Uber Leadership Vacuum Exposes Strings Attached to Startup Financing

The executive leadership vacuum at Uber and a series of PR missteps and management blunders is exposing the contentious push-pull dynamic between private equity and venture capital investors and startups that usually plays out behind the scenes and rarely makes headlines.

The rancor has revealed divisions within Uber’s early investors and its founder and former CEO Travis Kalanick as players with large controlling interests in the company jostle with management over control.

At the heart of the issue is the real and perceived power wielded by early Uber funders like Benchmark Capital who feel entitled to some degree of say-so over management decision-making in exchange for making a relatively risky investment in unproven startups. In the case of Uber, these investors are increasingly concerned by the executive leadership vacuum and want to protect the company’s sky-high valuation in light of recent PR problems, workplace culture and executive shakeup.

Writes the Wall Street Journal:

Benchmark filed a suit against Mr. Kalanick, claiming he knew about misbehavior at Uber, including alleged sexual harassment, in June 2016 when he persuaded Benchmark and other shareholders to allow him to add three board seats under his control. The misbehavior led to a months-long probe into Uber’s culture by former U.S. Attorney General Eric Holder’s law firm, which issued an internal report in June. This contributed to Mr. Kalanick’s ouster as CEO that month.

Benchmark is seeking to force Mr. Kalanick off the board and have control of the three seats returned to the board. It said this week that it acted in part because Mr. Kalanick was impeding the search for his replacement.

There’s often a deal-with-the-devil quality to investment relationships between startups and VC funders. For startups with no track record, let alone profits, these are the investors that are willing to come to the table, and the funding has real and implied strings attached. Meanwhile, Kalanick is the poster boy for founder’s syndrome, in which charismatic founders wield disproportionate power and influence, leading to a wide range of problems as a business evolves beyond startup mode.

While we’re unlikely to see a power squabble out in the open like this, it’s undeniable that private equity investors are increasingly likely to throw their weight around and impose their will if they sense that their investment is a risk. One thing is certain, a situation like this where management is at odds with the owners is bad for everyone involved. 

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Regional Economies Find Hidden Price of Noncompete Agreements

A recent New York Times article by Conor Dougherty puts a human face on the damaging consequences that result when workers in broad swaths of the economy are required to sign noncompete agreements as a condition of employment.

While the statutes have been widely embraced by pro-business state lawmakers over the last decade, regional economies are starting to feel a negative impact. By effectively preventing experienced employees in entire sectors – including vast portions of the Texas economy like oilfield services – from leaving to work in similar positions at other companies, the result is a stifling of innovation in which experienced workers change careers rather than advance in their chosen professions.

Other negative effects include depressed wages and an exodus of experienced workers to states that do not have non-compete statutes. Recent studies have found that about one in five U.S. workers are bound by non-compete agreements but only a fraction of workers burdened by noncompetes are in possession of the kind of sensitive business information that the statutes are meant to safeguard.

As Dougherty notes, the impact on individual workers who inadvertently run afoul of these agreements can be devastating.

“Employment lawyers know this, but workers are often astonished to learn that they’ve signed away their right to leave for a competitor,” Dougherty writes. “By giving companies huge power to dictate where and for whom their employees can work next, noncompetes take a person’s greatest professional assets – years of hard work and earned skills – and turn them into a liability…Put it all together, and suddenly some of the main avenues for finding a better-paying job – taking a promotion with a competitor, being recruited by an old colleague – are cut off.”

In addition, states with strict enforcement end up suffering from a brain drain as their most valuable workers move elsewhere for better career opportunities. An employee with 10 years of experience should be an asset, but in this environment such experience is a liability in terms of career mobility. Meanwhile, California does not enforce such statutes, and companies based there continue to be worldwide leaders in innovation.

Used correctly, noncompetes serve a valuable purpose in matters involving employees with access to truly confidential information and for senior executives. Businesses are justified to protect their trade secrets and truly confidential information, but the over reliance on these statutes threatens to harm businesses and workers alike.

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U-Turn Ahead: Uber hits brakes over new hire’s refusal to help in trade secret defense

In a move that surprised no one watching the drama between Uber and Google’s Waymo self-driving vehicle division, Uber fired engineering whiz Anthony Levandowski on Tuesday.

