ArsDigita CEO & VCs Sue Philip Greenspun

RM writes "ArsDigita, its CEO Allan Shaheen and the venture capitalists who took over ArsDigita Corp., the company that had everything to be the coolest company on earth, are sueing Philip Greenspun and two other co-founders of ArsDigita (Eve Anderson and Tracy Adams). The lawsuit was mentioned in this post to Philip Greenspun's site. Since the VCs took over ArsDigita, many of their best developers and staff have left the company or been fired, and now they are sueing their own co-founders, who gave the company its vision (which seems to be going down the tubes) and the profitability it always had. Sad, really sad."

Comments

Re:What this seems to be about

[Anonymous Coward]

It would be pretty hard to "leave Philip alone" when he's attempted to rearrange the board in direct contradiction to what he agreed to in exchange for $35 million. The sureness of opinion in this thread is pretty amazing considering the lack of knowledge. Philip complained that the process of pushing him out of the company seems to have begun "before the ink was dry" on the VC check. Might this perhaps be related to the fact that, before the ink was dry on the VC check, he announced he was going to spend $3 million of it on a house on Cape Cod? Of the 200+ AD employees, I know of only three that were upset when he was finally pushed out: his girlfriend Eve and his close friends/lackeys Tracy and Jin. The relief throughout the rest of the company was palpable. He may have some interesting ideas, but as a manager, the man is a walking disaster. Worse yet, he's a walking disaster who somehow seems to have gotten the impression he's God's gift to management, related to the fact that he think's he's God's gift to just about everything. Aside from spending money like a drunken sailor, Philip's ego destroyed his relationship with just about everyone at the company, manager and engineer alike. He was personally insulting to me personally, as well as everyone else at one time or another. The agreement with the VC's was that Philip would assume a role as visionary and strategist as chairman and AD would hire an experienced executive to run the company as CEO. This is what happened, but Philip found himself completely unable to let go. He interfered in the operation of the company and created confusion and frustration for everyone. After six months of this, he simply had to go.

Getting VC was a mistake

[deanc]

This is how I understand the situation, from what I've heard -- ArsDigita was profitable before they had a bunch of large VC companies come in. The decided to raise a lot of capital so that they would be able to hire much more staff and take on a lot more clients. The problem is that after they did this, after the dot-com slowdown, the new clients never materialized, and ArsDigita was left with having sold off part of their company and an overgrown staff that wasn't producing revenue, which is why they had to lay people off.

In addition, people have said that ArsDigita University (the free computer science school) had been established with money that the venture capitalists had given ArsDigita. Needless to say, they were probably a bit upset by this.

So, the question on my mind was this-- if ArsDigita was always profitable, why did they raise all that VC and over-expand? Were they getting greedy or what?

-Dean

Re:Getting VC was a mistake

[milo_Gwalthny]

VCs are generally motivated by two things after they make an investment: making the best possible return, and keeping an excellent reputation. VC is a repeated game: maximizing the return on any given round but ruining your chances in future rounds is a bad strategy. The reason reputation is important is that the best potential investees usually have several alternative sources of funds. As a VC, unless your reputation is sterling, you won't be invited to invest. Being relegated to the lower-tier deals makes investing much riskier.

Greylock and General Atlantic are not vulture investors. They are two of the three most respected venture capital firms on the east coast (I would say Patricof is the third) and both are, IMHO, in the top ten in the country. They have also been around for as long as pretty much anyone and are staffed with real professionals (that is to say, they're not Benchmark - a hype-driven latecomer.)

I can't imagine that these two firms would risk annoying their other current and future portfolio companies with a baseless lawsuit.

[full disclosure: I used to be a hardware developer, but now I'm a venture investor, although not with any of the firms mentioned in this post.]

What this seems to be about

[thenerd]

Like others, I've been wondering what this is about. I've read a bit of the documentation referred to on Philip's site, and it seems to be that ArsDigita and the VC's are suing Philip, Eve Andersson, and Tracy Adams because they think that a 'stockholders agreement' has been violated.

They think that the way this has been violated is because Philip, Eve, and Tracy have (according to this new money grubbing bunch of VC's), been claiming that they (or perhaps others) are working for the company as an officer or director, and that there are two sets of individuals that say that they run the company.

Why Arsdigita can't just give up and leave poor Philip and friends alone after completely screwing up everything is beyond me.

If it weren't for lawyers, we wouldn't need more lawyers.

thenerd.

Re:What this seems to be about

[StudMuffin]

Well, I'll tell you what - I am a former aD employee, and I'm coming out of the closet. I am NOT any of the AC's above, but I can say this as fact:

Philip was an asshole to me every single time I spoke to him. And I was fairly high up in the food chain, as a level 3 engineer (there were four levels, and Eve/Jin/Tracy/a couple of others were L4's). I was also a Technical Sales Manager - the first engineer brought into the sales group to try to coordinate the process of bringing in new business and keeping the out of control developers (led by Philip) at bay while we tried to sort out what was going on.

