57 posts categorized "Founders"

VCs, Protecting Ideas, and NDAs -- the Nextdoor.com Abhyanker Saga Continues

Nextdoor.com, Inc. v. Abhyanker, C-12-5667 EMC (N.D. Cal. July 19, 2013)

[Note from Bill: this is a post by Venkat Balasubramani, legal blogger par excellence. I am thrilled that Venkat is breaking, here on Counselor@Law, fresh new developments in this important, ongoing lawsuit. The case is not over, but it's getting juicy, and it throws into one package many of the disparate topics we like to cover on this blog (all that's missing is a securities law angle). Click here for a pdf of the written court ruling Venkat is analyzing.]

Abhyanker, who is a lawyer and well known entrepreneur, alleges that he tried to develop a neighborhood-based networking concept known as “Nextdoor,” that someone else ultimately took and ran with, to form Nextdoor.com. According to him, his Nextdoor idea was a spinoff from his concept called LegalForce, which was a private social network for inventors. He also developed “Fatdoor,” a Wikipedia-like public database of neighbor profiles. [sounds scary from a privacy standpoint!] Fatdoor’s assets were ultimately purchased by Google. In 2007 Abhyanker left Fatdoor (who wanted to bring in a new CEO) and came back to work on his Nextdoor idea.  

2757328137_b728306d92_zAbhyanker alleges that he told two people about his Nextdoor ideas and trade secrets: (1) Benchmark Capital; and (2) Sandeep Sood, a designer and contractor for LegalForce. At some point, Abhyanker pitched the Nextdoor idea to VCs, including Benchmark Capital. Although he did not discuss any confidential information in the initial meeting, he supposedly sought and obtained “assurances” from Benchmark that any confidential information disclosed by Abhyanker would be kept confidential. According to him, relying on these assurances, he pitched the Nextdoor idea to Benchmark. In 2007 Abhyanker left Fatdoor (who wanted to bring in a new CEO) and came back to work on his Nextdoor idea. According to him, while he returned to focus on his Nextdoor idea, others were independently working on the Nextdoor concept, and used confidential information and trade secrets to swoop in on the nextdoor.com domain name that Abhyanker had been pursuing for years. The Nextdoor.com founders were Benchmark capital “entrepreneurs in residence,” and Abhyanker alleges that the founders gained access to Nextdoor trade secrets through their work at Benchmark. 

These were just the counterclaim wranglings. The case was preceded by a (still-ongoing) proceeding in the Trademark Trial and Appeals Board, and a short-lived state court proceeding (which Abhyanker filed and dismissed).  

Abhyanker initially asserted several other counterclaims, but withdrew those and filed an amended pleading asserting only a trade secrets claim.  Nextdoor.com (& Sood) moved to dismiss Abhyanker’s trade secret claims. 

Adequacy of trade secrets allegations: Nextdoor argued that Abhyanker’s trade secrets claim failed because he failed to set forth the alleged trade secrets with the sufficient degree of particularity. The court rejects this argument, saying that Abhyanker’s laundry list is sufficient, and requiring him to be more specific would run the risk of forcing him to disclose his trade secrets at the pleading stage. Nextdoor also argued that there were no allegations of how it allegedly exploited Abhyanker’s trade secrets, but the court says there are some allegations—principally, Abhyanker alleges that Nextdoor used the bidding history for the nextdoor.com domain to its advantage. 

The court does say that the parties should work together to come up with a process for identifying the trade secrets and whittling down Abhyanker’s laundry list.  After this process is over, the court says that Nextdoor can revisit the trade secrets issue at the summary judgment phase, hinting that Abhyanker's trade secrets claim may not be all that they are cracked up to be. 

Public disclosure of trade secrets: Nextdoor also argued that Abhyanker disclosed the trade secrets in question in a patent application. Nextdoor says that Abhyanker had filed a patent application disclosing much of the trade secrets at issue in connection with his Nextdoor idea; Abhyanker disagrees, and says that the patent application covered Fatdoor (the wiki site) technology. The court does not delve into the details regarding what facts were disclosed in the patent application (presumably because the facts regarding what Nextdoor does are as yet undveloped), but does say that the patent application discloses the use of nextdoor.com in connection with a  networking site. The court dismisses Abhyanker’s trade secrets claim to the extent it’s based on Nextdoor.com’s alleged misappropriation of “using the name nextdoor.com in connection with a  neighborhood-based social network.”

In addition to the above rulings, the court also (1) says that Abhyanker’s alleged admissions in other proceedings that he does not own the trade secrets at issue (and that the trade secrets were part of FatDoor, which was ultimately acquired by Google) are not necessarily binding against Abhyanker in this matter; and (2) strikes a few of his affirmative defenses. 

