https://www.reuters.com/article/securit ... SL2N1PZ02TThe cofounder of Xfund, a venture capital fund which has backed startups including 23andMe, has filed a malpractice lawsuit against Ropes & Gray, accusing the law firm of secretly helping his partner seize control of the $100 million enterprise.
Xfund cofounder Hugo Van Vuuren in a lawsuit filed in federal court in Boston on Wednesday contends Ropes & Gray, while purporting to be counsel to the fund as a whole, worked behind the scenes to help his ex-partner Patrick Chung gain control.
If you have Westlaw, you can read the longer article here: https://1.next.westlaw.com/Document/Ieb ... c.Default)
The Inside Story of Venture Capital's Messiest Breakup, WIRED.com, Nov. 8, 2017.
https://www.wired.com/story/the-inside- ... t-breakup/I spoke with more than three dozen people over the last few months to try to understand what really happened with the Xfund. It’s a story that’s so complicated that the two parties involved disagree on the most basic facts of the timeline. What’s clear is that from the start, they had clashing visions for what they were building. The tale of Van Vuuren and Chung’s partnership and its demise offers a window into how power really works in Silicon Valley, where personal relationships are the most important currency and, in order to protect capital, investors are more likely to place their bets on people they know and trust. It’s a story that Chung is ready to archive, but one that Van Vuuren still can’t bring himself to accept. He believes he was wronged, and remains obsessed with laying bare a system that didn’t work in his favor.
Van Vuuren was on his way to South Africa for the Christmas holidays when the amended documents arrived via email. He was in a hurry because his mother’s living situation in a South African province had become unsafe, and he planned to use the trip to help her move to a safer home. He says he scanned over the documents quickly, paying attention to the portion that addressed the employee option pool, and signed them. The documents also contained a provision that gave Chung governance control over the fund. Although Chung says he and Van Vuuren discussed this, and in court documents he provided the court with an email trail showing he’d alerted Van Vuuren, Van Vuuren says he missed it. He didn’t discover that he’d signed away his voting rights for several months.
When he did find out, it was on a Saturday evening in the run-up to the fund’s annual investor meeting. Van Vuuren remembers that Chung convened a last-minute conference call for the four-person team. In the call, Van Vuuren says that Chung threatened to fire them. (Chung denies this, calling it “revisionist history.”) Afterwards, Van Vuuren reached out to a Ropes & Gray associate to make sure that Chung couldn’t do so unilaterally. The associate sent over the management agreement, which spelled out Chung’s full control. As he read it, Van Vuuren was confused. “I was like, ‘This is the wrong version, I’m reading this wrong,’” he says.
A few days later, students and investors crammed elbow-to-elbow inside a building on Harvard’s Radcliffe campus for the fund’s annual meeting. They also celebrated a tradition that had gotten its start in the early days of the Experiment Fund: the annual awarding of the Experiment Medal. Theranos founder Elizabeth Holmes had flown in from Palo Alto to receive it. (This was five months before a Wall Street Journal investigation raised questions about the legitimacy of her startup’s blood test technology.) Van Vuuren was distracted. As the event wrapped up, he pulled aside Ropes & Gray partner Aaron Katz, who’d done legal work for the Xfund. Katz and Chung were close friends; they’d gone to Harvard Law School together, and Katz attended Chung’s wedding.
Van Vuuren and Katz took a walk. “I said to him, ‘Look, the document I saw this morning from your associates tells me that I have one vote for every two votes Patrick has, which essentially makes me an employee,’” Van Vuuren remembers saying. “‘This is not okay.’”
Katz told him not to worry, and that he’d review the documents. Then the next morning, Katz confirmed that yes, that was correct. The revision to the voting structure had been included in the December documents Van Vuuren had signed, which enabled the fund to provide profits to employees. In effect, Van Vuuren had agreed to it.