The title originally was "Toptal sues co-founder $NAME for fraud". Since the case was dismissed, I've updated the title.
Edit: we've also replaced references to that person's name with "[redacted]" below. The reason is that HN threads tend to rank highly in search results. We don't want a situation where Googling some individual's name will forever lead people to an old thread like this, where they won't find important relevant information that, e.g., the case was later dismissed.
Generally we find out about these things because individuals (or, less optimally, their lawyers) email us and ask for threads to be deleted. We tell them that we don't delete entire threads because that would be unfair to the commenters who participated, but that there are usually other things we can do to help resolve legitimate privacy concerns while preserving the rest of the thread. This case was an example of that.
Just read through the whole thing (don't know why) - here is the synopsis:
It doesn't really talk about any ownership issues regarding the CEO - it's basically saying that [redacted] (an early employee) embezzled/mis-used money and when fired, started claiming he owned part of the company or was entitled to compensation.
According to the thing - [redacted] was hired a COO as an early employee with no equity, they claim he was unhappy, and that he embezzled a bunch of money by paying his girlfriend, getting bonuses, and misusing the company credit card (some of this he repaid). But once they found out, they fired him, and he started claiming he owned equity and/or was owed severance.
They want the money back, him made to shut up, and possibly drawn-and-quartered.
So it doesn't look like this is much broader than that .. again - according to the doc.
Throwaway for obvious reasons. I was at a startup in the valley where they got one of the cofounders to work for sweat equity for over a year then got him deported to his home country to remove him from the picture (was reliant on employer sponsored visa. They 'accidentaly on purpose' didn't turn up to his immigration meeting). He managed to dodge this by enrolling on some bullshit PhD to get back into the country but then they screwed him with trumped up claims of embezzling company funds. All I would say is, don't jump to any conclusions with your interpretation of this case.
Co-founders definitely do horrible things just to retain equity for themselves.
Another true story: A team co-founded a company together. They all agreed to be co-founders and split the equity as fairly as possible.
Co-founder X was put in charge of legal, since noone else wanted to do it. Unbeknownst to the others, X allocated a small pool of shares for everyone except for X, taking the vast majority of the company for himself.
When everyone received their share agreement, they did the division against the "total shares" listed in the agreement. Everyone's percentages came out as expected, since they falsely believed the "total shares" represented the total shares in the company -- rather than in the pool.
To illustrate this, X owned over 83% of the company, while the next highest co-founder Y (the CTO) vested < 0.33%/year. Amazingly, X and Y had both agreed to take identical pay (below living) and make identical sacrifices, i.e. quitting their jobs to go full-time together.
Y left after a year, having found out months prior and given X time to resolve it in (misplaced) good faith. X managed to get VC investment only a few months later -- by not mentioning that the company's CTO had quit only a few months earlier.
When the VCs found out about Y, X then informed Y he was never the CTO but a "freelancer" -- even though Y had joined with the intention of being CTO, performed all CTO duties, and was called the CTO by everyone involved. The other co-founders were informed to write they were retroactively "Founding Members" rather than "co-founders."
Of course, if the co-founders are experienced about business it would be difficult to pull this off. For example, you should insist on seeing the cap table even if you believe you know the percentages.
However, this happened to intelligent co-founders right out of college, who even had a parent's lawyer friend look over the contracts.
> That lawyer needs to be sued for malpractice. This is their job.
Why do you think that? Perhaps you parsed "parent's lawyer friend" as "parent's lawyer"?
The former is likely doing a favor and would not be paid the full sticker price when rendering such a service since the transaction is not truly at arm's length. The latter is more likely to be sued for malpractice since you would be paying the full sticker price.
Why would they hire someone for COO and not give this person equity? Sympathy for the devil and all but these people were asking for something bad to happen.
I find this sort of bonkers. Basically they all have contracts saying they'll get equity at the next round ... and the company is profitable and the CEO has no intention to every raise another round. So he currently owns 100% of the company: "As a result, even though it looks like a typical venture capital funded company, all of Toptal’s stock is in the hands of one person, co-founder and CEO Taso Du Val. Even Du Val’s co-founder and colleague for eight years, [redacted], has no shares."
That said, I do wonder whether there's some bigger story in the background (since [redacted] is referred to as co-founder in the Information article, and is getting sued in the parent)
Maybe I'm just slow because this occurs to me hours later, but this One Man, One Stock Grant thing is a terrible idea; if the employees know about it, and they surely do now, they have incentive to try to drive the company in such a way that it needs to take capital to survive, so they get their payouts.