My second day at the company, I met Philip for the first time. I was really looking forward to it. The conversation went something like this:

Philip: Who are you?
Me: My name's Hans, I just started. I wanted to say that...
Philip: Are you a programmer or a system administrator?
Me: I do both, but I prefer...
Philip: You are wearing a cell phone on your belt. You're a sysadmin.
Me: Well, not really. I...
Philip: Do you use emacs of vi?
Me (proudly): vi (it *is* the better editor)
Philip: You're a sysadmin. You just don't know it.
Me: Well, anyway, I wanted to say that I really enjoyed your book and I am looking forward to working here.
Philip:

Well, it really didn't matter WHAT Philip said, since he had already dismissed me and walked away.

At least Alex hung around and got a tummy rub.

Over the next few months, I attempted to build up an office in the midwest (Ann Arbor). I also worked to get new business and add a technical perspective to the sales efforts and keep promises to clients in line. Every time I came back to Cambridge, I either was pummeled by Philiip who couldn't give me the time of day but reveled in being insulting, or heard tails from the aD staff about his latest loose-cannon move.

Philip was OUT OF CONTROL. Spending money like water, planning koi ponds, and having doorways enlarged to allow his ego to pass through. The company was headed towards bankruptcy if his spending continued at the helm. Allen and his pack decided that it was time to curb those expenses. For god's sake, there were 40 $3000 flat panels, aeron chairs and workstations sitting in a nearly empty office in Atlanta (for example) that a) didn't have developers to work them and b) didn't have the client base to support hiring the developers to work them. There is one basic premise of business that, from my perspective, Philip decided to ignore. You have to earn more than you spend.

I finally decided to leave when Allen and Ern (rightfully, in hindsight) decided to close the Ann Arbor office that I was tasked to open, staff, and build up. I returned to a research position at the University of Michigan, where I am today. I was given the option to continue with Ars Digita in my current role, but with a new baby I didn't want to travel that much, so I declined.

I was constantly aghast at the over-the-top spending that aD did. The modest Ann Arbor office (which never had a chance to get established) worked with $20 chairs from office max, used 17" monitors and $5 steelcase desks from the University of Michigan property disposition. And you know what? We could have gotten as much work done as if we had the expensive stuff. My thinking was that we would push for this if we ever made a profit for the company, not before.

That ideal wasn't perpetuated by Philip, who was going around the world talking at conferences and opening offices. I *think* the last straw was when he sent an email to the company talking about how great Australia was, and that we were opening an office in Sydney. It was total anarchy, and Philip was simply out of control.

The board and VC's did the right thing to cut him out of a management position. They also did the right thing to try to keep his ... umm... "charisma" in a public facing position - let's be honest, much of the public opinion of arsDigita comes from Philips 18 charisma. But Sun Tzu had it right in the art of war: Leave an enemy behind, and he will rise to strike you from behind...

- Hans

summary of why they're being sued

[sethg]

While waiting for the official complaint (96 pages, or a 4-MB PDF), I found the following summary on one of the aD bulletin boards. I haven't waded through the whole complaint yet, so I can't confirm the accuracy of the summary, but based on the first few pages, it looks about right.

You can read the complaint (the description of the lawsuit) at Guan Yang's site. Since it's a 4 MB PDF, mostly full of scans of things like the ArsDigita by-laws, allow me to summarize. Note that I'm not a lawyer and might get things wrong.

philg = Philip Greenspun
jsc = Jin Choi
eveander = Eve Andersson
teadams = Tracy Adams
allen = Allen Shaheen
ernb = Ernest Blackwelder

philg, jsc, and the VCs all signed a stockholders agreement in March, 2000, which stated that the ArsDigita by-laws cannot be changed without the consent of the VCs.

The by-laws at the time of the agreement stated that only the Board of Directors (not the stockholders) can elect/remove company officers.

The stockholders agreement also says that everyone signing the agreement must vote to elect the CEO and two other senior company officers to the Board, and that the other two directors must be acceptable to the VCs. There are five directors in total.

On April 5, 2001, philg and jsc (who in combination own a majority of ArsDigita stock) signed an "action of stockholders by written consent", known in the complaint as the Contested Consent.

The Contested Consent amends the by-laws of ArsDigita, such that the stockholders directly elect the company officers. It demotes allen to President, appoints philg CEO, and appoints eveander and teadams as Executive VPs. It removes allen and ernb from the Board and elects teadams and eveander to the Board.

So basically, in exchange for capital, the VCs made philg and jsc give up control of the company. Now philg and jsc and trying to take back control, so the VCs are suing. Why are they suing philg, teadams, and eveander, but not jsc? I don't know.

-- Rob Mayoff, April 19, 2001

--

Re:Lesson learned.

[the eric conspiracy]

It would seem to me that a "monolithic conglomerate" is an oxymoron.

