When Your Former Boss Sues You for Starting a Startup

My first instinct is to congratulate Shred for standing up to the big bully. That was really almost what I posted.

But pick apart Shred's note, and really it's an emotional appeal based on two ideas:

1. That the sole test of stealing ideas is source code that has been copied verbatim.

2. That the only possible secrets of Smule are features implemented in released products.

These are pretty weak legs to stand on. They're actually preposterous.

Lawyers will tell you that it's really hard to prove theft in court without a smoking gun like "stolen source code", and the chances are, if they've stolen ideas in other ways, they will probably get away with it.

Almost certainly, Shred's lawyers are playing a key strategy role in this PR campaign.

So my advice is to be wary of emotional appeals from either side of litigation. We don't know what happened, and we learn less than we think from these notes.

ps. Yes I read the remarks in Business Insider too. I'm not advocating that Smule is the innocent party here. Most likely this is some bullshit pissing contest with 0 innocent parties.

Genuinely curious for your legal counsel's take on you posting such an article publicly. I've always thought the prevailing wisdom shared by all lawyers was "don't talk."

Also, in this day and age of using services like Github for personal projects but having access to other repos, etc., using things like 1Password for work and personal things, how has the discovery process worked with everything?

I'm really interested in knowing to what degree someone should be paranoid. Are you potentially risking your entire business because you once checked your work webmail from a personal computer or checked a personal email account from a work phone?

It should be noted that the startup in question, Shred Video, is (YC S15).

YC comment: http://blog.ycombinator.com/on-the-shred-video-lawsuit

The only time I heard Jeff Smith was in Stanford Podcast[1]. I listened to every podcast on Stanford (DFJ Entrepreneurial Thought Leaders lecture series) and particularly remember Jeff Smith because I thought he came out wrong from the talk. His statement "Palantir is evil" because they hired a guy who smule was trying to recruit. Seriously you are giving a talk to inspire future entrepreneurs and use that to bad mouth someone who is not even your competitor?

PS: I have no relationship with Palantir. It just really bothered me that someone would use that opportunity to bad another company.

[1]http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2992 (The point comes at the end as a reply to last question).

Back in 2000 (seriously!), I was introduced to a small group of guys in Redmond, WA. These guys were former Real Networks engineers, and had their original stock certificates in frames on the walls.

The product they were building was a cross-platform media player. It would stream music/video/audio/etc. and work on PCs and Macs. They had been in operation for just a few months, and had a great prototype in place. I interviewed with them and really liked their story. They followed up days later and invited me back one more time -- presumably to talk about joining.

A few days later I'm in my car, driving to their location. I actually have a cellular phone and it starts buzzing. I pick up (yes, nobody cared about driving & talking in 2000) and it's my friend who introduced me to these guys. The conversation goes like this:

      Me: Hello
  Friend: Hey, what are you doing?
      Me: I'm on my way to meet with those guys again.
  Friend: Are you there yet?
      Me: No. Why?
  Friend: Turn your car around, and don't drive near that place.
      Me: Why?
  Friend: Their place is being raided right now. Cops everywhere.
      Me: What?
  Friend: They are taking away everything.
      Me: (turns car around, never speaks with them again)

Real Networks had filed an injunction and the company was raided on charges of stolen intellectual property. I never learned the details, but as my colleague told me later -- he's pretty sure most of what they were doing had been built at Real Networks.

This is an inherently tough situation for the founders but not unwinnable, provided:

1. The code is as they say it is, entirely independently developed as opposed to code that infringes the employer's copyright because it has been stolen.

2. No moonlighting took place. If it did, the IP is so related in its broad subject matter that, even under the liberal California law, it could be said that it involved a reasonably anticipated extension of the employer's existing products or IP development, in which case it would belong to the employer even if the employees developed it strictly on their own time and strictly using their own resources while employed.

