Selinger now serves as CEO of RichRelevance
Selinger now serves as CEO of RichRelevance

David Selinger is a die-hard Redfin supporter.

He’s purchased homes through the online real estate service, and speaks highly of Redfin boss Glenn Kelman whom he calls “an amazing CEO.” Selinger, who runs the data analytics startup RichRelevance, has even been known to exchange recruiting tips with Kelman, since both companies operate dual offices in Seattle and San Francisco. They also share a similar venture investor in Greylock Partners.

So, it was with some shock and dismay that Selinger — Redfin’s first CTO and one of its earliest employees — received a letter in a FedEx package about seven weeks ago from Redfin general counsel Kate Ross. The letter included a check for about $370,000 — a payout for his 924,000 shares.

Selinger didn’t request it, nor did he cash it.

The content of the letter was clear: Redfin was attempting to cancel the shares of Selinger, along with those of co-founder Michael Dougherty. (See earlier this post: Redfin co-founder and ex-CTO sue company, allege scheme to cancel shares as IPO nears).

In an interview with GeekWire, Selinger said he felt “terrible” and “bummed” when the letter arrived and wasn’t quite sure what to do. Both he and Dougherty felt entitled to the shares, which they said fully vested in 2005 when Madrona Venture Group purchased a majority stake in Redfin at a time when the company was struggling.

But the bigger issue for Selinger and the one that particularly stung was this: Why didn’t Kelman just pick up the phone and give him a call?

Michael Dougherty
Michael Dougherty

“He has my cell phone number, I have his cell phone number. There is no reason that the first time I hear from Redfin, it is from their lawyer,” said Selinger. “That is really probably the most unfortunate decision in this whole process from my perspective is that we took something that could have been handled by: ‘Hey, guys, this is what we want to do.’ And, we say: ‘Hey, you can’t do that.’ And it gets resolved. It immediately escalated to lawyers.”

Given the legal ramifications and the large amount of money involved — Selinger and Dougherty say their roughly three million shares represent more than one percent of the company — the former employees filed suit in King County Superior Court.

The suit came after much deliberation, and thought. Selinger said he spoke to his wife in detail about the case, before making the decision. At time, he said he wondered if it would just be better to avoid the emotional turmoil.

“It’s financially important because of our kids. I made the sacrifice and I’d like to see that back,” said Selinger, detailing the long hours he put into Redfin while still working at Amazon.com. “But it is also just holding someone accountable on the basis of integrity when it impacts our family… Honestly, I sat there, and there was a big delay. And Michael and I went back and forth for probably three weeks before we hired a lawyer.”

It was especially challenging given the respect that Selinger has for Kelman and Redfin, a company that he helped build with a team of top-notch engineers from the Seattle area.

“This is incredibly emotional for us,” he says.

Selinger also took issue with those who’ve said he was trying to block Redfin’s IPO intentions. In fact, he said he’d like to hold onto his shares in the company, post IPO, noting that “I want to be in Redfin for the long haul.”

Glenn Kelman
Glenn Kelman

“I don’t want to hurt them in this process. I bought most of my homes through Redfin. I love Redfin. I use the Redfin app all of the time,” said Selinger. “I am so proud of what my team accomplished there. I don’t want to hurt Redfin. So, please be aware that I know you have to write a good story, but that is sincerely my angle.”

Selinger also noted that the suit is more than about the money, and he hopes the issue gets resolved quickly. In his view, the settlement agreement he signed is pretty “black and white” and not really open to interpretation. He’s also hopeful that the agreement happened so long ago that the shareholders and legal team at the company just aren’t up to speed on the matter.

“Our primary complaint here is: Please be fair,” said Selinger, adding that his stock is now worth significantly more than the payout that Redfin offered earlier this year.

“It is worth more than four times that much. I am not a man of tons of cash at home. That would be a significant change in the amount of cash that I have, more than doubling, tripling or quadrupling the cash I have at home, but what we are seeking here is that they treat us fairly based on the contracts that we all signed.”

