Binary Capital Settles Harassment Suit That Roiled Silicon Valley
(Bloomberg) -- Now-defunct venture capital firm Binary Capital and its founders are settling a 2017 harassment and discrimination lawsuit brought by former principal Ann Lai that helped sink the firm and played into a larger reckoning about gender in Silicon Valley.
The settlement terms of the case, much of which involved the use of non-disclosure agreements to prevent employees from speaking out about conduct at the firm, could deter other companies from relying on similar arrangements.
“It is an unfortunate fact that most employers believe they have nothing to lose, and everything to gain, by requiring their employees to sign illegal NDAs,” wrote Lai’s lawyer, Chris Baker, in a court filing, referring to overly broad NDAs. “Many employees will feel compelled to abide by an illegal NDA rather than risk the loss of their job and career or financial ruin.”
Lai has resolved her claims, according to a court filing, and is receiving a personal settlement of an undisclosed amount. She also reached a separate $61,000 settlement under a California labor law that will be split between her lawyers, former Binary Capital employees and the state of California.
Once the settlement is approved by a judge, Lai will drop her lawsuit against Binary Capital and its management companies, as well as its co-founders Justin Caldbeck and Jonathan Teo, according to a document filed in state court that was made public this week. Binary Capital and its principles did not admit to wrongdoing as part of the settlement.
While she was an employee at Binary Capital, Lai alleged, the firm had a culture of harassment, including a requirement from the co-founders that female job applicants submit headshots so that they could be judged on attractiveness. Her accounts and those of other women who had worked with Binary Capital sent shockwaves though the startup ecosystem at the time.
Lai left Binary Capital in 2016 and filed two formal complaints with government agencies alleging misconduct at the firm. In response, Binary Capital’s lawyers told Lai she had violated the terms of her non-disclosure agreement and was liable for $10 million in damages, according to a lawsuit Lai later filed. The lawsuit resulted in the $61,000 public settlement under California’s Private Attorneys General Act, which allows for workers to file lawsuits on behalf of the state attorney general.
While $61,000 is small in aggregate, because of the way it was calculated, it could cause other employers to rethink overly broad use of non-disclosure requirements, Baker said. That settlement amounts to $486.40 per pay period per employee, or $6,755.56 per employee, far exceeding other sums paid out under the Private Attorneys General Act, according to a court filing by Baker. The largest such claim on an aggregate basis was a California class-action suit settled last year against Walmart Inc., for a total settlement amount of $65 million—just $24.90 per employee per pay period, the filing said. That case, Brown v. Walmart, concerned the right of Walmart cashiers to sit while working.
According to court documents, an agreement Lai had signed at Binary Capital included the requirement that she give up her right to carried interest, meaning her share of the fund’s profits in its investments, if she violated the non-disclosure agreement. “One of the most troubling aspects of NDAs in the venture capital world is where venture funds condition the payment of carried interest on compliance with an NDA,” Lai said in an emailed statement. “This settlement eliminates that concern. A person should not have to choose between payment of their carried interest and speaking out.”
Lai, who earned three degrees from Harvard University before spending about a year at Binary Capital, said she left in May 2016 because of its “sexist and sexual environment,” according to her original lawsuit. She filed it in June 2017, just days after tech news website the Information published a report alleging that Caldbeck preyed on women entrepreneurs in a way that implied the promise of funding in exchange for sexual contact. The drama played out against the backdrop of the national #MeToo movement around the same time, as women outed predators across various industries.
In a 2017 court filing, Teo and Caldbeck said Lai was a subpar employee and misled them about the progress of a project, then resigned before she could be fired. While Caldbeck strongly denied Lai’s allegations at the time, he has since been working to rehabilitate himself, including talking to young men about the dangers of "bro culture." Lawyers for Caldbeck and Teo did not respond to requests for comment for this story.
As #MeToo swept the country, the venture capital industry dealt with its own series of allegations against male financiers and technology executives, leading to resignations from investment firm DFJ, 500 Startups, Sherpa Capital and others. Caldbeck resigned later in June 2017, while his co-founder Teo tried to outlast the turmoil. Ultimately, though, Teo also left and investors turned over management of Binary Capital’s holdings to Lerer Hippeau, a New York VC firm.
Caldbeck sued Teo last year, accusing him of fraud, and in March filed a dismissal of the case in San Francisco Superior Court.
Lai’s settlement must be approved by a judge before it becomes valid. The case is Lai v. Binary Capital, 17-CIV-02882, California Superior Court, County of San Mateo.
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