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.]

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

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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.