Investor Stories 487: Legal Battles, Founder Fraud, and High-Stakes Conflict — Lessons from Investors at Acadian Ventures, Interplay Ventures, and OneBrief (Demaree, Black, Peter Davis)

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0:23Welcome to the podcast about venture capital, where investors and founders alike can learn how VCs make decisions and reach conviction. Your host is Nick Moran, and this is The Full Ratchet. Welcome back to TFR. On today's special segment, we discuss major conflicts that guests have faced and how they resolve them. Here's a special segment called High Stakes Conflicts.

0:57Grant Emery joins us today from the Bay Area. He's the CEO and founder of One Brief, the defense company building the operating system for military planning. Without revealing specifics, talk about one of the highest stakes conflicts you faced as a founder, why the issue occurred, and how it was resolved. There was a very important one to me around access to frontier AI models on classified networks. And this is just a resource we cannot deal without. This is, I don't think this is a case where anyone's doing anything terribly wrong as much as the existing system inside of the government around authority to operate and the RMF process is fundamentally very difficult.

1:40I'm not sure that the process is what, if given the choice to build something from scratch, any senior leader would choose right now. And I'm actually really heartened that the administration is so keen on reform here. I think the difficulties of getting to that access were probably the highest stakes conflict we ever had.

2:06On today's special segment, we have Ben Black, Managing Director of Acadian Ventures, CIO of PowerLaw Corp and founder of Raise Global. Ben, talk about one of the highest stakes conflicts you've faced as an investor, why the issue occurred, and how it was resolved. Yeah. This one I'll tell you about because it's a long time ago, but it is a great story for anyone that's ever going to sell a company to private equity, right? So when I was at Maveron, I invested in this, basically, I found this deal that I really loved. And if Maveron didn't want to do it. They had their good reasons. And I was like, I don't know, I was like six years in my career.

2:45And actually, that was my, I raised my first personal SBB, is my first personal investment in a retail company called Sneaker Villa. Because remember, Val Brown's a consumer fund, I was a new consumer. It had about 20 million in revenue. It was like, it had a lot of issues. And we built that business up and we sold it and it turned, it really turned it around and we were crushing it. And a private equity firm from New York came in and they bought 70 % of the business and gave our investors a great return. And we decided to keep 30 as their junior partner. Selling to a New York private equity firm, and I'm picking them up because venture capital firms need to really, like, we are here, like, reputation is your bond.

3:24You know, everyone, I think the vast majority of people here are very cooperative and pulling together in the same boat. And like, and New York private equity firms have very different viewpoints about how to handle these things. And when they went to sell the business again, when it had doubled or tripled in revenue, they structured an exit where they got 95, 96 % of the proceeds and we got like four. Now, keep in mind, I'm an SPV that doesn't have a fund with a bunch of high net worth individuals. You have no recourse. You have no fees. We have no recourse. And what we did was we were like, look, we at least need to have a fight with them because this is ridiculous.

4:04They are just stealing this company from us. And we hired some litigators from Atlanta. And these litigators, like, usually you think that this is never going to work, right? Like, how could we win? But we said we at least have to threaten, right? We have to. So we basically passed a hat for like$300 ,000. And we hired some litigators. We're like, we got$300 ,000. Like, whatever you can do for$300 ,000 to create problems, go create as many problems as possible. How much money do you feel like was on the line directionally? Uh, about probably about at that point, an additional like 15 or 16 million that should have gone to us.

4:37All right. So enough to fight about, right. When we were doing, when we were started fighting with them and we were threatening to take them to Delaware Chancery Court to fight this, to fight this exit, the lawyer discovered a remarkable thing. The law firm that was doing the, the sale and the acquisition, they were the private equity firm's law firm. And they had never had another law firm be the law firm for the company. So the private equity was using their own law firm to sell the company. The company had no lawyer. And basically our lawyer came up with this gambit, this trick, and sent an email saying, hey, I'm trying to do the signature blocks.

5:15And a junior associate sent an email. Trying to do the signature blocks for this acquisition. Am I putting the firm, I won't mention the name of the firm because that would be bad. But should I put you down as counsel for the, for the product equity firm or for the company? And the lead partner at this huge firm just replies, product equity firm. And then we went, we have them. And then we went back to them and said, this is literally legal malpractice. We're going to turn you in. And then they ended up deciding to pay us a lot of money to go away. And it was the biggest win in any conflict I've ever had.

5:55It was like one of my happiest moments in venture because I was the one dealing with this as a pretty young guy. And I talked to my co-investors and being like, I just got another X millions of dollars out of the private equity firm. And they were so pissed. And I loved it. But that was the biggest conflict I ever had. They loved me at that point. Yeah, that was extraordinary.

6:24are you still managing expenses with outdated apps and spreadsheets if so it's time for ramp the leading u.s spend management platform covering corporate cards travel ap and more all built to save time and extend runway we use ramp at tfr and it's been a game changer As our preferred partner, they're offering listeners$150 just to take a demo. No need to sign up. Head to ramp.com slash partners slash TFR to claim your$150 before the offer expires. Now back to the interview. On today's special segment, we have Mark Peter Davis of Interplay Ventures. Mark, without revealing specifics, talk about one of the highest stakes conflicts you faced as a VC, why the issue occurred and how it was resolved?

7:14I've had people steal money at companies. I'll just throw that out. That's probably the thing that always feels like the biggest salt in a wound. The irony is, you know, for some of the people, it's happened a couple of times. We have over 200 portfolio companies. You do this long enough, you're going to kind of see a lot of different permutations and a lot of different human psychological dispositions. It wasn't obvious that people would do this. and it almost seemed self-destructive. There have been situations where people stole money and in doing so made less money. They destroyed the upside on their bet by screwing themselves over.

7:51So that is really hard to see. It's sad. Even if the money doesn't mean anything to you, in principle it hurts, right? Even if it's not a meaningful amount to the company, it's just brutal. My advice that comes out of this is when you get into these conflicts, there's two ways to approach them. A lot of people will go to the mat and try to win everything on principle. I've come to believe that in the downside destructive moments, you can't preserve all the value for everybody. It's not worth fighting over principle. It's about minimizing collateral damage. I usually will sort out these situations in suboptimal ways to do it quickly because it's a game of a little bit losing a battle and winning the war, in many cases saving the company, preserving the upside.

8:35So when I negotiate things like this, I usually do think there's a healthy strategy of leaving a little cheddar on the table. If it keeps you in the game, maintains relationships, and allows you to keep moving.

8:50That will conclude this installment of Investor Stories. If you're enjoying the program and would like to see it continue, take a moment and leave a five-star review in iTunes. Okay, that will wrap things up for today. Until next time, overprepare, choose carefully, and invest confidently. Thanks for joining me.