3. The Shred products do not embody proprietary trade secret information belonging to the former employer. For the employer to have a legitimate claim on this prong, it would have to show that it had non-public information (e.g., special algorithms, techniques, etc.) that gave it a decided competitive advantage, that were not known to others in the field, and that were the subject of special efforts by the employer to keep them confidential. If an employee who is bound by a typical confidentiality agreement learns of such trade secret information or techniques only while employed, or even develops or discovers them while being paid by the employer, all such trade secrets belong exclusively to the employer, even if the employee is capable of walking away with the secrets "in his head" only. If, however, the techniques, insights, information, etc. that the employee later used to develop the new products following termination of employment consisted of things known or derivable by any person skilled in the field were derived exclusively using that person's general skills and expertise, and not from taking any employer's proprietary information, then the employer has no claim on any of this. In particular, if someone was already an expert in the field before beginning the employment, and applies what he knows for the benefit of his employer while employed, that employee continues to own what he came in with and can use it as he likes in any post-employment situation. He does not lose what is his just because he passes through a particular employment situation. So, summing up, if the post-employment products derive exclusively or primarily from a former employer's "secret sauce," the employer has a claim; if they derive only from the general skill and expertise of an employee, the employer has no claim.

4. Nothing in the new products infringes any patent belonging to the former employer.

5. No other acts of unfair competition took place that would have tainted the new venture (e.g., no raiding of other employees by soliciting them while employed, no post-employment violation of any express non-solicitation clause, no customer theft based on misappropriation of trade secret information and the like).

6. The founders have a practical way of dealing with the legal costs and the impact of the lawsuit cloud on their ability to develop as a company. If the case is a clean one from their perspective, this usually means the employer will not be able to get any type of preliminary injunction to stop the venture during the legal fight. In that case, if the new venture can generate revenue, this can help fund things or can possibly be sufficient to assuage concerns of investors so as to convince them it is worth their while to fund the venture in spite of the lawsuit. The dollars involved in such a defense are large for a small venture but can be managed in the right situations (likely in the hundreds of thousands, more if the employer is particularly obnoxious).

7. If the former employer is taking a reputational hit by pursuing the lawsuit, this works in favor of the founders as well because there is a real price to pay besides money for being a bully (if that is what is happening). After all, who wants to work for a horse's ass of an employer given a choice.

I don't know the facts here but there are several indicators that the Shred founders are being truthful in what they are saying. If this all followed from an initial rejection of the former employer's effort to own or control them, this likely indicates bad faith by the employer. The offer to have the code compared by a neutral is also important. It is true that stolen code by itself may not be the key thing but such an examination can bring to light many important things about whether a viable claim exists here or not. The employer's apparent refusal to allow this does not speak well of its motives. Even worse, if, as I understand it from public reports, the employer wants the code turned over to it in discovery, this is a very bad sign. Even if this is done under a so-called protective order, this sort of tactic is very often a tip-off that it is the employer and not the employees that is trying to engage in dirty tactics to gain a competitive advantage. Information is very amorphous and having the employer's developers scour the code directly is a sure way for them to grab key ideas/techniques that they normally would have no ability to access. Another tip-off is the employer's CEO being taped making statements that he intends to win whether the employer is in the right or not. By itself, perhaps an inconclusive statement but combined with the other factors, this does not look like good faith. Finally, YC is standing behind Shred. This, again, is only an indicator but YC has demonstrated itself to be nothing if not honorable in innumerable situations and it does not want the taint of being associated with a dirty company. Its support is thus a good indicator of what is going on here in reality.

Only time will tell who is right but, on the surface, this looks to me like a classic case of abusive litigation aimed at gaining something besides a just result on the merits.

IANAL, but: for all the comments stating "there are two sides to every lawsuit," let me say that oftentimes there aren't. And just because someone threatens to sue someone else does not mean the party being sued did anything wrong, it just means plaintiff wanted to sue the defendant.