The company thought it scored a real coup last year in hiring Levandowski to lead its self-driving vehicle effort. The hope was that he would help the company leapfrog to the head of the self-driving technology and artificial intelligence pack. But the high-profile recruitment soured almost immediately when Google/Waymo raised questions about trade secrets and internal documents it believed Levandowski took with him after leaving Waymo. Levandowski’s refusal to cooperate with Uber’s defense and his surprising decision to invoke his Fifth Amendment privilege against self-incrimination crippled Uber’s ability to defend itself from the trade secret theft allegations. Uber general counsel Salle Yoo had given Levandowski until May 23 to turn over documents related to that case; when that deadline came and went last week, Levandowski’s days were numbered.

As previously reported in Legal Issues in the Executive SuiteUber bumbled this case from the beginning. Poaching top talent from competitors is enticing and potentially valuable for businesses in highly competitive fields, but there’s a right way to do it. The rules are fairly clear and based in common sense: When a new employer hires talent who may have trade secret information from a competitor, the new employer should take reasonable steps to ensure it doesn’t try to use the previous employer’s confidential information. As a condition of employment, the new employee should be required to sign documentation spelling out that the new boss doesn’t want any trade secrets or confidential information, and that the new hire is promising no such information has been taken or will be used at the new job.

Additionally, agreements like these should provide that the new employee agrees to cooperate in any investigation or litigation related to any claims of trade secret infringement. Finally, if the new employer finds out that any of these promises has been broken, it should be crystal-clear that the new hire will be subject to discipline, including termination.

In this case, while privilege logs released by Uber indicate that its lawyers discussed legal concerns involving the recruitment of Levandowski, there’s no indication that the company addressed these most basic practices to ensure that star employees don’t bring trade secrets and work products with them. Faced with the increasing likelihood of an injunction in the near term and ultimately losing the lawsuit, Uber was forced to cut losses and move on without Levandowski. Tech companies are notoriously cavalier about what they view as innovation-stifling legal matters. If this is not a learning moment for Uber, then it should be for the rest of the business world.

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Errant Email Steers Uber into Trade Secret Trouble

It’s too early to know the degree of vetting that occurred before Uber handed Anthony Levandowski nearly $700 million for his fledgling autonomous truck company named Otto and brought him aboard to lead Uber’s self-driving vehicle division. A high-profile trade secret theft lawsuit filed by Google’s Waymo self-driving car project raises serious questions about whether Uber conducted the kind of fundamental review of potential conflicts that should come when companies hire high-profile talent from competitors. As Uber assembles its legal defense, Levandowski’s decision to invoke his Fifth Amendment privilege puts Uber in an awkward position to say the least.

Google’s Waymo car

Levandowski had helped Google take the lead in self-driving technology, including key innovations in LiDAR sensors that allow driverless vehicles to monitor surroundings. Levandowski left Google in 2016 to form Otto, and according to the complaint, Google began an investigation after learning that Uber had acquired Otto only seven months later. Google’s internal review found that Levandowski had downloaded 14,000 design files from Google’s car project before leaving to form Otto.

Writes Bloomberg:

“Google seemed content to sit on that information until Dec. 13, when a Google employee received an email from a supplier that was working on components for the lidar sensor in the company’s first production car…Strangely, though, the email’s subject line—“Otto Files”— made reference to Levandowski’s company. According to Google’s suit, the contents of the email, which seemed to have been intended for Uber rather than Google, included a machine drawing of a lidar circuit board that had Otto’s name on it but looked almost identical to Google’s. Two months later, Waymo sued Uber for trade secret theft and patent infringement, seeking damages and an injunction that could seriously impede Uber’s self-driving car program.”

 So far, the judge presiding over the case has been unimpressed with Uber’s response, which claims that lawyers cannot find the 14,000 documents in question on Uber’s servers. Meanwhile, Levandowski’s computers have not been searched because he has invoked his Fifth Amendment right to avoid self-incrimination. Privilege logs released by Uber show that the company’s lawyers discussed legal concerns about the acquisition months before it was announced.

“If you think for a moment that I’m going to stay my hand, because your guy is taking the Fifth Amendment, and not issue a preliminary injunction to shut down what happened here,” said U.S. District Judge William Alsup. “You’re wrong.”

While there can be enormous value in attracting key talent that can help solve problems and leapfrog technology, this kind of high-risk talent acquisition is not easy to navigate and there is a right way to do it to avoid the legal mess Uber finds itself in. It’s usually not one mistake but a compounding of mistakes that gets companies in trouble in situations like this, and Uber may be learning the hard way that high-level hires and acquisitions are areas in which advice of experienced counsel is critical.

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President Not Alone in Cavalier Approach to Protecting the Digital Crown Jewels

A brash, ego-driven leader flaunts his organization’s best efforts to protect precious digital assets. Wielding an unsecure cell phone and overall poor cyber hygiene, this headstrong personality doesn’t take kindly to IT underlings trying to guard the digital crown jewels.

