It’s no secret that these days, down rounds are about as common as khaki pants in a startup boardroom — and that nearly as many startups are being wound down entirely.
But VCs eager to get back 20 cents on the dollar should prepare themselves for something potentially more unpleasant than bad returns: litigation.
“We’re definitely starting to see more situations with distressed companies,” says Carl Metzger, a partner in the litigation group of Goodwin Proctor. “VCs’ fiduciary duties [to their LPs] are at complete odds with common stockholders [like founders and early employees] who are no longer represented by management of the company. They’re saying: ‘It we keep this [startup] going, nobody is going to get anything.’ Meanwhile, if you’re a common stockholder, shutting down the company is the last thing you want.”
The lawsuits, like three others filed in Silicon Valley in recent years involving Wine.com, Epinions.com, and Nishan Systems — whose founders all sued their venture backers over terms they viewed as favorable to the investors but onerous to nearly everyone else — are bound to follow as a result, says Metzger.
“We haven’t seen a new wave yet, but after all these dilutive financings, it’s going to come,” he says.