Finally, the court also denies Abhyanker’s request to disqualify Nextdoor.com’s law firm, Fenwick & West, on the basis that they previously represented LegalForce. Abhyanker says that Fenwick assisted him in protecting his IP for LegalForce, including preparing non-disclosure and invention and assignment agreements. Fenwick, for its part, had an independent Fenwick attorney review the files and billing records. This lawyer concluded that Fenwick did not really help LegalForce with its IP strategy and at most provided LegalForce with some form documents. The court credits Fenwick’s view, rather than Abhyanker’s view, and also says that the matters in question (this dispute and the prior representation of LegalForce) are not related. The court also says that Fenwick was not likely to glean confidential information relevant to this dispute as a result of its limited representation of LegalForce. (The court also notes that Fenwick implemented an ethical screen between the lawyers working on litigation matters against Abhyanker and lawyers who worked on LegalForce, the bulk of whom are no longer at Fenwick anyway.)

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Yikes. A messy dispute that weakly promises to get at the answer of whether, patents aside, ideas are protectable in this context. In terms that will resonate with entrepreneurs, this case gets at the perennial question of "if I have an idea and a domain name, or the name of an app" should I require someone to sign a NDA before I disclose the details?" My money is on the parties running out of gas to pay their lawyers and eventually coming up with some sort of settlement.

Abhyanker has weak trade secrets claims overall. But he was undoubtedly pursuing nextdoor.com. The fact that after pitching it to Benchmark, it showed up as an idea pursued by former Benchmark entrepreneurs in residence can’t look particularly good for Benchmark. (In addition to the domain name, he also pointed out that the prototype used by Nextdoor.com was for the same neighborhood that Abhyanker focused on when he was working with concepts around next-door.) That said, VCs don't sign non-disclosure agreements for this very reason, and although they are from time-to-time accused of taking an idea that they may receive via a pitch and running with it using another team, I don't get the sense that what happened here is wildly outside the expectations of most entrepreneurs. (It's possible that I'm way off on this, feel free to correct me in comments. It's also worth noting that as domain names become scarce and more valuable, Abhyanker's allegations regarding the domain name--while seemingly menial--do get at an important part of a start-up's trajectory.) 

I’m curious about why Abhyanker withdrew his breach of contract claims that presumably included claims based on non-disclosure obligations Benchmark agreed to? Common wisdom suggests that non-disclosure agreements are over-rated and may even make you look amateurish, but you wonder whether a robust non-disclosure agreement would have helped Abhyanker in this scenario? 

Apart from the merits of the dispute, the disqualification ruling is very interesting. Fenwick, which is one of the go-to firms in Silicon Valley (and in Seattle), works with a huge number of entrepreneurs and ventures. To the extent the judge here would have disqualified it, I would guess it would end up taking a second look at its policies around conflicts and whom it can continue to represent when clients (or former clients) have disputes against one another. I’m not saying its representation of Nextdoor.com against Abhyanker here is improper, but I found it very curious that the court relied heavily on summaries of billing records, when it’s widely known that lawyers in this space often work with smaller clients in the hopes that they may grow into more viable clients—it’s not about billing in the early stages of the relationship. Abhyanker’s testimony about him going to his “family friend,” Fenwick attorney Rajiv Patel, for help regarding intellectual property protections for stuff Abhyanker was developing (based on the partner’s IP expertise) did not put Patel in a particularly favorable light. Abhyanker’s argument is that this IP protection involved protection for situations such as when Abhyanker was pitching the nextdoor concept to Benchmark, or working with contractors such as Sood. How can Fenwick, who signed up to help him with these issues, now represent an adverse party in a lawsuit involving these same issues. Not a terrible argument in my opinion. 

Anyway, a crazy dispute that continues to grind on, but one that raised some interesting points.

The takeaway: to the extent you are looking to protect something like an idea and a domain name, I wouldn't rely on trade secrets. Any sort of implied confidentiality obligation is tough to enforce as well. You have to weigh the extent to which doors will slam in your face as a result of requesting an NDA, but that's what would have probably saved Abhyanker here.

Added: Check out the comments below. Also, as Jeff John Roberts noted in this story from January of this year ("Kickstarter project wants to expose idea thieves of Silicon Valley"), Abhyanker launched a Kickster project titled "Entrepreneurs in Residence"!

Photo: Kelli Anderson / Flickr.

Making an offer without making an offer

This is interesting: Richard Schulze has this morning sent a letter to the board of Best Buy, memorializing an offer to buy the company.

Except it isn't an offer. Call it a non-binding letter of intent, then?

BestbuyNo, not that either, because "neither Best Buy nor I shall be subject to any binding obligation with respect to any transaction unless and until a definitive agreement is executed and delivered."

