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Cruise's $1 billion exit is now in doubt after a founder files legal claim

It's a scenario all too common in Silicon Valley: A startup gets a big exit, then people who were involved in the early days pop up to demand what they believe is their fair share.

Nabeel Hyatt

Startup Cruise made waves at the beginning of March when General Motors acquired the autonomous driving tech company for $1 billion and reinvigorated interest from venture capitalists in autonomous tech startups.

Now, Cruise is again in the spotlight — but this time, it’s for being at the center of a legal battle.

The question at hand: As a former self-proclaimed co-founder of the company, is Jeremy Guillory entitled to a share of Cruise’s equity?

Given how much money is at stake, this case is likely to set a precedent for startups looking to exit in the future. How each party conducts itself and what they’re willing to do to win, as well as which documents are legally binding, speaks volumes as startups with higher valuations seek to exit in the years to come.

Cruise’s deal with General Motors is expected to proceed as scheduled, according to the automaker. For GM, this is one of the auto industry’s biggest acquisitions of a Silicon Valley company to date and gives the automaker a better chance to compete against Google and Tesla in the development of autonomous cars. For Silicon Valley, one of the industry’s largest exits — and the biggest exit Y Combinator has yet seen — is in jeopardy.

So far, it’s a classic case of he-said, he-said. On the one hand, there are the monied stakeholders looking to silence a threat to their investment. On the other is a former co-founder hoping to get what he believes is his fair share of the sale of a company he helped conceive.

Jeremy Guillory
Jeremy Guillory

After the acquisition was announced, Guillory approached current Cruise CEO Kyle Vogt to ask for what he believed was his share of the company. He cites, of all things, an application he filled out for Y Combinator, the startup incubator behind Cruise, as evidence he was a co-founder and therefore entitled to half of Vogt’s equity.

After several weeks of negotiations, Cruise filed a suit against Guillory for making a false equity claim, adding that the two — Vogt and Guillory — mutually agreed to part ways before the acquisition.

Days after Cruise and Vogt filed their suit, Guillory and his team of lawyers filed their own complaint, alleging Vogt was in breach of contract for denying Guillory his fair share as well as credit as a co-founder. In Guillory’s account of Cruise’s origin story, there was nothing mutual about the way he and Vogt parted ways.

So what happened?

Y Combinator isn’t like other venture capital firms. Twice a year, the startup incubator accepts applications from founders of early-stage companies to be a part of a class of startups in which the firm invests $120,000 and three months of development guidance.

Guillory and Vogt met in October 2013 and decided together to work on a company that retrofitted existing vehicles to have semi-autonomous capabilities.

Both had experience working with self-driving technology — Guillory helped to develop Lidar technology at a company called GrayMatter, and Vogt helped build a Wi-Fi-controlled Ford F-150 at MIT. The original concept for Cruise looked much like the work Guillory did at GrayMatter, which used low-cost commodity hardware to enable cars to drive semi-autonomously.

Together, they applied to be a part of Y Combinator’s Winter 2014 class of startups. But mere weeks after they applied in October of 2013, Vogt and Guillory parted ways, and at the time of the Y Combinator interview, Vogt was alone. Now their respective suits center on how that went down:

  • Guillory says the original Y Combinator application is a legal document.
  • Cruise doesn’t have any documentation showing the two agreed to part.
  • Y Combinator president Sam Altman preemptively brushed aside Guillory’s argument in a blog post: “Even if Jeremy had signed a stock agreement, he wouldn’t have reached the standard one-year cliff for founders to vest any equity.” He is referring to what is a typical waiting period before a founder can claim equity in a company with venture backing — in this case, one year.

Cruise boosters say the Y Combinator application isn’t important to the dispute, but that it’s about how much work Guillory put into the company. A jury will have to decide how much value Guillory added to Cruise’s intellectual property and sources claim Guillory didn’t write a single line of code while at the company.

The company that Guillory co-founded, sources close to Vogt argued, isn’t the company GM ended up buying, and thus the technology he brought to the table had not been ascribed any value.

