://www.internetnews.com/ent-news/print.php/3073811/ http://www.internetnews.com/ent-news/print.php/3073811/
- aaronjg 14y agoThe 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.
- samt 14y agoLet's face it, "teach big business a lesson" is a convenient press tactic. First Round is a bunch of capitalists like the rest of us.
- kevinpet 14y agoI think the lesson for big business was "don't fuck with our companies" and the lesson for startups was "we won't let big business fuck you over".
- abbasmehdi 14y agoI 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. Edit: clarity.
- SoftwareMaven 14y agoThe 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.
- mcherm 14y agoAlso, offering an NDA before working with a person can be a difficult issue and can slow things down; presenting one before working with a large corporation is simply standard practice (if you have a reasonable NDA) and will not affect the relationship at all.
- josephlord 14y agoMany big companies won't sign 'your' NDA but they will have their own one that is probably reasonable (although check it, and get it checked by a lawyer if you are disclosing anything really stealable). That can cause deadlock when bit companies need to talk to each other...
- tobyjsullivan 14y agoI 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...
- grellas 14y agoA few thoughts: 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.
- chamakits 14y agoSorry for the ignorance, but could someone explain what an "analytical model" is, and what it composes?
- paborden 14y agoQuestion: 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."
- unreal37 14y agoThey discontinued the program after 18 months.
- recoiledsnake 14y agoOkay that makes a lot of sense now. I was wondering why there was nothing about a high ongoing royalty rate mentioned in the article. If even trivial patents can get ~3.5% on revenues, such blatant theft of actual files and ideas should get substantially more.
- praxeologist 14y agoHere is a similar story I saved from a while back: http://venturebeat.com/2012/02/27/a-classic-startup-horror-story-the-ma-bait-and-switch/view-all/ 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 14y agoThere'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.
- tripzilch 14y ago> 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.
- saraid216 14y agoThe justice system is not supposed to be driven by the market. In theory, they could have done this entirely without paying any lawyers: I doubt the paperwork by itself would have cost too much for a normal company. In practice, the problem with the justice system is that it's too large to navigate without lawyers, and lawyers must be paid. That's an indictment of the market's inability to force lawyer fees down to a reasonable level, not the justice system.
- robomartin 14y agoOne 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).
- jamesnorris211 14y agoI personally do not have http://www.fundingforlawsuits.com http://www.fundingforlawsuits.com that are working for me, but I am seeing some major differences between my lawsuits from others. Thanks for sharing your thoughts on this subject.