This is probably not the most stable foundation upon which to build a company.
> Because — and this is amazing — NO ONE at Toptal has equity other than the founder
Most businesses have a fixed number is of equity owners, including service business like Toptal. In most businesses like that, if you get any equity at all, it'd be unusual that you could keep the equity if you leave the company.
I would take a solid salary over equity almost any day, having been burned by failed startups in the past, and/or left before my options vested. It'd be nice to get a solid salary AND equity, but I'm never going to work anywhere again where I take a pay cut in exchange for equity.
True that. Even a successful exit can lead to employee common stockholders (i.e. holders of stock gained through vested, executed options) getting screwed. Look what happened in Gilt Groupe's IPO, for example: https://www.vox.com/2016/1/19/11588918/gilt-groupe-is-a-caut...
It's curious that Toptal is structured as a single member LLC. That would make it difficult/impossible for a VC to invest. And, while they claim they raised a round from a16z, it's not listed on a16z's full list of investments:
Strange that it's not on the website there. I don't know if the investment really happened either, but there are a couple links on a16z which seem to suggest they did invest in TopTal. Some articles reference a seed round.
(these links are all empty apart from a logo and a date ranging from 2013 to 2016)
I don't think any of that supports the assertion that he promised to convert the note but never did. Whatever promises were made are in the note itself.
What's especially interesting and radical about this is that, if it's true, the note was no-recourse for the investors. As I imagine is typical, a note I did once would convert to preferred upon raising a certain amount of money, but if we didn't, the note holder could either extend the term or elect to take common instead. The idea that you could do a note where the investor gets nothing if you don't raise more money is fucking wild.
That said, I guess it's not totally beyond the realm of possibility that even investors like A16Z would consider doing a no-recourse deal, provided the round was really hot and the investor was super confident that the company would raise more money.
If it's true that the note is no-recourse, then I say more power to him. Ask for the terms you want! You'll never know how much leverage you really have unless you try. The worst thing that can happen is they say no.
They've also had at least 5 general counsels... and were taken to court by another marketplace for scraping their database of programmers (ultimately settling out of court).
Ah yeah Toptal. I did an interview thing with them 3 or 4 years ago. I don't remember the details, except that it was online, moderated, timed, three python algorithm challenges. I nailed the first two and went overtime on the third, and was told I could "try again in six months." I remember it being an unpleasant experience.
So someone explain this. The amount seem to be in the low 100k area?
Why bother suing?
Du Val has hoarded all this stock, apparently it has worked, you can argue the ethics of it, but he seems to have pulled it off.
Why not just write off this relatively small amount for a company with $200m revenue?
Why draw attention to yourself and your company?
I used to work there and ego / control is definitely a motivator for the CEO. He's the type who would absolutely pursue a law suit like this regardless of the cost/benefit, just to make a point. He said as much to the company when they were having issues with confidential information leaking.
Looks like it was more than that (plus he's now trying to claim he owns a part of the company and/or entitled to $2MM.. again, according to the doc)
"[redacted]'s at-will employment was
terminated for the reasons herein explained, and [redacted] left Toptal’s employ unjustly
enriched, and with amounts owed by him to Toptal in the form of unpaid loan amounts,
unreimbursed credit card charges of a purely personal nature, and restitution for amounts caused
to be embezzled and diverted to his girlfriend and for an unapproved, self-awarded bonus, totaling
at least $629,850.46."
Yeah - they said that.. but then they had the whole $629k+ in the actual ask in the suit.. there is either more in addition, or they don't "accept" the pay-back (or just trying to make it look bigger to benefit the case)
That theinformation.com article alleges that Toptal CEO Taso Du Val has all the stock, despite that employees and investors, including Andreessen Horowitz, expected to get stock.
Since our industry has become the 1980s Wall Street of ethics, not much behavior surprises me anymore, but a successful startup allegedly backstabbing a prominent VC does.
What do you mean by "expected" stock ? Is stock in some way similar to a baby that might get born on a given date or is stock assigned by lottery or whims of a deity?
Did they have a contract that promises them stock? If yes, then they should demand that in court; if not, then they shouldn't have been "expecting" it - especially if we're talking about seasoned investors, which shouldn't be "expecting" anything other than what they themselves explicitly wrote in the investment paperwork. If they have a contract that promises them stock when pigs fly, then they shouldn't have been expecting that stock - they probably shouldn't have also accepted the disadvantageous contract, but that's a different issue.