Redfin declined to comment, while Dougherty, who now works at Amazon, issued this statement:

“Redfin is a fantastic company. I’m proud of the role I played in its founding, and excited about what it’s achieved since. Our current dispute is unfortunate, but I’m hopeful that Redfin will recognize our rights with respect to our shares and that we’ll ultimately resolve things.”

Madrona Venture Group, an early investor in Redfin, also declined to comment. Selinger said that Madrona has been reluctant to share information, treating the two former employees as if they are no longer shareholders. That’s part of why he said they decided to file the lawsuit, so they could collect more information in the discovery process. “This is why it is so silly,” he said.

The situation certainly is a messy one. And it highlights the challenges that sometimes accompany early-stage startups, in this case one that has grown into a significant company. Redfin raised a $50 million venture capital round last fall, and some have speculated that it is positioning to go public.

Selinger, who now runs his own venture-backed startup in RichRelevance, says that the letter appears, to him, to be a method to force a settlement in an effort to get his shares back, and those of Dougherty. At this point, he said Redfin is treating them as non-shareholders, initiating the lockout when they sent the checks earlier this year canceling their shares. That set the entire chain of events in motion, he says.

“They have gone out of their way to take action…. It would be advantageous for them to try to execute this in order to force a settlement where they get some of their shares back…. It feels like a financial engineering move,” said Selinger. “It just really sucks.”

He then paused for a moment, and added:

“As the CEO of a company, this is something that I would never do to a shareholder. Period.”

Comments

  • Ding

    This also all sounds like amateur houring lawyering. Repurchase options on an exit are very common, often with negotiated price terms. But I’ve never seen a repurchase option that was not time bound so that there was a specific period of time in which to exercise. 6 months or a year are common, as is accelerating the expiration of the option if there is a change of control. It sounds like only the change of control part was included here.

    Too bad for all involved.

  • no fan

    “Why didn’t Kelman just pick up the phone and give him a call?” Because Kelman is:
    A. spineless
    B. deceitful
    C. arrogant
    D. All of the above

    • Anon

      While I have no personal knowledge of what happened here, my exposure to Glen is that he is a good guy and overall A+ human being. I don’t think he is any of those things.

  • Paul Uhlir

    “detailing the long hours he put into Redfin while still working at Amazon.com” hmmm

  • Hater

    Boo hoo, some one sent me a check for 370 thousand dollars. Life is so unfair…

    Redfin should have bought back their stock for the pennies they were worth when Dough and Selinger left. They didn’t stick through the tough times, and Glenn saved a sinking ship.

    • NotTrue

      This is not factually correct. The $360k was the negotiated repurchase price. It was not pennies on the dollar. They founded the company, they own a little over 1%, so there is plenty of ownership for the investors, Kelman, and employees. This seems like greed. Redfin will go public and some folks just want that extra 1% so they can get more money. There is a lot of risk when you have no job, no salary, and then try to do a start-up. Kelmen created a lot of value, and he will make more money than these 2 founders combined. Why can’t they have their 1% for the role they played.

  • http://www.bowenboston.com/ Jonathan Bowen

    Redfin encompases everything that’s wrong with the internet.

    • ByeByeSeattle

      I’ve used Redfin twice. Once to sell a home and once to buy a home. It wasn’t a perfect experience, but under the right circumstances, I think Redfin is an excellent option (especially for a buyer). I have recommended them to people who have bought via Redfin and had great experience. I think it is a bit of a stretch to say it represents everything wrong with the Internet.

  • SeattleLocal

    Wow. What a dick move, seriously. Having spent nearly 20 years in the seattle tech scene, I’ve not met many guys that are cooler or have more integrity than Michael Dougherty. Kelman and the board trying to screw the guys that helped build the company out of what they deserve is embarrassing to see. It’s not like they bailed with huge founders shares immediately like some have done. Pull your shit together Redfin. FFS

    • Madrona Sucks

      Kelman can’t make this kind of decision on his own. It impacts the cap table and requires approval from the board. It is possible that Kelman is sympathetic to these folks but the board won’t agree. Keep in mind, Kelman was not around when these agreements were made so he doesn’t have all the historical details. It is just something he now has to deal with because he is CEO. Who were the first investors? Madrona. I’d look in their direction.

