Can you imagine a world where an entrepreneur could be sued for refusing to give up? A world where starting over could attract a lawsuit?
We live in that world. It has happened before, and it will happen again.
Startups die, but the entrepreneurial spirit dies hard. After a failure, some founders may want to work on an entirely new project, but others refuse to let go, and give the same business idea another try.
But these tenacious entrepreneurs may run into problems if they do not get the failed startups’ consent to pursue the same business idea, even if it was their idea in the first place.
Directors And Officers Are Fiduciaries
Directors and officers owe fiduciary duties to their company. This means that they must stay loyal to the company, put the interest of the company before their personal interest and never misappropriate trade secrets or misuse confidential information.
This is true even after a director leaves the company. Unless the company consents to it, he or she cannot disclose confidential information. This makes perfect sense, of course. Without such rules, company insiders could crush struggling startups by selling secrets to competitors, and founders could swindle shareholders.
But the logic behind the law collapses when the startup is a failure and a founder is stuck with no options to reinvigorate the business idea.
The easiest way of resolving this problem is for the shareholders to agree to redistribute the intellectual property and tech. This agreement could be there from the get-go, in the company’s initial shareholder agreement, or later on, as the company liquidates its assets.
Short of that agreement, founders cannot give another shot at the same idea or expand on previous company technology — at least not without risking a lawsuit.
The Cautionary Tale Of Schroeder v. Pinterest
One case first filed in 2012 against Brian Cohen, Chairman of New York Angels, and Pinterest’s first angel investor, has been sticking for these very reasons.
In Schroeder v. Pinterest Inc.’s October 6, 2015 decision, the New York Appellate Division refused to shut the case against Brian Cohen just yet, and reversed in part the lower court’s decision, holding that the “court erred in dismissing the breach of fiduciary duty claim against Cohen.”
Before investing and advising Pinterest, Brian Cohen was the Chairman and CEO of Rendezvoo LLC. By early 2008, Rendezvoo was going nowhere and the founders were contemplating liquidating the company. In mid-2008, Brian Cohen abandoned the company, and proceeded to invest in and advise Pinterest in 2009.
Startups die, but the entrepreneurial spirit dies hard.
Brian Cohen gave the Rendezvoo idea and other confidential information to Pinterest, according to the complaint. As a result, Pinterest allegedly copied many features of the Rendezvoo site — among other things, the ability for users to post their interests for their friends, and the use of a “board” as both the main user interface and profile page.
Brian Cohen tried to get rid of the suit by filing a motion to dismiss. However, he couldn’t dispose of the heart of the lawsuit: the breach of fiduciary duty.
It did not matter that he was no longer working for Rendezvoo by the time he invested in and advised Pinterest. The information acquired while at Rendezvoo had to stay confidential, which the plaintiffs argue he failed to do.
Takeaway
Even without a non-compete clause, fiduciaries (directors and officers) may not share with their new ventures the confidential information of past employers.
This cumbersome rule is particularly inefficient when applied to the CEO of a failed startup because it discourages one key character trait that defines most entrepreneurs: They are persistent.
Even if what Rendezvoo alleges is accurate, Rendezvoo had tried and failed. If Brian Cohen wanted to give it another shot, his previous co-founders should not be able to stop him or obtain a free-ride on the new venture’s success.
Of course, as is almost always the case, the sensible way of avoiding this kind of trouble is to negotiate the restriction away through contracts.
This whole lawsuit could have been avoided.