Rapt founders settle suit against Accel, Levensohn

Two of the three co-founders of business software company Rapt Inc. have settled their suit against Accel Partners, Levensohn Venture Partners and Rapt, according to court documents obtained earlier this month by VCJ.

The two sides in the dispute were scheduled to have a “complex case status conference” on Sept. 15. But accordinng to the settlement documents: “The parties expect to file a dismissal within 45 days and respectfully request that all conferences … be taken off calendar.” Details of the settlement were not disclosed.

A partner at Levensohn declined to comment. VCJ contacted Accel, Rapt and attorneys for both sides, but none returned calls.

The suit was filed by Adam Galper and Paul Dagum, who co-founded Rapt in 1998 with Tom Chavez, who remains as CEO and board member of the San Francisco-based company. All three co-founders worked for Sun Microsystems prior to launching Rapt, which develops profit optimization software for improved pricing and supply descisions. Chavez and Rapt were named defendants alongside Accel, Arthur Patterson of Accel, Levensohn and Christopher “Kip” Sheeline of Levensohn.

Galper and Dagum claimed breach of fiduciary duty and fraud in their complaint, which was filed in San Mateo Superior Court in August. In the suit, Galper and Dagum alleged that their Rapt equity was unfairly diluted by the defendants, in part because they each had left the company to pursue other interests. They had received founder’s common stock while bootstrapping the company, although the suit does not specify how much.

In the beginning

Rapt raised its first round of institutional funding in November 1998, with co-plaintiff Bristol Investment Co. providing notes that later would be converted into common stock. The issue of common stock soon became important, since subsequent investors would receive preferred shares. Accel was the first such investor, leading a $4.7 million Series A preferred round in July 1999 at a pre-money valuation of $6 million. Later, Summit Partners led a $27.8 million Series B preferred round in May 2000 at an $80 million pre-money valuation, with Sheeline, who was then a GP at Summit, taking a board seat.

During this period, Galper left his CTO role to take a similar job with XTime, while Dagum stayed aboard as chief science officer.

By the time the company raised a $9.13 million Series C in March 2002, the bubble had burst. Rapt’s funding was at a pre-money valuation of $32 million. Levensohn led the deal, with new Levensohn partner Sheeline maintaining his seat. The company completed a Series D financing earlier this year at a pre-money valuation of about $35 million. This represented a second straight down-round when the Series C capital is considered.

It is important to note, however, that not all common shareholders were affected equally. Rapt increased the current employee option pool by 10x, to “make them whole.” It also allegedly included a carveout for Chavez, so that this founder’s equity would not be similarly washed away. Neither Galper nor Dagum was offered any “make whole” provisions or a carveout, thus reducing their ownership interests by about 90%, according to the suit.

The complaint argued that the Series D round this year was a breach of fiduciary duty, because it had a disproportionately adverse impact on one group of stockholders as compared to the others. Moreover, it argues that the round valuation was artificially low (based on revenue growth), and that Accel and Levensohn did not adequately seek third-party funding. —Alexander Haislip with additional reporting by Dan Primack