I'm speaking from personal experience, a former employer threatened to sue me for unspecified 'trade secret infringement,' and it cost over $20k in legal fees to convince ourselves we were covering all our bases.

The problem is there's a basic asymmetry in these situations: it costs very little to initiate a lawsuit, or even just threaten to initiate a lawsuit. We were so scared we spent money on lawyers (and a second opinion!) before anything had even hit the court system.

Probably obvious advice we should've taken: do nothing until they'd actually filed something, then respond only to specific allegations. The burden of proof is on the plaintiff, and California has some really excellent worker protections around IP etc. Had we just ignored them it probably would've blown over.

Shred sounds like they're on top of this, but if anyone needs the name of a good IP lawyer in CA (he's in LA), message me and I'll put you in touch. I would love to refer him some business because he gave me hours of free advice, and was generally very good about keeping costs down. (Relatively speaking. Signing a check over to a law firm feels like the worst use of capital.)

Business Insider makes an interesting claim about the boss's public statements on litigation...

http://uk.businessinsider.com/smule-ceo-shred-video-lawsuit-...

I am sad to say I was a Smule customer, having downloaded and played Magic Piano. I also purchased quite a few songs inside the app. It is/was a great app.

Not anymore. I've deleted Magic Piano and I'll never again be downloading, purchasing or contributing to in any way Smule or Jeff Smith's companies or products.

I'm in the middle of writing an article about startups and attorneys. Normally I write articles for attorneys to read, but this time I'm trying to write for startups. This story falls right into the "hate lawyers" mentality I;m trying to address.

They seem to have not adopted appropriate procedures for exiting an employee. Nor did they have appropriate advice on handling IP issues. This is evidenced by the article's conflation of copyright (the literal code) function (what the code does) and tradesecrets. Whether the code enables the same features is not the issue. It is very possible that he stole and used code in an altogether different product. It is also possible that he stole said code and didn't use in any other product. That can still be a copyright/tradesecret violation.

Having legal advice at hand can prevent these situations in the first place. It doesn't cost much to have a lawyer drop by for an afternoon each month. I do quick IP lectures all the time at small outfits. Making sure new employees and current managers understand what IP actual means can really calm the waters.

"Mark wanted an amicable departure with Smule, and was more than willing to help his former boss and co-workers after he left."

Rookie mistake Mark. Clean break, and go do your thing.

Good luck but you need to understand where you made your mistake before launching this whole David vs Goliath story.

Hi All

I'm a founder of Shred Video and the author of this article. Happy to answer any questions about our experience.

I got curious about the facts, so I dug a bit. If anyone is interested, here is all the public information about the case:

http://webaccess.sftc.org/Scripts/Magic94/mgrqispi94.dll?APP...

This isn't the first time, even for a yc company. Remember AdGrok? I think the original post is down, but the short version is the founders met while working for AdChemy. AdChemy's ceo Murthy Nukala -- who sounds like a real piece of work; he apparently got $2.4m [1] in the eventual walmart acquisition while the employees got fuckall -- sued AdGrok and basically killed the company. They had to raise while being sued and the founders basically got tired of the stress [2].

[1] http://www.businessinsider.com/document-from-walmart-adchemy...

[2] http://priceonomics.com/the-time-my-startup-got-sued/

This comes down to what it means to be an employee and fundamental aspects of class. The reality, although difficult for most to accept, is that the current wage-based system grew directly out of the previous system which was outright slavery. The ownership/master class view employees as property. Any and all output including ideas are also viewed as the property of the owner.

And so far as possible employers attempt to extend the range of their ownership and control of their employee's and employee's ideas as far into the future and to as great a degree of scope as they can get away with.

Fundamentally these are unresolved issues our society has about class, equality, and freedom.

I am with you Shred team - this is a ridiculous and unfortunately all-too-common occurrence. Startups are difficult enough without all the lawsuits etc.