Anyone monitoring the headlines might guess we’re talking about our commander in chief, but President Trump’s cavalier online habits have strong parallels with some leaders in the business world. While Fortune 500 corporations are far ahead of the data security curve, given increasingly strong board and shareholder oversight, it’s not uncommon for smaller companies – particularly privately held businesses – to be led by executives who might be headstrong, less accountable and less inclined to change habits and follow the rules regarding data security best practices.

Revelations that President Trump appears to be using an older model Android-based cell phone are shocking to those who understand the hacking threat, and recent business headlines bring home why it’s so important for businesses to do everything possible to protect data in our knowledge-based economy. Anyone following the news in this area will see lawsuits alleging increasingly creative ways to steal trade secrets. In Houston, Statoil Gulf Services recently sued its former chief technology officer, arguing that he stole trade secret technology, transferred them to his wife, and had her patent the technology. Click here to view Joe Ahmad’s interview with the Houston Chronicle about this lawsuit.  But a key issue in almost any trade secret case is whether the information is a secret.

Businesses that do not do their best to protect trade secrets often find it more difficult to prove to a jury that their secrets have been stolen. In the recently concluded ZiniMax v. Facebook/Oculus trial, ZiniMax won a $500 million verdict against Facebook, but failed to convince jurors that its trade secrets had been stolen by departing high-level employees who had been hired by Facebook. The jury’s decision was likely influenced by testimony that showed the company had not taken steps to keep those secrets secure. See Joe Ahmad’s interview with Polygon.com here.

The possibilities for trade secret theft are infinite and evolving, and defenses for yesterday’s attack may not help you tomorrow. Whether you’re the president of the United States or the president of an oil and gas company, today’s leaders should be working with the premise that it’s not a matter of if, but when a hacker will infiltrate your network. With that in mind, executives should be doing everything possible to make those intangible digital assets as secure as possible, and understanding that using an unsecure cell phone is the equivalent of leaving the back door to the warehouse wide open.

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Game industry executive’s job-hopping mistake leads to `Game Over’ jury verdict for Facebook/Oculus

Hours after a Dallas jury returned its $500 million verdict for ZeniMax over claims that Facebook and Oculus unfairly used its virtual reality coding, the creator of that code, John Carmack, took to social media to continue his defense.

Carmack, the legendary co-founder of id Software and lead programmer for some of the industry’s best-known games, hotly disputed the jury’s finding that Oculus developed its innovative virtual reality headsets with help from “non-literal” copies of code that Carmack had written while employed by ZeniMax. He was accused of taking the code with him when he departed to Oculus, a Facebook subsidiary.

“This is just not true,” Carmack wrote in a Facebook post as Facebook and Oculus promised an appeal, and ZeniMax threatened to seek an injunction on future Oculus headset sales.

While the lawsuit is understandably layered with nuance and complexity, Carmack’s story offers yet another reminder for executives and innovators who leave their jobs for competitors. Carmack’s personal and professional reputation and the Facebook/Oculus defense were seriously damaged by findings that Carmack had taken data with him on a USB drive after he left ZeniMax. In addition, jurors heard testimony that Carmack wiped his hard drive shortly after being served with the lawsuit and that he had even Googled a query seeking instructions for how to clear a hard drive.

For passionate and highly driven minds like Carmack, it’s not hard to understand the urge to take work with them when they leave. It’s human nature to view personal devotion and long hours spent at work as an extension of one’s identity. In fact, unless they have legal advice or are knowledgeable about the law, most people take too much with them when they leave their jobs. As Carmack’s case illustrates, that can be a big problem if someone decides to file a lawsuit.

This case is far from over, and all eyes are now on the post-trial proceedings and the likelihood that ZeniMax will obtain an injunction on future Oculus Rift headset sales. Gaming industry publication Polygon.com has been closely covering this litigation. Read Polygon’s recent coverage here, which includes an interview with Joe Ahmad, AZA founding partner and author of the blog, Legal Issues in the Executive Suite.

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Picture that text you just wrote on the screen in a courtroom

Executives know better than to put questionable statements in email, right? Well, it is past time to realize the same goes for texts. Just like a Miranda warning: Anything you text can and will be used against you in a court of law.

