The lawsuits I’ve seen in venture investing

As a tech founder, you can and will be sued for anything, whether the plaintiff has a real grievance or not. Below are the times I’ve seen companies most vulnerable to a suit, and what you can or can’t do.

You’re about to sell the business. This is arguably the point at which you’re most vulnerable because even if you have insurance, it doesn’t matter. A potential acquirer is going to say “make this go away, tomorrow,” and many acquirers will pass all together, even if it’s an asset sale. Filing a claim with your insurer is going to take many months (sometimes 10+) so you’re almost always going to be forced to settle. If you’re selling the business, tell as few people as possible and do everything you can to make sure past employees or former business associates do not find out.

You just fired someone. If you don’t already have EPL insurance, get it. Nobody is good at hiring and inevitably you’re going to hire someone that you need to fire. No matter how amicable the firing was, there is risk that the person will come back and sue you: all it takes is them falling on hard times and a lawyer taking their case on contingency.

A competitor claims you’re infringing. Even if you’re not infringing on someone’s patent, copyright, or trademark, if a competitor thinks you are or if the competitor just wants to slow you down, you could get sued. The good news about suits like this are they’re less common because they are very expensive to litigate: we’ve seen plaintiffs spend upwards of $150k and spend 10 months in court trying to establish infringement. Nonetheless, if you’ve got the budget to patent some of your most important IP, it may be worth it not so you can go sue competitors, but so that you can easily play defense when they try and sue you.

You’re sideways with your banker. Boutique investment banks sue their former clients all the time. This will happen when you’ve hired a small investment bank to run a process for you, they fail, you raise money on your own or sell the business on your own at some point, and now the banker believes they’re due a fee because you’re within the ‘tail period’. Make sure the banker contract says they only get paid on intros they make directly and have a 6 month tail. Terminate any banker agreement as soon as they’re no longer working and the process is over; do not let these agreements linger.

Shareholders are angry about the next round. This was a newer one for us. We closed a round whereby a strategic shareholder was upset the business did not end up in a difficult cash position so they could buy the company at a distressed price. The company was promptly sued based on very frivolous and meritless claims. The company knew going in the risk of a suit was high, so they consulted with counsel ahead of time to figure out whether the suit was meritless and how much it would cost to defend. They planned accordingly.

I’ve come to believe that it’s not about avoiding getting sued so much as it is being prepared for any suit. Do what you can to minimize the risk at all times and always be conscious of it.

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