FOUNDERS OF EPINIONS SUE BENCHMARK AND AUGUST CAPITAL

HatTip to Techdirt. Story hits the NYTimes which isn't good news for William Gurley (Benchmark Capital), John Johnston (August Capital), and Nirav Tolia (Epinions co-founder) who were names as defendents in a lawsuit:

"It's rare for the founders of a company to sue their financial backers," said Paul T. Friedman, a partner at Morrison & Foerster in San Francisco. "Venture is a small world in which relationships are very important. Most people find a way to avoid disputes so they can live another day."

The basis for the suit is the proposal made in February 2003 to merge Epinions and DealTime, a comparison-pricing site. By then four of the company's five founders - Naval Ravikant, Ramanathan Guha, Mike Speiser and Dion Lim, who did not join the suit - had left the company but still owned a total of more than six million shares of Epinions common stock.

The four owned enough shares to scuttle the merger but gave their blessing, even though it meant valuing those shares at zero. At the time, investors holding preferred shares, including Benchmark and August Capital, had claim on the $45 million they had invested collectively.

The four founders, the suit says, were led to believe that the company was worth $23 million to $38 million, making common stock worthless.

The suit contends that Mr. Gurley, Mr. Johnston and Mr. Tolia failed to share "material facts concerning Epinions' financial affairs," including news of a deal with Google that the company knew would increase its 2003 profits by 1,400 percent.