Here is a thought, why don't you just freeze on that old code-base and start afresh? I work with video extensively and know what you are doing can be done using open-source components and it shouldn't take much time. I can volunteer my time & coding chops to help out a fellow entrepreneur

The problem isn't source code theft, it's this, in the words of the Smule CEO [1]:

"If you fork off a startup and there's IP overlap, it's just a big mess."

And the big legal mess favors the company with more resources, something Smule knows. Whether the lawsuit is personal doesn't really matter. What matters is that former employees started a company in an overlapping product space, which unfortunately made them an easy target for litigation.

1: http://uk.businessinsider.com/smule-ceo-shred-video-lawsuit-...

Also https://news.ycombinator.com/item?id=10262034.

Several rookie mistakes in here by the Shred team. First of all if you are gong to start a company while working for someone else, get an explicit agreement in writing before starting that venture. Second, there should have been an agreement/contract in place for doing the additional work which was requested by Smule. The claims of theft could still be made by Smule but Shred's story loses credibility for me because these basic business practices weren't followed. Who is to say that the lines weren't blurred when it comes to leveraging the assets of the former company? And if a laptop is obviously the property of Smule then nobody can force you to keep it.

I feel much empathy for the Shred team but the story has a bunch of challenges buried within.

Interesting story, and it sounds (from a one-sided perspective) like Shred's founded acted in good faith. And I agree with the disconnect between frivolous lawsuits and small companies.

I don't think the last line in particular does Shred any favors. ("Turn this offer down, and you will reveal yourselves as anti-innovation bullies, using your wealth to harass a young startup with litigation just because you can.") They might be, but they might also have good reason not to agree that a code audit is an unambiguous, standalone, infallible process. This is setting up a, "When did you stop beating your dog?" kind of question.

I'm glad shit like this is rare enough (in silicon valley, at least) to be worthy of a post.

Filing frivolous litigation against a YC sartup seems like a fantastic way to become blacklisted virtually everywhere.

Maybe they didn't get the memo.

I'm not familiar with any of the people involved and haven't read the pleadings. That said:

* The lawsuit may make it more difficult for Shred Video to raise funding, but the linked writeup and YC's blog post don't exactly show Smule in a positive light. The "if we're wrong, we'll win" quote from Smule is telling. I'd want a very good explanation of this mess before entering into a partnership with Smule.

* Smule is warning that any employees using company property on company time to build their own startups exposes them to legal liability. This is a perfectly reasonable position. (Note I'm not saying that Shred's founders did that, only that Smule's point is correct as far as it goes.)

* California law in particular is more startup- and founder-friendly than most and makes some elements of employment contracts unenforceable as a matter of public policy. It likely doesn't apply here, but it does mean if you build and sell, say, drones in your spare time while working a California pharmaceutical company, that employer wouldn't have an IP claim (even if the employment agreement was broad).

* Shred's founders should have made a clean break and not retained any hardware or access to code after they left. That's what I did when I quit my job at a large publicly traded company last year to found https://recent.io -- I returned the work laptop on my last day and haven't done any work for them since. But this is hindsight, I know!

Errr, All I'm seeing in the article is a, 'We didn't use any of their code guys, see compare the functionality of our products yourself.' Unfortunately, as true as the article might be, simply showing different functionality doesn't mean you didn't steal other portions of the codebase that don't deal directly with the algorithms of what you're doing. For all the reader knows you stole video decoding/encoding, audio decoding/encoding portions or something even as innocuous as a GUI frontend. Now agreeing to do a 3rd party analysis is a wise thing, hopefully the legal system forces this. If the accusation is that code was stolen, then someone should have to actually verify against what is alleged that they stole, it'd be pretty ridiculous if they awarded any damages without doing anything like this and simply went on the basis that 'they are similar products or may use similar algorithms.' Being similar or using similar algorithms does not mean they are the same.

"...the US legal system offers little protection against frivolous lawsuits."