I was trying to be concise and not to make a case, so stated it intentionally weaker than my impression from the details in the article. Are you speaking of this particular case (e.g., that they shouldn't have expected the subsequent funding round), or making a more general point about contracts and "expected"?
Go to https://cms.collierclerk.com/cmsweb
Click Case Search
In "Case Number" input "11-2019-CA-002689-0001-XX" (no quotes)
Click Search
Click Dockets
Click the paperclip next to Docket Num 2
TLDR; Toptal started small and took a little funding early on, but now has over $100mm in annual revenue and got there mostly through organic growth rather than follow on investment rounds.
The company seems to be wholly owned by one of the co-founders. The other co-founder, who was in college when the company started, doesn't have an equity stake at all. Presumably he had a salary from day 1. There seems to be some sort of agreement that if the company restructures, he might get equity at some point, but this isn't necessarily going to happen.
Founder 2 (no equity) is accused of defrauding the company by misusing funds and hiring his girlfriend at an above market rate. The language of the complaint indicates that he's upset about not having an equity stake.
Toptal is a massive ADA violator for those with ADHD screened out by competition programming style interviews, but are great programmers under routine conditions.
When I used to be a manager who did hiring, I was always open to accommodating the candidates needs. Like instead of whiteboard, using paper or laptop. So far nobody asked for take-home projects. A few times people asked for a second chance and I'd agree to it.
> 65. Also after the termination of [redacted]'s at-will employment, again to extract even more money from Toptal and continue to unjustly enrich himself at Toptal’s expense, [redacted] has also made baseless and unfounded claims, that he is entitled to $2 million in severance, the monetary equivalent of a two-month leave of absence, and a $40,000 bonus.
I'm pretty sure this is 3 separate items - $2 million severance AND 2 months of pay AND $40,000. If $2 million is the equivalent of 2 months of pay, the sentence should have been structured differently.
Another story of non-executives being screwed over stock - we’ve seen claw backs, revaluation, reweighting, etc
Seriously people need to stop accepting anything other than actual, real shares, that aren’t any kind of lesser grade/b class shares. Guaranteeing investor payback over employee payback.
Employee’s, especially early ones, are taking more risk than the VCs and should be compensated at a higher rate. If investor repayment is higher priority in funding rounds/buyout employee investment should be paid back before purely cash investors.
The reality is that you need to be able to trust the founders and board members you work with. A corporation's board typically has the authority to issue new shares (thus diluting existing shareholders), so even having unrestricted common stock or even preferred stock does not guarantee that you will always own a certain % of a company's outstanding shares.
Between all the preferred share terms, warrants, options, contingent earn-outs, etc, there's a million ways to engineer the divvying-up of proceeds in a sale.
Ultimately, it comes down to whether you trust your leaders to hold to the spirit of their agreement with you.
All that said... it would be really interesting to see a corporation with bylaws and governance/voting structured in such a way that employee ownership and payout %s could be maintained within certain guaranteed bands. It would severely limit that corporation's flexibility, and might lead it to have a higher risk of failure in bad funding market environments... but it could become a big draw for high-value employees who strongly prefer equity certainty over cash comp and company autonomy.
This is 100% true. You need mechanisms that validate and verify that trust (real stock or standard options, documented legal contracts, etc..) AND you need to have the personal trust in the board/founders in the first place.
Even with both there's risk beyond just market risk, but at least you've done what you can to minimize it.
It's an unfortunate mix of both, according to The Information. A co-founder, early investors, and employees aren't receiving stock because their contracts were dependent on future fund raises (which never emerged).
Nobody is going to offer you priority stock with maximal liquidation preference, even if you are at CxO level (you get priority, but a lower liquidation preference). Investors get the best ones; regular employees are out of luck most of the time; they should be happy just to get (worthless) common stock.
Edit: we've also replaced references to that person's name with "[redacted]" below. The reason is that HN threads tend to rank highly in search results. We don't want a situation where Googling some individual's name will forever lead people to an old thread like this, where they won't find important relevant information that, e.g., the case was later dismissed.
Generally we find out about these things because individuals (or, less optimally, their lawyers) email us and ask for threads to be deleted. We tell them that we don't delete entire threads because that would be unfair to the commenters who participated, but that there are usually other things we can do to help resolve legitimate privacy concerns while preserving the rest of the thread. This case was an example of that.