Schulze writes that he has put a lot of work into his non-offer, and alludes to legal reasons for not being able to be more definitive about what he is proposing:

"Over the last two months, I have done an extensive amount of work to develop a plan to address the company’s challenges, and I have had conversations with several premier private equity firms with deep experience in retail who are interested in a possible acquisition of Best Buy. In addition, I have had discussions with highly-regarded former Best Buy senior executives, including Brad Anderson and Allen Lenzmeier, who have expressed an interest in rejoining Best Buy in this context. As you are aware, Minnesota law requires that I receive permission from the Board of Directors before I reach any agreement with potential partners in this effort. While I have not yet reached any such agreements, I am confident, based on my discussions to date, that I could in short order if the Board allows me to do so."

Except that he goes on to be pretty precise on what he'd pay for the company: "Based on my analysis of publicly available information, and subject to due diligence, I would propose to acquire all of the common stock of Best Buy for a purchase price in the range of $24.00 to $26.00 per share in cash."

Call it a proposal, then. One without the financing lined up, but credible, given the team of bankers and execs pulled together . . . er, lined up ready to be pulled together.

Photo:  Ron Dauphin / Flickr.

Entrepreneurs, real and fake

This passage from the Isaacson biography of Steve Jobs has been quoted widely:

"I hate it when people call themselves 'entrepreneurs' when what they’re really trying to do is launch a startup and then sell or go public, so they can cash in and move on. They’re unwilling to do the work it takes to build a real company, which is the hardest work in business. That’s how you really make a contribution and add to the legacy of those who went before. You build a company that will still stand for something a generation or two from now. That’s what Walt Disney did, and Hewlett and Packard, and the people who built Intel. They created a company to last, not just to make money. That’s what I want Apple to be."

If the central point is that cashing in, as an end in itself, isn't all that admirable or ambitous, I totally get that.

Genuine or fakeBut when you think of the ways startups serve an economy of innovation, isn't it a bit peculiar to insist or assume that every new venture should look to build a business that lasts for generations?

Apple, of course, has frequently extended its speed to market through acquisitions of technologies. Some of the coolest features of the iPhone were realized from innovations from startups that sold out to Apple (the acquired technologies that come to mind from the Isaacson book are the pinching and swiping features and the voice recognition function). No doubt that in many cases, Apple improved the acquired technology and otherwise further developed it so that it could be marketable; in other cases, too, the talent acquired (the original innovators) ended up taking a leadership role within Apple to teach the bigger company things it may not have learned otherwise.

When a startup is purchased in order to be shuttered - where the aim of the bigger company is to squash a competitive threat by simply taking the upstart out of the game - then I suppose the takeaway for the startup founders and investors is whatever financial gain they may have realized from the deal; but there are usually points of experience gained, too, that surely have some value for the ecosystem.

Isn't it okay for a group of founders to want to see their technologies reach a market? If the terms are right, can't it make sense to leverage the resources or market share of a bigger company, thus mitigating the financing and execution risks of building their own Apple?

Rhetorical questions, I know, but Jobs's statement is making me think that part of building a "real" company may also include the willingness to become part of another company already on its way at a quicker pace or with greater inertia.

Photo: Michael Fleming / Flickr.

Apple Products and the Force of Personality

As fascinating and well paced as Walter Isaacson's biography of the late Steve Jobs is, Jobs's character did not "click" for me until page 486.

The context is Jobs struggling in a hospital near death with pneumonia. Isaacson writes:

"Even when he was barely conscious, his strong personality came through. At one point the pulmonologist tried to put a mask over his face when he was deeply sedated. Jobs ripped it off and mumbled that he hated the design and refused to wear it. Though barely able to speak, he ordered them to bring five different options for the mask and he would pick a design he liked. . . . He also hated the oxygen monitor they put on his finger. He told him it was too ugly and too complex. He suggested ways it could be designed more simply. . . ."

Suddenly Isaacson's thesis fell into place: Jobs was hard-wired to be the person he was; Jobs's life is admirable, because he found a way to engage with and contribute to the world that wholly leveraged his temperament.

Apple Products and the Force of Personality

Later in the book (page 543) Isaacson quotes Jobs speaking about one of his own children. "She's in the process of learning how to be who she is, but tempers it around the edges so that she can have the friends that she needs." I read into this a self-awareness, too, and a moral philosophy of life, almost as though you should assess your own personality as a resource for which the optimum use should be found.

The book may have implications for the political debates between proponents of open or closed systems. Or, at least, it debunks the idea that all players in the market arrive rationally at the views they have.

You put the book down with the conviction that Apple's strong positions on the side of integration and utility are not reasoned business calculations but rather manifestations of Jobs's own aesthetic of control. It is absolutely eye-opening to pick up and work with an iPhone, having just read Isaacson's work.

Steve Zakuani on Leadership

"Leadership is when you discover your gift, and you serve it."

That, in a nutshell, is Steve Zakuani's view of leadership.