If they believe that, they need better lawyers. I know this is over-simplified, but -- If the lawsuit is truly frivolous they can file for a summary judgment. If that is not granted, then the lawsuit was not frivolous.

Never take your former employer's code away with you, folks. It's like leaving a deliberate trail of blood in the water: the sharks will follow it.

One of the most interesting company's to come out of S15. No wonder, people are coming after you. You must be doing something right. Stay at it :).

I'm always so paranoid of this at any of my employers so I go through great lengths ensure everything is separated. It's a lot more work in terms of managing your stuff, but can simplify situations like these. I always keep my work and my personal projects completely separated. Separate machines, separate repos, separate accounts and I don't do personal stuff at work. My goal is to have a clear separation so if either of us decide that our contract isn't working; it's as frictionless at possible. While I applaud the fight for what's right, there is no doubt that a legal disagreement will take time away from building the product that your users want.

This sounds a lot like a non-compete claim masquerading as a trade secrets misappropriation claim, and if so should be dismissed as a matter of law unless Smule can allege what specific trade secrets were stolen.

The "bullying" aspect of this is interesting to me. Would taking VC money from a big player help me in such a situation. Let's say for arguments sake I am backed by a16z. Is it usually part of the deal that they provide their legal muscle in these spots or am I on my own?

What would happen if a YC company (pre-funding) gets threatened in this manner? Edit: Nevermind didn't realize it is a YC company (summer of 2015 batch).

Here's the relevant blog post: http://blog.ycombinator.com/on-the-shred-video-lawsuit

This is kinda why I like free/open source; you don't get too many weird issues like this and it can be very obvious and public if you've copied source code or "took inspiration" from others' code.

Maybe Smule doesn't want their code and IP floating around anywhere outside the company? Even if they trust the company doing the audit, can they trust all the employees of that company, and any future acquirers?

I'm not taking sides (because I don't know anything), but after reading this and Geoff Ralston's post, that's at least one good reason Smule wouldn't agree to the 3rd party audit that no one else has brought up.

Of course, I say this with a background in the quant hedge fund world and I doubt any decent fund would agree to voluntarily submit their most proprietary code to be reviewed by anyone.

If you wish to brave the San Francisco Superior Court's abysmal court records website, you can plug in case number "CGC 15 545359" to see the docket and view the documents in the case.

There are tons of cases out there of clear abuse of the legal system, where the facts are as close to black and white as you can get. This doesn't seem like it is. From an outside view, reading about employees who had access to trade secrets, even source code, leaving together to make their own product in a similar field while retaining access to said secrets (the ongoing support role) seems like a very murky case, and something that the court system is probably best to sort out.

You know what is sad and wrong thing here: YC companies have reputation and perception in my mind (by reading storied about BnB, Uber, heroku, rapgenious, etc.) that my initial reaction is that Shred founders are just typical hipster white kids who stole other's people hard work.

I'm 100% wrong with my initial reaction but if I'm YC I would look into this trend and perception in public.

Again I'm wrong and there should be no judgment here.

What I have trouble understanding, given the ubiquitous nature of the internet, is that people continue to start up companies in the US or other countries where there is an unbalanced and corrupt legal system. Why not at least start a company in a country where you are guaranteed some form of defence through the courts even if you don't actually want to reside there?

It sounds like a strategy might be for YC to have a litigation attorney on staff to help deter frivolous suits against YC startups.

If you're an employee at Smule you should quit immediately with no notice. Make Smule hurt where Jeff Smith will feel it.

I demanded a clause in my last employment contract stipulating that I retained the ability to use methods developed for later employment but the system as a whole is the property of my employer. Protects both parties. I can't steal his product. He can't prevent me from doing math.

Wow. This is a well written piece and really sets the facts straight. Go Shred! As for the comment that there are zero innocent parties: huh? Doesn't seem like that reader read the facts.