“I was a seed and Series A investor and board observer in Cruise and I never heard of Jeremy until this week when I read about the lawsuit,” Jim Scheinman, founder of Maven Ventures, told Re/code. “As far as I recall, he was absolutely not involved with Cruise in any way.”

Guillory, however, is arguing that his value to the company came at the company’s founding. In other words, Guillory is claiming Y Combinator would not have funded the startup without the ideas he brought to the table, and he is therefore entitled to his stake.

Jeff Chanin of Keker & Van Nest, LLP, and one of Guillory’s lawyers told Re/code that Vogt saw value in Guillory’s work: “He wouldn’t have agreed to this if Jeremy’s contributions, which Cruise then used to raise capital and attract GM’s interest, had no value. Mr. Vogt is trying to rewrite history to justify keeping Jeremy’s fair share for himself.”

A co-founder asks for his share

While this legal battle appears to follow a standard narrative in which a former founder comes out of the woodwork to claim a cash prize after an acquisition, things took a bit of a turn during and after negotiations.

Cruise was so concerned about making sure the GM acquisition would go through that it filed a lawsuit before Guillory made any legal claims. Altman, who stands to gain from the deal, also sounded off in a blog post about the matter, naturally siding with Cruise.

20160416-YCombinator-Cruise

Put simply, these efforts were a clear signal of just how important it was for Cruise to head off any attempt by Guillory to extract a stake.

The two parties went through weeks of negotiations before considering taking the fight to court. According to sources close to Vogt, Guillory demanded $5 million out of the gate. He didn’t ask for acknowledgment as a co-founder or 50 percent equity until two or three weeks into the negotiations — it was all about the money.

In Guillory’s version, he approached Vogt shortly after the acquisition to ask how much he would receive. While Guillory thought his share would be about $5 million, he didn’t demand that amount, a source close to Guillory said. After all, Guillory didn’t know the full value of the share he is claiming, because Vogt refused to allow him to see the breakdown of equity and ownership of investors and shareholders, also known as the cap table.

Vogt initially said Guillory wasn’t entitled to receive anything, but he soon after offered $100,000 — which then increased to $1.5 million to make the problem go away, according to Guillory’s complaint.

After weeks of negotiations, Cruise proposed terms of a settlement with an imposed deadline. Though few sources would give any explicit details of those terms, some said that Vogt agreed to allow Guillory to identify himself as a co-founder in his own bio, but that the company would not acknowledge it on their websites or properties. This did not satisfy what Guillory felt was owed to him.

After Guillory didn’t respond, Cruise filed its suit.

“Mr. Guillory’s baseless allegations have also caused an unnecessary and damaging delay in the sale of Cruise to General Motors,” Vogt’s complaint reads. “Time is truly of the essence in the highly competitive and frenetic race in the development of autonomous technology. Any continued delay damages Plaintiffs. As a result, Plaintiffs seek the Court’s immediate resolution of this matter so that Cruise and General Motors may proceed to fulfill the respective benefits of their bargain.”

Altman’s blog post went up on April 13, just two days after Cruise filed its suit. Altman said he wrote the post because he “wanted to help Kyle [Vogt] in a difficult situation and make a general point about an ongoing problem.”

On April 14, Guillory filed a cross-complaint in response to the now public legal dispute between him and Vogt.

As sources close to Guillory would have it, he never considered litigation throughout the negotiations and didn’t consult a lawyer until he was told Cruise had filed a suit under seal, or protection of secrecy.

In his countersuit, Guillory further alleges he was being pressured into agreeing to the settlement without being given much time to consider it.

Sources close to Vogt dispute this version of the story. They said that Guillory’s threats during the negotiations were substantial enough to interfere with the GM deal, and thus warranted the initial lawsuit.

It was a preemptive strike, so to speak. But instead of silencing their opponent, Cruise and Vogt may have just handed him the platform to very publicly ready his defense.

Here’s the original Y Combinator application:

This article originally appeared on Recode.net.

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