Executive Summary

This business and legal case study highlights a dispute between an internationally renowned Marketing & PR advisor and a startup con artist. The Marketing & PR advisor entered into a simple advisory contract with a startup founder, who promised compensation of 1% of the total capital raised by the startup in exchange for a wide range of marketing and PR services. After the Marketing & PR advisor performed the services and the startup garnered much positive publicity and hype as a result, the founder refused to pay despite publicly claiming the startup closed an investment totaling nearly $50 million. Thereafter, negotiation efforts faltered and formal legal action was taken as a result, which inevitably revealed the startup founder’s complex fraudulent scheme. The legal actions took unexpected twists and turns, but ultimately resulted in a favorable settlement for the advisor. This case study emphasizes the importance of clear contracts, due diligence, and involving legal counsel in material transactions (whether it’s VenCounsel or another practitioner or firm).

Introduction

Navigating the legal complexities of startups can sink promising ventures when entrepreneurs fall prey to deceptive opportunists. This business and legal case study examines the risky frontier where entrepreneurial dreams meet harsh realities. New startup and creative ventures need external advisors and consultants for expertise and investor connections, but hype is inherent in raising capital. Savvy entrepreneurs balance inspiration and integrity, while the naive follow charismatic charlatans promising much more than they can deliver. When ambitions become delusions, investors, service providers, and other key contributors get burned. Consider Theranos' fraudulent tech claims. WeWork's CEO wowed investors with empty buzzwords while burning cash. FTX's founder fabricated a genius and egalitarian persona while concealing a $9 billion house of cards comprised of conflicts of interest. This case study illuminates the darker side of the startup ecosystem, where opportunists exploit trusting entrepreneurs' visions. But understanding past failures can empower entrepreneurs to manifest success through integrity rather than illusion. With diligence and experienced legal counsel, founders can avoid missteps and build ventures on ethical foundations and hype.

Background

About the Client

I represent a globally recognized and influential marketing and PR authority who recently turned VC partner. With an illustrious career spanning well over a decade, this incredible individual has cultivated an incomparable reputation within the international innovation ecosystem, harnessing their expansive expertise and ingenuity to propel up-and-coming early-stage startups to unprecedented heights. Over the years, my client has become renowned for formulating and executing riveting marketing and PR campaigns that have elevated fledgling startups from the depths of obscurity to the forefront of the public eye.

The Startup and its Founder

Several years ago, my client received an unsolicited communication from a first-time founder of a promising FinTech startup — a decentralized lending platform. The founder was a young, sophisticated, and charismatic serial entrepreneur with a grandiose vision to build groundbreaking decentralized finance technology. Despite having little experience or network in the emerging software technology space, the first-time tech startup founder sought to leverage my client's skills, expertise, and network to get the startup off the ground.

The Advisory Transaction

Enticing Deal

Like many new ventures, the startup lacked the capital to engage my client and pay my client's standard fees. Because the startup was still in the early stages of ideation, the engagement would require a lot of work on my client’s part. Since the startup was actively fundraising, the founder proposed an alternative compensation structure — payment of 1% of the total capital raised by the startup in exchange for my client’s PR/marketing services, mentorship, and industry connections.

At first, my client was apprehensive about the proposed compensation structure because of the substantial amount of work required and the high risk of not receiving compensation if the startup failed to raise capital. But the founder remained persistent. After weeks of ongoing discussions, the founder shared with my client an official-looking document showing an investment commitment in excess of $10 million to assuage my client’s valid concerns. The investment commitment document reassured my client that he would be at least compensated for the immense value that the startup and its founder would be receiving from my client’s efforts.

Mission Accomplished

After entering into an advisory contract, my client dedicated a considerable amount of time and energy for nearly a year to actively support the startup and its founder. Throughout the course of the engagement, my client provided invaluable mentorship and guidance to the inexperienced founder, which led to marked improvements in the startup's product offering. Additionally, my client's PR and marketing services led to thriving online community engagement, a massive social media presence, high-profile public speaking engagements, extensive press coverage, and valuable relationships with strategic partners, thought leaders, experts, service providers, and investors. Not to mention, the startup used my client's name and likeness in their marketing materials to further bolster their credibility. Through my client's committed affiliation, the startup and its founder generated significant hype, gained positive mainstream public recognition, and strengthened their image within the emerging technology ecosystem.

