For those who haven’t seen it, HBO’s Silicon Valley has somehow created an exaggerated caricature of this nation’s technology hub that is also incredibly accurate and true to life. As someone who grew up in Silicon Valley in the 90s and who now works closely with many of its entrepreneurs and startups, the show has always had a special place in my heart.
While the show was always interlaced with the protagonists’ legal troubles (season 2 culminated in two episodes of nail-biting arbitration), season 4 has taken this to a whole new level. What was once a half-hour escape into a hilarious yet disturbingly precise portrayal of the Valley, has now become a weekly case-study in why entrepreneurs and startups’ success is so often inexorably linked to their ever-escalating legal woes.
After three episodes in a row of watching Richard, Dinesh and Jared blindly feel their way through sometimes genuinely complicated legal issues (with horrible results), I couldn’t resist. Here is the legal advice I would give the Pied Piper team, episode by episode.*
Season 4, Episode 1 (Contains Spoilers)
Due to the acquisitional gymnastics performed in the season 3 finale, Pied Piper is now the property of Bachmanity LLC, which is equally controlled by Erlich and Big Head (and being managed by his father). At the same time, Erlich continues to promise Richard, Dinesh, Jared and Gilfoyle ownership in Pied Piper, in lieu of a salary, a promise that he seems unlikely to keep.
After internal strife over Pied Piper’s future, the episode ends with Richard resigning as CEO and trading his shares in Pied Piper for sole ownership of the underlying technology, with a vaguely and broadly worded universal, free and limitless license of that technology back to the company (which is now called, Piper Chat?).
It never ceases to amaze me how incredibly savvy, brilliant and successful entrepreneurs continue to operate on “handshake” agreements without putting them down on paper. And while California does enforce verbal contracts, they are notoriously more difficult to prove than their written counterparts.
To the guys, my advice is to get the shareholder agreement in writing. It is better to have an awkward conversation early on than to avoid the issue and then spend years in litigation.
Similarly, to Richard, my advice is to get everything he did in the last 3 minutes in writing. A separation agreement explaining his responsibilities during the transition to a new CEO; a sale of ownership, which will likely require board approval and may be considered a security, requiring filings with the necessary state and federal agencies; his ownership right of the technology he developed; and finally. a license agreement explaining how that technology can be used by Piper Chat.
This episode also saw plenty of employer faux pas that appear funny, but are actually horrible, horrible ideas.
To Erlich, my advice is to stop making promises he cannot keep. California law is very protective of employees and promising employees compensation, of any kind, without the ability or intent to deliver, opens Erlich and Bachmanity up to a slew of employment claims, including fraud.
Erlich’s not-so-subtle attempt to diminish Dinesh and Gilfoyle’s equity stake may be funny in the moment, but the difference of a single percent could be worth millions if Pied Piper becomes successful or is acquired. Partnerships have been destroyed, and lawsuits have filed, over much less.
Finally, to the two larger companies: Hooli and Raviga Capital. As B and C plotlines, Gavin Belson (Hooli’s CEO) and Lauri Bream (Raviga’s Managing Partner) punish their subordinates, Jack Barker and Monica Hall, by relocating them to less desirable offices with direct views into the men’s urinals. While moving offices is probably not a violation, purposefully positioning your employees within eyesight of the urinals as a form of punishment is by definition harassment and a hostile work environment. And even though we have recently seen worse behavior from real Silicon Valley companies, that is no excuse.
Whether an everyday employee owes their company a special duty of loyalty is somewhat of an open question. It is unquestionable, however, that a company’s directors and officers owe it, and its shareholders, a fiduciary duty to take actions that are in the best interest of that company. This seems to have been entirely forgotten by our fictional directors and officers.
To Big Head’s father (Mr. Bighetti), I would advise that he be less cavalier about his indifference as to the future of Pied Piper. As a member of Pied Piper’s board of directors, he owes a fiduciary duty to the company. When he admits, during a board meeting, that Pied Piper is “already dead” and his only goal is to make Erlich miserable, he has violated this duty. Most boards have a provision for removing members who violate their duties. And if nothing else, the court can always be petitioned to do the same.
Obviously, it goes without saying, that Gavin Belson’s use of Hooli’s jet for a personal grudge is a gross violation of his fiduciary duties. Since almost every action he has taken since the very first season appears to be a violation of his duties, I expect I will be forced to make similar refrains against him in future posts.
*As a disclaimer, since the characters and situations aren’t real, neither is my advice.These posts are meant to demonstrate to entrepreneurs that doing their own legal work makes about as much sense as doing their own dentist work; you’ll still end up at the dentist’s, it’s just going to hurt a whole lot more.