Despite sporting the title “Intellectual Property,” episode 3 of HBO’s Silicon Valley had surprisingly few legal issues. Due to the slowdown of legal issues, we will be combining episodes 3 and 4 for this article.
Season 4, Episodes 3-4 Recap (Contains Spoilers)
After “acquiring” (by bullying Dinesh) Piper Chat, with its billions of dollars in potential liability, Gavin is fired from Hooli. At the same time, on his journey to develop a decentralized internet, Richard discovers that the technology he needs already exists, and has been patented by Gavin.
After some false starts, Gavin and Richard decide to form a partnership, with Gavin supplying both his patent as well as working capital. With the rest of the Pied Piper team out of work, Richard recruits Gilfoyle and Jared to join his new venture.
At the same time, having lost Piper Chat and his VC company, Erlich partners with Jian Yang and transforms his eight-recipe octopus app into a “shazam for food” app that they call SeeFood.
Upon hearing that SeeFood has little chance of success, Monica convinces her rival at Raviga Capital to invest. However, when he finds out the truth and sticks Monica with managing SeeFood, she begins to pressure Erlich and Jian Yang to follow through.
Continuing on his uninterrupted streak of luck, Big Head applies to become a student at Stanford University, only to be hired as a guest lecturer. With Jian Yang refusing to work on SeeFood, Erlich uses Big Head’s class to do the work for them. This comes to a crashing halt when the class decides to steal the idea and go into business for themselves, backed by the very VC Erlich originally spurned.
Predicting SeeFood to fail, Erlich trades his 10% claim for a car and a newly-installed palapa. Jian Yang then convinces Periscope to purchase his technology, for $4 million, as a way to find and remove pornography from their platform.
Legal Analysis / Advice*
In these two episodes, we witnessed the formation of two partnerships: (1) Gavin and Richard; and (2) Erlich and Jian Yang. Both relationships would benefit from a formal partnership agreement, specifically outlining each partner’s roles. More importantly, the agreement should discuss how the partners will resolve a dispute when they are deadlocked against one another.
In the case of Erlich and Jian Yang, their failures to agree left their company stalled, with both founders trying to hurt one another rather than working towards a common goal.
Although Richard and Gavin seem to be getting along, for now, their partnership has also begun to show some cracks; specifically as it relates to hiring their team. With both Richard and Gavin owning exactly 50% of the company, but with Gavin owning the patent and supplying the funding, Richard will have a hard time enforcing his decisions without an agreement in-hand.
While using Stanford students as free labor may have seemed like a good idea, it quickly fell apart. This example shows why it is important for a company to be careful about how it hires employees or contractors.
First, there are California and Federal laws to consider. Without being careful, that “free” labor could very quickly turn into a lawsuit for failing to pay minimum wages.
Beyond that, whenever bringing in third parties to work on your project, a company should have agreements in place to protect their trade secrets, work-product and confidential information. Without these protections, a contractor can easily take the same idea and become a competitor, as the Stanford students so aptly demonstrated.
Fiduciary And Contractual Duties
Monica seems to have completely forgotten that she is a partner at Raviga and therefore owes her other partners, as well as her investors, a fiduciary duty to act in their best interests. Instead, she seems to act like a gremlin, doing everything in her power to disrupt Raviga’s inner workings.
Upon learning that Peter Greggory (former managing partner of Raviga, now deceased) also contemplated a decentralized internet, Monica gave Richard unfettered access to Peter’s prior work. Whether Peter’s work is owned by Raviga, or by his estate, it is definitely not owned by Monica, and therefore not hers to give away.
If Peter’s notes are owned by Raviga, Monica is likely violating contractual confidentiality as well as her duties as a partner of Raviga. If the notes are owned by his estate, then she is either breaking and entering onto private property or has improperly misappropriated his estate’s property. Either way, Peter’s notes are not Monica’s to give away.
Erlich and Jian Yang are no better. Having signed Raviga’s term sheet and accepted their money, they owe both a contractual and fiduciary duty to Raviga to use that money towards creating the SeeFood App. Instead, they buy a Palapa, a sports car, and refuse to do any actual work. Had Jian Yang been unable to sell his product to Periscope, and they failed to produce a product, they would likely be liable for the full $200,000 investment.
Due diligence is having outside professionals (usually lawyers, accountants and financial analysts) review a merger or sale of assets, to make sure that a company knows exactly what it is buying. Gavin was fired from Hooli specifically because he failed to conduct the necessary due diligence when acquiring Piper Chat.
Erlich fell into the same trap. Relying on solely the information that he possessed, he sold his shares in SeeFood, only to learn that SeeFood was subsequently acquired for $4 million. Depending on the language of the sales agreement, Erlich may be able to argue that he was defrauded into selling when Jian Yang withheld crucial information about the company’s prospects. With $400,000 riding on it, if Erlich hasn’t seen a lawyer yet, he should now.
*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 being their own skydiving instructors; it’ll save some money, but your parachute may not open.