Rug Pull

Months after my client performed and satisfied his obligations under the contract, the founder released a public statement that the startup had secured $50 million in funding, accompanied by a scanned image of a $50 million bank wire transfer document as proof. However, the founder never informed my client about the closure of the $50 million financing. When my client learned about the $50 million capital raise from an unaffiliated third party, my client promptly contacted the founder to request the payment owed according to the contract terms - $500,000. Initially, the founder made excuses for the delay but assured my client that the payment was forthcoming. The founder provided different excuses each time my client followed up regarding the payment owed but continued to reassure my client that the payment was on its way. Suddenly, the founder completely ignored my client and stopped responding to any further messages. After several months of my client's requests, the founder finally responded to one of my client's outreach attempts but denied owing my client anything and outright refused to pay any amount.

Legal Dispute

The startup owed my client $500,000 according to the advisory contract, but the founder refused to pay. My client made good faith efforts to negotiate with the founder for months - without success. Frustrated, my client asked for my help in collecting the payment owed. With me by my client's side, initial settlement discussions proved productive. After a couple of weeks, the founder even agreed verbally to specific settlement terms. However, the founder ghosted again when it came time to sign the settlement documents. We had few other options than to escalate and seek court intervention to recover the $500,000 owed by the startup under the contract.

Battle Begins

We conducted due diligence in preparation for and during the legal action. Service providers and other contributors to the startup had informed us that the founder was refusing to pay them. There were whispers across various startup communities that the $50 million bank wire transfer document could have been fabricated to attract more investors. Additionally, the startup had raised additional capital. However, the startup had no actual product despite claiming otherwise in marketing and promotional materials. The startup only had a semi-functional website landing page. Further investigation revealed that the founder controlled multiple domestic and offshore entities to transfer and hide the raised capital, which made it difficult to trace investment proceeds.

Initial Legal Claims

Based on mounting evidence and credible information received from our own investigation and trusted third parties, it became apparent that the founder was using the startup as part of a complex fraudulent scheme to raise capital, not to fund the startup, but to fund the founder’s opulent lifestyle (including renting a luxury penthouse in the center of Manhattan).

After intensive legal research and analysis, we initiated the legal action and filed claims in federal court against the startup, the founder, and the web of related legal entities. We alleged that the startup, its founders, and the related entities controlled by the founder were civilly liable for breach of contract, unjust enrichment, fraud, and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) arising from securities fraud, bank fraud, and wire fraud. We knew that fraud and RICO claims were high bars to meet and the offshore legal entities would be challenging to deal with. But we were certain that we would achieve success based on the merits, especially in light of our diligent efforts and strong legal basis tied to the Himalayan mountain load of proof that we had compiled and continued to collect.

Unexpected Turn of Events

The legal proceedings then took a surprising turn. The founder, who had been ignoring us for months, launched a borderline frivolous counterattack against my client to avoid paying amounts owed to my client and needlessly prolong litigation. The founder accused my client of violating securities laws by acting as an unregistered "broker-dealer" due to my client accepting a fee tied to the total capital raised and making introductions to a few investors, which was a mere fraction of the comprehensive services provided by my client. It was a bad faith understanding to flip the proverbial script and paint my client as a villain. Legal gaslighting, if you will. If my client was deemed to have acted unlawfully as an unregistered "broker-dealer", the advisor contract could be voided, my client could lose all right to the $500,000 payment under that contract, and my client could incur additional penalties.

Unregistered-Broker Dealer or Finder?

Our confidence remained unwavering, and business continued as usual. In my client's case, we argued that he acted legally as a "finder" in a limited capacity. A "finder" is someone who merely introduces prospective investors to a company raising capital in exchange for a fee. Unlike broker-dealers, who actively participate in investment transactions, negotiate investment deal terms, provide securities valuations, and are required to register with various federal and state regulatory agencies, finders are generally exempt from "broker-dealer" registration. However, some states these days may have registration requirements for finders (e.g., California and New York), which are well beyond the scope of this case study.

