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A Classic Startup Horror Story

venturebeat.com

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Re: A Classic Startup Horror Story

#2

Post by brooknam »

Having seen a startup in Austin, TX go through this same kind of thing, I would guess its more common than the author makes it sound here.

The best defense is to build a technology that isn't cheap to reproduce. There is no better moat than killer IP.

Re: A Classic Startup Horror Story

#3

Post by cienrak »

I don't understand why they didn't try to fight this based on the NDA or no-use. Wouldn't a good lawyer be willing to take this on retainer, if they could prove their tech was being ripped off despite the legal protections they signed going into the deal?

Re: A Classic Startup Horror Story

#5

Post by espinchi »

The key for a successful negotiation is to have leverage. In this particular case, it looks as if the founder of this startup needed the acquisition to happen. Otherwise, when The Company refused the official term sheet, or when they noticed any other smelly things down the road, they could've halted until that detail was sorted out, or even canceled the negotiations.

The conclusion in the last paragraph of the (highly enjoyable, btw) story goes in this direction, but it's a bit optimistic: the real lesson learned is this: get your business to a level of success where you don’t care if the deal falls through. Get profitable. Get such amazing user growth you have investors begging to put in money. Well, I wish it was that easy!

Re: A Classic Startup Horror Story

#7

Post by casca »

Something doesn't smell right with this story. If a big company clearly breaks a contract, there's money to be had and the lawyers will work on retainer. NDAs are legal agreements. They can include terms that prohibit the creation of a similar product for a length of time.

My favourite snippits are: "We shipped some amazing new products" and "Our systems handle load today that they wouldn’t project to have until 5 years from now, all on a minuscule startup budget". Shipping is easy. Selling is hard. And building something that scales to (optimistic) 5-year (!) projects seems like premature optimsation to me.

Re: A Classic Startup Horror Story

#8

Post by true_religion »

cienrak wrote: post #3

I don't understand why they didn't try to fight this based on the NDA or no-use. Wouldn't a good lawyer be willing to take this on retainer, if they could prove their tech was being ripped off despite the legal protections they signed going into the deal?

I'm having trouble following... how were they ripped off?

There's some confusion about the NDA, but as far as I can see... The Company didn't disclose to anyone.

It broke down in due diligence which could just mean that The Company looked at their financials, and found that they were a lot weaker than first presumed and thus not a good acquisition. I'm not sure they admitted that they weren't profitable (who does really?), so it might have been presumed that if you have X products, and Y infrastructure then you must have Z sales behind it. When they looked at the financials, they didn't see the sales figure they wanted so bailed.

Re: A Classic Startup Horror Story

#9

Post by karamazov »

true_religion wrote: post #8
cienrak wrote: post #3

I don't understand why they didn't try to fight this based on the NDA or no-use. Wouldn't a good lawyer be willing to take this on retainer, if they could prove their tech was being ripped off despite the legal protections they signed going into the deal?

I'm having trouble following... how were they ripped off? There's some confusion about the NDA, but as far as I can see... The Company didn't disclose to anyone. It broke down in due diligence which could just mean that The Company looked at their financials, and found that they were a lot weaker than first presumed and thus not a good acquisition. I'm not sure they admitted that they weren't profitable (who does rea…

NDA's are normally written not only to prevent disclosure, but also to prevent the company receiving the information from using it to copy your product. If you're disclosing to a potential competitor, you don't want them sharing that information with anyone else, but you especially don't want them just stealing your codebase and using it themselves.

Re: A Classic Startup Horror Story

#10

Post by j_baker »

joedev wrote: post #4

That's not a classic "Startup" horror story. That's a classic "Built to Flip" horror story. One of many reasons why selling is not an desireable business-model strategy.

There are reasons to sell a startup aside from having built it to flip. It can even happen in a startup that the founders had every intention of building into a big sustainable business. Many times, it's because the founders and/or investors have "checked out" of the business and want a quick return on their time.
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