  • Bubba

    Just another example of the reality of business in modern times – professionalism is dead. The technology sector is the poster child for much of what is wrong with modern business. A sector where people turn on each other like jackels eating a dead animal.

  • Russ Roberts

    Seattle start-ups have higher integrity than this. If Selinger is right, this is terrible for the most important reason, doing the right thing.

    But the move by Redfin doesn’t make financial sense to me either. Based on the anecdotes from the article, the disputed amount of money between Selinger/Dougherty would amount to something in the $2-3 million range. For a company about to go public, why would you put IPO timing, bad press, and potentially expensive lawsuits into the mix for a relatively small sum of money. And it’s not even 2-3 million additional dollars they would have to pay out, but rather that would remain as the value of outstanding shares. To redeem ~1% of the stock for treasury shares spread around to all other shareholders seems small for the risk associated.

  • Guest Meister

    When founders 1. leave a company holding significant shares, but 2. the company is still highly uncertain to succeed and will need to raise a lot more capital, then generally 3. those absentee founders agree to sell back some or all of their shares (or as seemed to have happened here, they sell back a call option with a fixed price). Why? If the company has a significant portion of its equity held by absentee founders, and it is not yet likely to succeed, then investors may view it as “unfundable.” The reason absentee founders choose to do a repurchase agreement, economically speaking, is that they judge the risk-adjusted, expected value to them of having been part of and owning some upside in a “fundable” company is higher than owning a greater percentage of an “unfundable” company. (Non-economically speaking, they may choose to do this because to do otherwise is a d**k move that screws over the remaining founders.)

    Also, note the inherent survivorship bias — you rarely hear about the innumerable companies where founders left but refused to agree to a repurchase, because those companies tend to fail.

    Facebook is an interesting example where they squeezed the absentee guy out with a dilution move — which is what ends up happening when 1. the absentee founder doesn’t agree to the repurchase, but 2. the company is deemed “fundable” by the new investors.

    Call it fair or not, but the investors don’t give a hoot about the absentee founders’ previous contributions — they view the purpose of founder equity as being to motivate active contributors to the company going forward. “What have you done for me lately.”

    Regarding the present case, and again disregarding what is “fair” or not, it makes perfect sense that the pre-IPO cleanup lawyer brigade would handle this in such a way. They are trying to make it very very clear that they are drawing the line as to who is in, who is out on the cap table, and that they are not going to f*** around with any uncertainty — because it’s uncertainty that might queer the deal, not the actual value of the particular shares in this case.

    It’s an interesting problem that typical straight-line or cliff-plus-line vesting schedules don’t solve. Perhaps if founders got together and had goal-based vesting, that would help. E.g.: “we are trying to make a company worth $1 B, so your founder’s shares, at the point you leave, will be deemed vested at the percentage determined by a fraction, the numerator of which is the company’s valuation and the denominator is $1 B.” Yes, I know, unworkable and crazy, but how much crazier than the current state of affairs, where to avoid uncertainty and “unfundability” companies must rely on the good graces of departing founders to execute and abide by repurchase agreements?

  • gues

    Glen ought to let it go. He may be thinking they don’t deserve that much- given they didn’t work there the last 10 yrs- but thats how the dice rolls. Deal with it and watch out for your own interest man.

    Don’t be cheap like Jobs. If your IPO doesn’t go through in this hot IPO market season, and the markets falter- you’re going to have to wait another 10 years for the next boom and who knows if RedFin will be around till then.

  • boop

    “It’s financially important because of our kids … ” : Well, that explains it all. If you’re doing something for your offspring, it’s totally justified no matter what.

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