Misinformation, and what's really going on

[wuliao]

I work at aD, and I've been here since the beginning a few years ago. The amount of misinformation on this staggers me, and the amount of blind Philip worship makes me ill. The posts by Philip represent one side of the story (his), but are far from being the complete story. The claim by RM that "the best developers" have left aD is flagrantly false. In fact, the best developers have stayed because Philip (and his complete disdain for software engineering, design, QA, scalability testing, etc.) no longer exert an influence here. Philip is smart, articulate, and knowledgable about many things, bu the is not a software engineering god, nor is he an expert software architect, nor is he a capable manager.

Re:Misinformation, and what's really going on

[Joe Shipman]

Keep in mind that ArsDigita was highly profitable when Philip was CEO. All of the things that looked liked extravagance (beach house retreat for programmers, ArsDigita University, Ferrari prize for recruiting) could actually have been paid for from 1999 profits. ArsDigita had $20 million in revenue and a fat profit when the venture capitalists came in.

The ironic thing is that most VC deals from the past few years were for companies struggling to figure out how to make money. The VCs would go in and try to turn the company into something with a sustainable business and profits. Most of the time they weren't creative enough and failed, losing their investors $millions. In the handful of cases where they succeeded, they built things sort of like ArsDigita with Philip as CEO: $20 million in revenue, happy customers, profit. What is ironic is that the VCs turned ArsDigita from what they were always desperately trying to build themselves (a company with revenue and profits) into the kind of company that has historically lost them all their money (a company with an optimistic spreadsheet and revenue forecasts from not-yet-existing products).

Don't assume that merely because a VC made money in the go-go years of the 1990s that the VC therefore has any special knowledge of business.

It's the damned market...

[alexhmit01]

This anti-VC rhetoric on Slashdot is REALLY childish. In most cases, the VCs don't come in and take the shots, they usually provide a board member and try to guide the company, but if they wanted to run one, they'd start there own.

The problem here, there is a HUGE market downturn. The VCs try to get money out of each investment. If one looks like it is doing well (gonna IPO, etc.) they leave it alone. If one is not doing that well but they believe that they can extract money from it, they will try to get some money out.

In this case, the company has a lot of silly side projects. Greenspun was teaching at MIT, including a class that taught the ACS system. Additionally, his Arsdigita University was teaching ACS. With the products being Open Source, training hundreds of people how to be ACS consultants probably didn't make the VCs happy.

The company was run like it had the value of Microsoft with it's side projects. The VCs realized that aD didn't have the goal of maximizing revenue and minimizing costs. They had a goal of becoming famous.

I believe the VCs saw that wall street wasn't going to reward them, because they were running PROGRAMS designed to DESTROY their OWN competitive advantage. Think about it, as a consulting company around a program you have released Open Source, you get hired because you know it best. With everyone learning it, that's not the case.

I've had potential clients approach me asking to hire me for ACS projects. I know others from MIT that get the same.

The VCs have a right to be pissed.

However, the VC takeover is unlikely to work. Completely reinventing a start-up isn't that bad, but aD might be a BIT too big for that.

Alex

Re:profits?

[StandardDeviant]

arsDigita, not arstechnica. aD was actually quite profitable from my understanding (well, certaintly not an IBM or GM or MSFT in terms of absolute dollars but fairly impressive for a small design shop nonetheless).

I think the numbers mentioned by PG were 10K in initial investment, building into a company with annual revenues in the $millions. I don't know what their profit margin was but it was probably pretty good (the customer is buying all the bandwidth and machinery, all you have to pay are salaries, and maybe the occasional Ferrari ;-).

I wish I knew more about the case. It's still a shame to see this happen to PG and Co. though, I think a lot of people have learned very cool things becuase of their efforts to disseminate what they've learned.

--
News for geeks in Austin: www.geekaustin.org

Not strage at all

[a_n_d_e_r_s]

Ars Digita has left their own roots and are reinventing itself. No more open source and selling conculting hours, now they are going to sell software.

Consulting is a very profitable business, now they ae leaving it's roots and a transoforming the comapny to become 'the next Microsoft'. Not strange that the employees are leaving. A business whos most valueable assest are the people behinf it, can't expect to be able to change direction and management and still expect to retain all skilled workers.

It happens when people with no clue try and make profit with something they do not anything about. That lawyers get's involved is no strange either since that is the way many people do business.

I feel sad for Ars Digita who made such a blunder selecting which VC to do business with.

VC Morality

[Alien54]

the first impression sounds like the typical stereo-typical short term short sighted planning for the VCs in trying to maximize the money return back to their wallets, regardless of the long term prospects. This is a first impression, of course, YMMV.

But this is probably the same kind of thinking that led VCs, in San Francisco to treat the remaining employees at one company so badly that they basically walked out, screwing the VCs.

Without more info it is hard to know where to point the finger, but I know where I'm placing my bets.

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