Texts have been the bane of married men and women in divorce court for years, and they are providing for juicy and damning discovery in civil and criminal cases as well. And, destroying texts is increasingly being seen by courts as destroying evidence. Texts are electronically stored information, and when you know there could be a lawsuit, you should know you need to keep it.

texter-by-daradaradaraTexts are normal fare in courtrooms now. Judge Judy even uses them regularly as evidence in her TV arbitration cases about landlords and loans. In a federal copyright case in New York involving Jay Z, called Walker V. Carter, texts became critical evidence about a contract and royalties. They are treated like normal evidence in criminal cases too. The Texas Court of Criminal Appeals just tossed a conviction and death sentence of a Waco man, finding the admission of text message evidence was unconstitutional because the texts were seized without a warrant.

In a recent case in federal court in North Carolina called Shaffer v. Gaither, the plaintiff dropped her cellphone in the bathroom and destroyed relevant text messages without backing them up. The judge was not happy. The judge didn’t dismiss her sexual harassment case but said he might tell the jury at trial that missing messages could be assumed to have reflected badly on her.

In an trade secret case between night clubs in Colorado called Christou v. Beatport, the court issued a sanction for not securing texts. So when litigation is anticipated, destroying evidence like this is sanctionable. Back up those texts on paper, get a new phone and give the one with evidence to your lawyer. And do not go holding evidence near running water.

It took the world a long time to realize that our private jokes and nasty sentences from emails could be projected up on a screen in court.  That goes for texts too. Executives should be careful to keep a company’s most private business as private as possible by saying it in person to the people who need to know.

Too many of us think of texts like Snapchat – here one minute, gone the next. But texts live on, on your phone and on the recipient’s phone. We speak differently in texts, talking with more raw language, less formality and less care. That late-night message on the road saying, “Stop by my room,” could be costly. Texts could be proof of collusion, proof of trade secret theft, proof of just about anything. They are evidence.

There can be legal distinctions between what is on a company phone and what is on a private phone. But once the two are mixed, the texts are likely discoverable. What to do? Separate your two text worlds. Texts to clients should not include third parties. Speak in person or on the phone whenever possible and when you text, know you may not be alone.

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NFL lessons for the C-Suite on succession planning, Exhibit 1: Tony Romo

Dallas Cowboys owner Jerry Jones has himself in an ideal succession situation. He waited to draft the perfect candidate – Dak Prescott. He and can now let potential future star quarterback Prescott learn while aging star Tony Romo still has the ball.

cowboysBoards and C-Suite folks should think like Jones: Keep your stars in place, but keep an eye on the future of the company. A CEO can fall at any time, be it from a physical problem like the cancer that took Apple’s Steve Jobs, a sexual harassment scandal like the one that felled Fox News’ Roger Ailes or a government investigation like the New Jersey inquiry that caused United Airlines to drop Jeff Smisek.

Certainly the NFL may not always get it right or do it smoothly. Just look at the Indianapolis Colts; they couldn’t afford Peyton Manning and Andrew Luck, so they tossed their older star. Of course, corporate America doesn’t have to deal with NFL salary caps. Nor does corporate America have to bench one player for another to be useful. A CEO successor can be the COO or president or serve some other role in the corporation while being groomed to take the helm should there be a natural succession or a sudden need for a replacement.

A 2014 study by the National Association of Corporate Directors showed that two-thirds of U.S. public and private companies reported they still have no formal CEO succession plan in place. Even though it can be awkward to plan for a company leader’s exit, having no plan is bad for shareholders, bad for employees and bad for business. This can be especially devastating to a smaller business. Even family businesses can have this problem as The Economist notes in discussing a lack of succession planning in family oil businesses in the Arabian Gulf.

 MIT Sloan Management Review this summer cited the example of Surveymonkey whose CEO died unexpectedly last year. There was no succession plan. The company looked at 75 candidates before making a choice two months later, only to have that person be replaced six months after that. That uncertainty and tumult had to cost them.

Apple did it right when the company knew Steve Jobs would be leaving, as I wrote back in 2012. Warren Buffett has been careful about this too. He realizes that such a plan allows people to stay invested and believe that things are, and will be, under control. Boards and incumbent CEOS owe it to their constituencies inside and outside the company to deal with the sensitive subject of passing the baton. Just as a smart company buys insurance for unforeseen problems, a smart company has a succession plan even if it seems the CEO is in great health and the horizon appears to be without scandal. Accidents and quarterback sacks happen.

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Your Employment Agreement is Nothing Like a Mortgage Document

employment-contractAnother report on employment contracts is discouraging but not surprising. A survey of 1,000 people in the U.K. showed that more than 90 percent didn’t read their employment contracts – despite the fact that the terms can haunt them for years if they are violated. I have written about this subject before, including earlier this fall in regards to a lengthy online nondisclosure agreement that Republican presidential candidate Donald Trump required of online campaign volunteers.

