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What led to Benchmark’s ‘unprecedented’ lawsuit? Maybe founder-friendly provisions that made Uber founder Travis Kalanick king.

It’s tough these days for boards to discard entrepreneur CEOs.

TechCrunch 9th Annual Crunchies Awards
TechCrunch 9th Annual Crunchies Awards
Benchmark GP Bill Gurley
Steve Jennings/Getty Images for TechCrunch

When Bill Gurley wrote six weeks ago that Travis Kalanick had earned “many pages in the history books,” this probably wasn’t what he had in mind.

Fresh off ousting Kalanick from the CEO role at Uber, Gurley wrote late that evening on Twitter that “very few entrepreneurs have had such a lasting impact on the world.” What was left unsaid was that Gurley and his venture capital firm, Benchmark, were fuming over what they considered a cover-up that — as the investor’s firm alleged in a lawsuit today — amounted to high-profile dupery.

That rift between Kalanick and Benchmark burst into public notice in an extraordinary explosion that landed in Delaware’s Court of Chancery on Thursday afternoon. It depicted the Uber co-founder as a meddlesome conniver who was looking out for himself first and the company he built not at all.

In some ways, the complaint told a classic Silicon Valley story: A founder and a funder at each other’s throats over whose ideas were better.

That’s not new — but it’s rarely been so publicly dramatic.

“It’s unprecedented,” said Steve Blank, a Silicon Valley historian and entrepreneur. “In the past, Travis would’ve been in the parking lot looking in the window with a forlorn look.”

But thanks to a series of what are called “founder-friendly” provisions that have been slowly adopted by the industry over the last decade, Blank argued, it’s harder than ever for a company’s board to actually discard an entrepreneur turned CEO.

With gobs of cash in the venture capital ecosystem and limited places to invest, founders could afford to press for an advantage. So they insisted on founder-friendly provisions — terms that would protect them should investors try and squeeze them out of their own companies and ensure larger and larger paydays down the road.

The increasing use of dual-class stock structure, in which founders can have small ownership percentages, but outsized influence over company decisions via voting rights, has played a role. Facebook and Google has them — except they also have leaders who have played nice with investors.

Not Kalanick. Benchmark said in their filing that Kalanick holds only 10 percent of the company’s preferred stock, but has 16 percent of Uber’s voting power. He also has 35 percent of its common stock, which grants him disproportionate influence in company votes.

And indeed, Kalanick, even after his removal in June, retained his seat on the board of directors and has even told some that he wanted to eventually return to the top role, even though he was ousted from his job by top investors.

“We could probably go read the Bible about founders behaving badly,” Blank said. But now, “founders get out of control and the board has no control.”

Much of the Uber story defies precedent. Never before have we seen such an immensely valuable company — one that continues to remain private — escaping the scrutiny of regulators and public markets that typically hold powerful companies accountable, for example. And, rarely before have we seen such a ceaseless exodus of company brass, creating a leadership vacuum that has left the ride-hailing giant rudderless.

And now we add this: One of tech’s most prestigious venture capital firms is publicly and legally pummeling the former CEO of its own portfolio company with 38 pages of gnarly allegations. Six years ago, Benchmark adored Kalanick enough to give him millions of dollars. Now, it despises him enough to initiate a lawsuit that is sure to inflame tensions at a company with a $70 billion valuation that is a cornerstone of Benchmark’s financial future.

That future, of course, will be largely decided by the to-be-named judge in the case, who will decide whether Kalanick gets to keep the board seat that he could eventually try to use as a launchpad to his old job.

But it’ll also be decided in part by public pressure. Do other investors agree with Benchmark’s lawsuit? At least one major investor with an Uber board seat, the private equity firm TPG Capital, was quiet Thursday, declining to comment to Recode.

Benchmark said two days ago — when, presumably, this lawsuit was being crafted — that they remained “long” on Uber and projected it would soon be a $100 billion company.

That may be true, even as it fired a torpedo directly Kalanick and, by extension, at the company he built. In the coming weeks, Kalanick’s lawyers will toil away responding to the complaint and, as his representatives signaled Thursday, come out swinging.

This fight will be messy, litigious and definitely drawn out. Which means Benchmark may find itself a bit longer on Uber than Gurley realized.


This article originally appeared on Recode.net.

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