Sounds so familiar. Feeling for you and anyone else going through this!

> He’s not suing us because we’ve harmed Smule in any material way.

If they can't establish damages, and there was no breach of contract, it doesn't seem like they would have a case.

This is the exact narrative from HBO's Silicon Valley.

If he shuts you down can you make your code open source and allow others to compete in your place? ;)

Can someone explain why a company being sued needs a lot of money to survive?

this guy needs to be careful.

1.) people reading this won't pay attention or understand the fine detail 2.) non-compete clauses etc. are there because learning on the job gives an advantage to starting up after leaving.

should have researched legal precedent and played it safe imo. waited two years and set up somewhere geographically remote from the original employer...

i hope this plays out well. as much as there was some naivete in this enterprise i don't think there was any ill intent, and this really is a bit of bullying... the only sad thing is that the bullying might be legally justifiable given the circumstances described.

Here are my thoughts.

Let's assume the poster's former employer is trying to sue them into submission. That's a plausible claim as that kind of thing does happen.

Well, if true, that strategy is clearly working.

Why do I say this? Because no competent lawyer would let their client post something like this. It can only hurt you. Make any statement of fact that helps the plaintiff and they'll use it against you. Make a statement that doesn't help them? Well they were going to dispute that anyway so who cares?

So I can only conclude the Shred Video doesn't have competent legal representation and thus is probably going to be or are being bled dry by litigation unless they can find a source of funding, which, as noted, is more difficult with a lawsuit hanging over your head.

One thing I've consistently done is when I've left a job I've never taken any hardware with me nor a single line of source code. It can only hurt you. Obviously I don't know if that were a factor here but the poster has stipulated one of the founders did have a Smule laptop with company source code on it. Woops.

Consider this a lesson learned: either don't offer to help your former employer when you're working on something else or get them to release any current or future claims to your company or IP before you do. Also, you probably want to get paid upfront. A separate contract should govern such work and it should state clearly that the former employee has access to the source code at the employer's request and the employer relinquishes any claims resulting from that source code. Employer might not go for that. Fine. Walk away.

As Paul Sutter stated, this is an emotional appeal. I too suspect there was fault on both sides here without knowing the facts.

One question I have is: when did the founders start working on what became their startup? That matters. If there's a crossover with their employment then that's potentially a problem.

In California the law is pretty generous with side projects so this might actually be OK but here's the thing...

If the plaintiff through discovery finds source code commits to the project that occurred before they finished working for Smule then even with Californian law they have a problem because the plaintiff has now established:

1. The founders started working on this before terminating employment; and

2. They claimed otherwise.

It's (2) that gets you into trouble because it hurts your credibility when making any other claims.

This is why any competent lawyer will not allow you to make such public statements. Let me repeat: it can only hurt you.

The founders are making the mistake of trying to win this in the court of public opinion. That doesn't matter for this particular plaintiff I suspect. So they've just given him a bunch of ammunition as every statement will be carefully parsed and fact-checked and any inconsistency will be used against them. Even if a statement is ambiguous and was intended one way but can be interpreted another (that can be disproven), it's a problem.

I had a threat of a lawsuit once that basically amounted to someone using the threat of it to get out of paying a fairly substantial amount of money. Not life-changing but certainly annoying. The lawyer I spoke to at the time (side note: free legal consultations where you shop around a potential case can really help) gave me this advice:

"Don't respond (to emails, phone calls, etc)."

If they file suit, they file suit and you can deal with it then. Until then don't give them any ammunition.

Other facts that may matter here are any patents Smule has or are pending and if the founders are listed as inventors. Something like "algorithmically annotating a video to music" is the sought of nonsense patent the USPTO might grant and may later be invalidated as being overly broad and generic but again that puts you in the position of having to either show non-violation or to invalidate the patent. Neither is quick or cheap.

Thanks for the reminder to disable HN notifications in Safari.