Redfin co-founder and ex-CTO sue company, allege scheme to cancel shares as IPO nears

redfin_logo_tag_webRedfin is facing a lawsuit in King County Superior Court from two of its earliest employees who allege that the Seattle online real estate company is attempting to wipe out their shares as it preps for an initial public offering. The suit was filed Monday by Michael Dougherty and David Selinger, well known technology executives and entrepreneurs who joined Redfin when it was just a germ of an idea.

The suit, filed this week in Seattle, could be a significant roadblock for Redfin as the company considers an initial public offering. Redfin declined to comment on the suit.

Selinger now serves as CEO of RichRelevance

Selinger now serves as CEO of RichRelevance

Selinger joined as CTO in 2004, while Dougherty was a co-founder and an original investor. As part of their employment agreements, both were given restricted stock agreements, Selinger receiving 924,000 shares and Dougherty getting two million shares. Those shares were to become fully vested if they left the company for good reason, or if there was a change of control.

With Redfin in dire straights in the Spring of 2005 under then CEO David Eraker, Dougherty and Selinger left the company, signing a settlement agreement acknowledging that their shares were fully vested.  At the time, Redfin also reserved the right to repurchase the shares at 40 cents per share, though that right disappeared at the time of a change of control.

Here’s more from the suit:

legalissues-redfin

Dougherty and Selinger allege that the series A investment by Madrona — which closed in Sept. 2005 — constituted a “change of control” since more than 50 percent of the combined voting power shifted to those who were not previously shareholders of the company. Dougherty and Selinger allege that Redfin did not notify them of the change in control status.

Michael Dougherty

Michael Dougherty

“In January 2014, and apparently in anticipation of an initial public offering, Redfin purported to exercise its right of repurchase from Messrs. Dougherty and Selinger, and purported to cancel their shares,” the suit says. “That right never existed, however, because it was obtained by misrepresentation.”

Redfin has grown into a sizable company in the past 10 years, with CEO Glenn Kelman telling GeekWire late last year that it anticipated sales of between $50 million and $100 million in 2013. It raised a $50 million venture capital round last November, a round that many viewed as a harbinger to an IPO.

Dougherty now works at Amazon.com, while Selinger serves as CEO of San Francisco-based RichRelevance. In a LinkedIn recommendation, Kelman notes that he never worked with Selinger, but says that the engineer “built a magnificent real estate search application.”

Madrona Venture Group declined to comment on the suit. You can see the full suit here, which details some of the early growing pains that Redfin experienced as a startup.

Redfin (1)

  • guest

    Shakedown city. Hold the IPO hostage.

  • guest

    Yeah, just like Madrona held ‘em hostage for that early round of funding.

  • guest

    not surprised
    kelman is smarmy — if he had half a sack, he would have called each of these folks, explained the situation, and made some sort of equitable (excuse the pun) arrangement

    • guest

      This sort of thing requires board level approval. Its not something the CEO can handle on his own. Presumably, some negotiations were attempted before a lawsuit was filed. Thats how it typically works.

      • guesto

        But a strong, integrity-based CEO gets the Board approval to do just what has been suggested.

        • guest

          Not always. This would require the CEO basically saying to the VCs, “hey, you guys are gonna make less money now.” That requires integrity based VCs on the board to agree to it. Maybe the CEO has no integrity too. But no way this gets done without the VCs agreeing to it cause it dilutes their position. So the key question for me is this — when did the CEO get hired? If this happened before he was brought in, then it was all Madrona. If he was there at the financing, then he was in on it with Madrona.