It can’t be said too often: Read these contracts. Understand them. Get a lawyer’s help if necessary. My high-level executives often are asked to sign complicated non-compete agreements, and I work with them to get more flexible terms. Non-competes used to apply primarily to well-compensated employees, but they are increasingly used for the rank-and-file.

Many people who are asked to sign these agreements consider them fairly innocuous documents, much like the piles of papers one signs when they purchase a home. Buyers sign page after page without thoroughly reading the contents, but they feel fairly confident they understand the terms.

For example, when agreeing to a 30-year mortgage, in no way does the buyer believe he/she MUST remain in that home for three decades, right?! They’re not checking into the “Hotel California,” as the Eagles’ song goes. One can leave as long as the loan is paid off. The lender just wants the loan repaid – they don’t take an early departure personally.

The mortgage lending process is regulated and fairly normalized, so people feel pretty comfortable with the process. That is not the case with employment agreements in Texas, where employers are allowed lots of leeway in setting terms in employment contracts.

Historically, Texas and U.S. laws have been very protective of those who take out mortgages. But in regards to non-compete, nondisclosure and confidentiality agreements, there generally are no similar protections for employees outside of a few states – Texas not being one of them.

These agreements vary substantively and substantially. The job may be appealing, but there can be real danger lurking in the employment agreement that comes with it.

Additionally, after years on the job, an employee may forget signing a binding non-compete agreement way back when. Or they may not have realized they were agreeing to employment terms when they signed onto the company’s savings plan.

Carefully consider all the details, understand the employment terms, protect your own interests. You know the people who may end up suing you if you decide to break your employment agreement.

 

 

 

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Dialer Beware: Trump Volunteers Must Sign Onerous Agreement to Work Online Phone Bank

sign contractWhere do I begin?

There are so many troubling aspects to the lengthy nondisclosure agreement that Republican presidential candidate Donald Trump is requiring online campaign volunteers to sign that I just had to speak up.

The contents of this 2,271-world nondisclosure agreement have come to light in recent days as the presidential campaigns ramp up their voter outreach efforts.

At this point, I will disclose I’m a Hillary Clinton supporter. But let’s set aside politics and just analyze this from a legal perspective. My complaints and concerns about this nondisclosure agreement come from my experience as a lawyer who represents executives in a variety of matters, including these types of legally binding agreements.

To sign up on the candidate’s website for the Trump Red Dialer, an online call system that connects campaign volunteers with potential voters, one first must first sign the nondisclosure agreement.

If you sign this far-reaching agreement, and you need to think long and hard about it before you do, you are prohibited from criticizing Trump as well as any member of his family for the rest of their lifetimes, not just during the campaign period. You also can’t comment critically on his brands or disclose any personal information about the candidate.

This non-disparagement requirement is just too ambiguous and broad. It states you cannot disparage Trump or any “family member,” which includes grandchildren and his nieces and nephews, or any of their companies. Try figuring out who all of these people and companies are – just try! Nor can you even disparage any of these companies’ products.

Yes, non-disparagement clauses are difficult to enforce and legal cases regarding them are rare. But that doesn’t mean they can’t be successful.  At least one Arizona court has enforced a non-disparagement clause, so you need to be careful about signing one.

The definition of “confidential information” is a little over the top as well. It includes anything Trump insists is confidential, including his “political affairs” and other things that are clearly public.

Additionally, the non-compete and non-solicit is strange and unnecessary. The “no competitive services” clause is particularly troublesome; it requires the person to agree “not to assist or counsel, directly or indirectly, for compensation or as a volunteer, any person that is a candidate or exploring candidacy for President of the United States other than Mr. Trump and to prevent your employees from doing so.”  So much for changing your mind.

I could go on and on, but you get the idea.

Again, we’re talking about online volunteers here! A legal question to ask is what is the consideration – what does the volunteer get – in return for signing this broad agreement?  One guess is that it could mean they may get access to some type of confidential information. But that is neither promised nor even implied in the agreement.

In the business world, this would not fly.  Maybe Trump has passionate supporters who will sign anything just for the privilege of doing work for free.  But most companies will have to promise something, and limit the restrictions to those reasonably necessary to protect the business, for it to be enforceable.

Unfortunately, I think many volunteers will sign the agreement without getting any legal advice whatsoever. They support the candidate and they want to be part of the political process. Those are sincere goals. But in doing so, they also are making a lifetime promise that could someday prove to be problematic.

 

 

 

 

 

 

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