Washout: The Founders' Tale and Investors' Tale

Abstract

The competing narratives of the founders of Alantec, Inc. and the venture capitalists who funded the company are explored in the context of Kalashian v. Advent VI Ltd. a California Superior Court case. The founders of the company, which produced switches for computer networks, raised several rounds of financing from venture capital firms that ended up controlling the company's board. After the company continued to fall short of its sales projections, the board ousted the founders and brought in new management. The company subsequently raised two new rounds of financing which resulted in dilution of the interests of the founders from about 8% to less than .01 %. Alantec then launched a new product, "the Power Hub," which became highly successful, and the company ultimately went public. The founders sold their remaining shares shortly after the IPO. Two years later, Alantec was acquired for the equivalent of $70 per share. Following the sale, the founders sued, alleging that the venture capitalists had committed fraud and breached their fiduciary duties as controlling shareholders of Alantec. The case presents actual excerpts from the trial briefs of both the founders and the venture capitalists, and presents competing views on how and why the dilution occurred.

Learning Objective: To explore the legal issues surrounding down-rounds and wash-outs, comparing and contrasting the interests of founders with the interests of venture capitalists. To explore the nature and scope of fiduciary duties and contractual duties in the context of a company's issuance of new shares.