The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:55:13 · Jason Lemkin, Harry Stebbings
[00:55:13] S2: Okay. There was one I liked, but I I like the one because it could change a lot of tech stuff. The engineers suing, which one was it? Which which are they? The license deals? I didn't think about that, but now it seems like an obvious claim that that, like, I lost the benefit of my consideration by doing this. I don't know where the lawyers come out on this one, but, yeah, give us the background on this one. [00:55:34] S3: Grox engineers sue over NVIDIA's $17,000,000,000 license and hire deal. Two former engineers sued in Delaware, alleged Grock's board effectively sold its core technology and top 200 staff to NVIDIA through an 11,000,000,000 license plus, about 3,000,000,000 in stock, leaving common holders with a hollowed out company.
00:55:51 · Rory O'Driscoll
[00:55:51] S0: The news is that they perceive that there might be a course of action because zooming out a million miles, corporate law tries to say everybody gets treated the same and there's two hundred years of precedent, and you know exactly how it happens. All common shoulders get treated the same. Board members have a duty of care, fiduciary duty to all shareholders. Your case law up the wazoo has to happen. And this stuff tears up all the case law, and it effectively allows the buyer to reallocate consideration in the company. Hey, you guys are coming across, and you get a lot of money. You guys are getting stayed behind, and you get a little money. And crucially, these two employees had already left the company. And I don't know this for sure, but my guess is when the acquirer is allocating capital, they don't say, oh, I also want to take care of the ex employees, because they're like, why would I bother? But Delaware law says everyone who owns a common shareholder is exactly the same, and it's one of the non negotiable principles of this stuff that you treat everyone in the same security in the same way. So when I read that, I'm taught, that's interesting. That's a clever little case. And it'll run a little. I wouldn't be surprised to see it settled because there's probably only a small number of people in the class because my guess is everyone who came across was happy. My guess is everyone who stayed and got stuck is happy, so it could be a relatively small number of people who'd left already. But it's gonna be an interesting case where they probably have some legal argument to make.
00:57:15 · Dev Ittycheria
[00:57:15] S1: Yeah. I'll connect dots. Right? Remember, we started this discussion about people leaving and, you know, leaving very, very quickly. And here's the parallel I draw is like investors long ago and actually even more recently have learned to protect themselves in situations. They negotiate these kind of issues upfront, what happens in any kind of exit, including a weird one. Employees never thought to ask about this. So if you're a founder, you're gonna have employees saying, hold on, what happens to my equity if the company's tech and some members of the team get bought, but the company doesn't? And I think founders need to be able to answer that question because that's a question as people learn about this, it's going to be coming up more and more often, especially if people switch between companies very often.
00:57:56 · Rory O'Driscoll
[00:57:56] S0: And the idea of corporate law Delaware or even if you go to a place like Texas, you shouldn't have to think about it as an employee because it's like, dude, there's common law and you'll all be taking care of the same. But once that gets eroded, as you say that, once that you know it's up for grabs, then it's quite insidious. And you're right, everyone has to think, when I join a company, I don't just have to think what my 1% is worth. I have to think, well, what could happen to my 1% if you sell the IP? What could happen to my 1% if you sell the IP and half the employees? And I think it probably makes everything harder to pull off. So it'll be interesting to see if this leads to some kind of pushback away from those kind of structures. I mean, they're not ideal, and the the only reason people are doing them is because of the FTC. I mean, no one ever say this because they can't, but it's because of the FTC and the fact that you can't get M and A through in any appreciable time, whereas you can get these deals done literally overnight and the employees start next days. It's a workaround, a regulatory problem that is no surprise creating a bunch of second order issues and unfairness.
00:58:56 · Jason Lemkin
[00:58:56] S2: I just think it's interesting because it it... Listen. This this structure is fading away a little bit in the politics aside in the current administration. It sure seems easier to get a quick deal done, a a fin or a listens lab pretty quickly. Right? So some of these issues, some of them are fading at the margin. But man, I don't know. Some of these deals sure feel like mergers and substance to me. So I think I think if one of these lawsuits wins, which even if one fails, another may well win. Right. I think this is a mergers and substance. I think these deals will die because they already have double taxation. They're already horrific from a double taxation perspective. Then add a whole set of risk and carve back for the employees we're leaving behind with the keys at Windsurf who will end up being the big winners and cognition, right? But it looked like they got left with the keys and a year of cash to work it out. I think it'll end these deals if there's significant legal risk here. It also feels to me a little like a safe note. You know, SAFE say, I know this sounds niche, SAFE say they qualify for a qualified small business stock because they're stock, but they're not. They're clearly not stock. And all these non merger documents say they're not mergers, there's licensing deal. I'm sure they say the more deals go by, the more clauses say it's not an acquisition but just because you say it's not a duck, it don't mean it's not a duck. I think some of these are
01:00:09 · Rory O'Driscoll, Jason Lemkin
[01:00:09] S0: Exactly, and that's exactly the case to lay it out, which is it was a de facto in acquisition and there's a whole bunch of things you have to do in an acquisition. So yeah, you're right. [01:00:18] S2: It's just in hindsight that we didn't think about this because they may end up being like, how the hell did we think we could do these deals? And just completely work around the... Not just part of the cap table, but the whole cap table. [01:00:28] S0: But it's it's forgiveness permission. I don't... We talked about it at the time. We don't like it. It feels unfair. But I think the pragmatic answer that I'm willing to bet... Grock was NVIDIA, wasn't it? Right? I'm willing to bet. Let's say they have to settle and they have to chuck in an extra $200,000,000. The real answer is my lawyers, my very smart lawyers came to me and said, I found a way that we can buy this company on a Sunday night and all the employees start on Monday morning and we have the IP versus this other way where we put in an application to the US government and close in nine months. And Jensen said, is there some risk? And they said, yeah. He said, I can live with it. Done. We did the deal. And then two years later, you go, yeah. There was a little bit of risk. It turns out it's 1% extra on the price. Here's $200,000,000.