Disclaimer: I'm not your lawyer, this isn't legal advice. Do get your own lawyer to advise you on this, one familiar with licensing disputes.
Sounds like (e.g.):
1) Contract is for $10K.
2) Client pays $4K.
3) Client stops paying.
4) Client issues chargeback for $4K.
5) PayPal dispute resolution recovers $2K of the $4K chargeback.
It's possible to claim that the PayPal dispute was a settlement of the purchase price, but it seems like it would be a stretch if that actually flies in court. I doubt that the PayPal dispute resolution covered the remaining $6K that was due, rather than just the dispute over the $4K that was already paid.
Or, couldn't you argue that the Pigeonly guys charging back themselves is an admission that they shouldn't have the IP?
First, we're trusting one person's word over another on HN; this is one of the wonderful reasons courts exist. And let's say hypothetically the person who just posted this loses in court, this nice little shaming comes back and bites them as a defamatory attack.
Hey, I just discovered a good use for a patent troll!
[1] It would be unfortunate if this drama played out on HN, he-said she-said style. Although the eventual resolution of this will be very interesting and relevant to developers and entrepreneurs so I expect to read about it here some day.
Whether or not I can share the eventual outcome of this matter, I do plan to write an article on concrete steps that developers can take to protect themselves in situations like this.
The OP's chances of recovery strictly went up when these company got funding. Compared to before, the OP has everything to gain and nothing to lose -- before, he had already written off this project as a bad project. Now, the company that has gotten funding needs to make sure that everything is on the up-and-up.
Assuming OP's story is true, it's entirely in OP's power to say "we won't license the code, FOAD," which would force an expensive and possibly fatal rewrite of the code at this late date. OTOH, with that leverage, OP can name his price. If he demands too much, the VCs might just pull the plug. If the OP's goal is revenge, mission accomplished. But revenge doesn't put food on your family.
That said, they have every incentive to burn the $2m fighting this claim, because otherwise they have nothing. The best result for OP would be a negotiated sale of the software for some $$, or perhaps equity in the business if they can stomach the risk. Nobody wins if the legal dispute eats up all the money and sours the business.
Anyway, as others have said: shut up, get lawyer.
Decide what you want to get out of this:
Do you want to destroy the company? Perhaps take them over/replace them in some way? (A good lawyer will ask "What does this accomplish", although deterrence is not illegitimate in my viewpoint).
Get paid for your work, with suitable interest and penalties?
Get a piece of the action of the other company?
If you're telling the truth, there's a good chance you've got them in an exquisitely delicate situation. While they've officially raised a lot of money, if it just happened there it's unlikely it's all been transferred to their bank account. Even if so, you can mess them up going forwards with justified legal action.
For those panicking over defamation, truth is an absolute defense to it, you just have to be able to afford to get your day in court. Although I'll note everyone who's every been in a lawsuit, on whatever side, says it becomes a consuming thing, you've got to think about the opportunity cost. Something a good lawyer will bring up.
I wonder how this company could have made it through DD with a venture capital firm, since that would have involved contract review.
More than 10 years ago, a larger company stole my start-up's work, including our typos. We (when I say "we" in this comment I mean all the people in the start-up) internally agreed to handle it through the court system. Anyway, we had a loose cannon, and at a security convention he was telling everyone he could how that other company stole our stuff (and went directly to the competitor's booth to bitch at them). A year later, people remembered that the software was stolen, but they didn't remember which party was which -- half of them thought our company was the thief. [1]
This was before the days of blogs, so you might have better luck today with the public getting basic facts right, but you're spinning a giant gun around and it just might end up pointed at your face when you are done.
[1] This was among the reasons we decided to handle it through the courts. It was also the last time said loose cannon ever went to a conference during my tenure there.