Even an exit involving hundreds of millions of dollars is not always a reason for all parties involved to celebrate. An exit is the holy grail of the venture capital industry, but there are more than a few entrepreneurs dissatisfied with their share when the company they founded is sold. Lawsuits before the deal is completed are quite common in these matters, a time at which the company is considered vulnerable to pressure, or shortly afterwards, when the gap between the amount that the entrepreneur receives and what the investors receive becomes clear.
Cadent founder Eldad Taub, who developed a 3D scanning device facilitating better coordination between dental bridges, implants, and crowns, recently won a verdict in his favor in just such a claim.
Cadent was sold four years ago to Align for $190 million, after raising $120 million, making the exit profitable for the company's recent investors. At the same time, the company underwent several crises that enabled the new investors to obtain a change in the terms under which the older investors and the entrepreneurs were paid, and this, as is not infrequently the case, is where the problem lies.
Taub founded the company in the 1990s, managed it until 2003, and later served as its president. In 2006, as often happens with venture capital-supported companies, disagreements emerged between the entrepreneur and new investors in the company, mainly foreign funds, and it was agreed that he would resign.
Taub resigned in 2008, but not before being promised that he would receive options of a senior executive in any plan launched at the company up until March 2013.
According to Adv. Eitan Rothschild of the Nathan Meir & Co. law firm, who conducted the lawsuit, together with Adv. Shay Shatz, "When Taub was forced out of the company, it was already clear that something like an exit was about to happen. The entrepreneur had many options in Cadent, but it was clear that due to the ownership structure in the company that resulted from the many investment rounds, his options would have a negligible value when the company was sold. At a later stage, a new options plan was proposed in order to provide the employees with options that would be really significant. Taub realized that this was going to happen, and therefore made his resignation agreement contingent on adjustment of his options to the new plan.
"Cadent initially alleged that the matter was not under the jurisdiction of a labor court, because the amount of the claim was high and because it involved a number of issues not involving labor. Indeed, entrepreneurs can fulfill many different roles in startups: they can be shareholders, executives, and also directors. The labor court ruled, however, that what was involved was a labor dispute.
"Cadent also initially claimed that this was not an incentive plan, but we obtained the document, and saw that 'Incentive Plan' even appeared in the heading of the plan. They then alleged that Taub had been promised remuneration like senior management, but who exactly belonged to senior management had not been defined, and he had indeed been paid like some of the managers in the less senior echelon of senior management. The contract we obtained, however, explained that plan had a remuneration key under which the new options had to reflect the number of the old options, and Taub had many old options, so he was entitled to a larger amount than he had actually received."
Rothschild continued, "Judge Idit Itzcovich did not completely accept our arguments, but neither did she accept their arguments. She finally devised a formula taking into account the average remuneration of senior management, together with the average options; translated this into an amount, and awarded Taub NIS 4.5 million. The defendant had to pay court costs."
Published by Globes [online], Israel business news - www.globes-online.com - on April 8, 2015
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