6303721017_46883db3fc_zMy girlfriend and I went to hear him speak earlier this month at Seattle Central Community College. Helen paraphrased Zakuani's view a bit more fully, this way: No leader went to school to learn how to be a leader. She just recognized a passion, a gift within herself, and served it.

Zakuani traces the cult of celebrity of today's culture to the Romans and Greeks, who believed certain gifted persons were to be singled out and privileged.

But, Zakuani believes, every person is born with a gift. If a person can identify his gift, surrender himself in service to that gift, he by definition has become a leader.

Leaders don't worry about followers, they just do what they are committed to doing. An apple tree doesn't send out invitations, Zakuani says. It counts on those wanting apples to seek it out.

Part of what Zakuani said makes me think of the perennial discussion within the startup community about mentors and advisors . . . and how much equity to give them. Mentors are very important for Zakuani. In his experience, mentors "never seek to gain from you." They may merit your respect, but fundamentally they are leveraging hard won lessons to give you a jump or leg up. They are spending personal capital on you and are making you the focus.

As a Sounder's fan, I was relieved to hear Zakuani say that he sees himself playing for another 10 years. But as much as he enjoys playing soccer, the game is "too small" to be his purpose in life. He sees soccer as the platform by which he will help others through the Kingdom Hope organization he founded. "I don't play for me. I play for those who are going to need me."

Pioneers of the Commercial Web

Two of my oldest friends, the two serial entrepreneurs I admire most, each a bona fide pioneer of the commercial Web, Dan Fine and Joe Snell, finally met last night.

6278521899_da3bea5eb1_zI'd been looking forward to this for weeks. Among many, many things since, Dan is the Fine in Fine.com, a company that pioneered the idea that businesses might want websites. Among many, many things since, Joe is the startup specialist who, with Daren Tsui of M-Spot, founded Pantheon, a company that pioneered the idea that print newspapers might want to publish other than on paper.

The meeting was the doing of my buddy Randy Price, SVP of ArenaNet, who put Dan, Joe, Jeff Strain of Undead Labs, and me (what was I doing there?) together in a panel for the entrepreneurial law and business MBA class Randy teaches at Seattle University.

How Dan and Joe have not crossed paths or how I have failed to bring them together in the years since Web 1.0, I'm not sure. I guess we've been busy.

They made up for lost time and started comparing notes right away.

And they threaded Jeff Strain, a founder of ArenaNet, into the conversation. And then Randy started the class and the three of them threaded the students into the conversation. Life, the universe, hating working for the Man, being an entrepreneur, caring for a family . . . you have to go to an entrepreneurship class to put all those topics into a thematically integrated discussion.

Many thanks to Randy and the SU students for having us.

Dan's convinced that we haven't seen anything new in 15+ years. Everything - search, bandwidth, interface, experience - is better, but nothing is different.

Miles travelled, still at the starting block.

Pictured, left to right: Jeff Strain, Joe Snell, Dan Fine.

Five Years of Iron Rule

I don't know if the Groupon IPO will come off or not, but I saw a story late last week about their pricing target and I thought I would check back on the S-1.

4057052318_bf18e88281_zInteresting development in Groupon's plans for supervoting rights for its founders.

Similar to Zillow, Groupon founders are to hold "supervoting" Class B common stock. This concept was part of the disclosure when Groupon originally filed the S-1 with the SEC back in June.

Since then, some blanks have been filled in. Each share of Groupon Class B common is to have 150x the voting power of a share of Class A common, the security to be offered in the IPO!

Here's how the Groupon S-1, as amended last week, describes the prospective impact of the voting power of Groupon's founders, following the IPO:

"After this offering, our Class B common stock will have 150 votes per share and our Class A common stock, which is the stock we are selling in this offering, will have one vote per share. . . . [F]ollowing this offering, our founders, Eric P. Lefkofsky, Bradley A. Keywell and Andrew D. Mason, will together control 100% of our outstanding Class B common stock and approximately 34.1% of our outstanding Class A common stock, representing approximately 58.1% of the voting power of our outstanding capital stock. Messrs. Lefkofsky, Keywell and Mason will therefore have significant influence over management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, for the foreseeable future."

But here's the really interesting development, something not contemplated in the Groupon S-1 filed back in June: Cinderella's supervoting shares will turn into pumpkins in 5 years.

"Our Class A common stock and Class B common stock will automatically convert into a single class of common stock five years after the completion of this offering. Following the conversion, each share of common stock will have one vote per share and the rights of the holders of all outstanding common stock will be identical. This provision of our amended and restated certificate of incorporation may be amended only by the affirmative vote of the outstanding shares of the Class A common stock and the outstanding shares of the Class B common stock, each voting as a separate class. As a result of the automatic conversion, our founders will have identical rights as all other stockholders."

Photo by Jonathan_W.

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