“This is reflective of a growing tension between startups and investors.”
– Shruti Gurudanti, partner and corporate transactions director at Rose Law Group
By Sarah McBride | Bloomberg
When Denis Grosz invested in software startup Toptal LLC in 2012, he hoped the $1 million bet could one day make him a fortune.
Instead, it landed him on the receiving end of a lawsuit, leading to more than $2.6 million in damages against him and his new firm and possibly tens of millions more in legal fees.
At issue is a challenge to a fundamental convention in Silicon Valley: whether the startup has denied early investors a return by refusing to switch their decade-old convertible debt commitments into equity, tying up their holdings even as the company has flourished. Without equity, they can’t sell their interest in Toptal, making their outlay worth little more than the day they invested.
While Silicon Valley relationships between investors and the startups they fund are frequently tense, it’s rare for them to boil over into lawsuits. Deals are usually hashed out behind closed doors, struck by founders eager to please their backers and investors wanting to seem founder friendly.