Momentum Shift

My client performed "finder" activities in a limited and narrow capacity by making a few investor introductions as part of a myriad of other services provided. The fee he agreed to, which was 1% of the total funds raised by the startup, was not dependent on securing capital from prospective investors introduced by my client. Instead, the fee compensated my client for his long-term comprehensive PR and marketing services, his reputation and goodwill, his high-value relationships, as well as the risk of loss in the event the startup failed to raise little to no capital.

My client did not participate in any stage of the startup's investment transactions, did not negotiate any investment terms, did not provide any valuations or give advice on the merits of any startup investments, did not actively solicit investors to provide capital to the startup, and had no history of selling investments.

The founder's accusation that my client was an "unregistered broker-dealer" proved to be weak. The founder was steadfast and unrelenting in his position solely based on the fact that my client accepted a commission as compensation. As such, we were able to systematically dismantle the founder's argument, which shifted the momentum in our favor. The founder became increasingly frantic as he realized he and his startup were going to lose the lawsuit.

Foul Play

Faced with impending defeat and a huge blow to their ego, the founder resorted to dirty tactics and unethical foul play outside the courtroom. The founder began publishing disparaging and defamatory statements about my client publicly across the internet, including large social media community groups, group chats, and through articles in countless publications. The overwhelming amount of false public statements cast my client in a negative light and damaged their reputation, which opened the door for us to bring other defamation and business tort claims. However, the sheer volume and widespread proliferation of disparaging and defamatory statements were beyond human manageability. We did everything we could to remedy the damaging matter, including submitting endless takedown notices to every publication and platform imaginable, with only limited and mixed success.

Settlement

Neither my client nor the founder was willing to back down from the court fight. However, legal costs and expenses were skyrocketing and spiraling out of control. Bringing additional claims against the founder would make an already complex legal dispute more complicated, exponentially increase legal costs, and prolong legal proceedings for many more years until resolution. If and when a resolution arrived, the founder likely would be judgment proof (or in prison) and a judgment in our favor would be fruitless. So at a certain point, it just made sense for both parties to re-engage in settlement discussions. After months of heated settlement negotiations, my client and the startup founder finally called a ceasefire. The battle ended, and my client received an invaluable outcome in his favor.

Aftermath and Justice

Although my client's legal action did not immediately bring justice, and the startup founder faced no immediate consequences for his fraudulent and unlawful acts, the legal battle ultimately exposed his pattern of deception and fraud. My client's legal battle against the startup and its founder led to other civil litigation and an FBI investigation. I continue to receive requests for help from third parties who were affected by this founder's actions.

Now, years after my client and the founder's dispute ended, the founder is serving a lengthy prison sentence for wire fraud, securities fraud, bank fraud, and even defrauding the federal government.

It took a while, but justice was finally served.

Key Takeaways & Insights

• Contract. Clearly specify the deal terms, including the specific services to be provided. If investor introductions are part of the services, include appropriate representations and warranties, limitations of liabilities, disclaimers, indemnifications, dispute resolution, attorneys fees, among others.
• Fee Structure. Clearly spell out the fee structure. Transaction-based commissions directly tied to total capital raised from investors introduced by a third party are not per se unlawful, but generally frowned upon by regulatory bodies. Fees can be structured in a variety of ways (e.g. small % commission + small % equity, small % commission + monthly retainer, monthly retainer with clawback for non-performance) to reduce regulatory scrutiny.
• Involvement. Ensure only Company executives (or equity holders) are involved in each stage of investment transactions, including negotiating the investment terms, handling investment funds, and managing fundraising closing procedures.
• Disclosures. If collecting a fee based on investor introductions, be transparent with the fee arrangement with investors.
• Due Diligence. Do a little bit of research and due diligence on the companies and people to determine if they’re the right fit and they’re legit.
• Litigation. Litigation is costs a lot of time, money, and energy.
• Legal Counsel. Consult with legal, tax, and finance advisors if engaging in any stage of the offer and sale of investments.

DISCLAIMER

This case study is based on a actual generalized facts to preserve confidentiality and is intended for educational and informational purposes only. The contents of this case study do not constitute legal advice or a legal opinion and should not be relied upon. Consult with legal counsel, including VenCounsel, for any legal matters relating to the subject matter of this case study.