Here’s What Happens to a Startup After a Sexual Harassment Scandal
(Bloomberg) -- BetterWorks Systems Inc. isn’t a well-known name in Silicon Valley, but the startup achieved a moment of infamy last year that it hasn’t been able to shake. A former employee sued the company in July, claiming the chief executive officer sexually harassed and assaulted her and that management failed to take proper disciplinary action. The allegations were levied as the #MeToo movement was mushrooming, and the fallout at BetterWorks was widespread.
Kris Duggan, the 43-year-old CEO, has disputed the allegations but resigned from the company he co-founded. Fundraising efforts were derailed. A dozen customers severed business relationships with the startup, which makes human-resources software. The events also torpedoed plans by Penguin Random House to publish a book co-written by Duggan and John Doerr, a prominent venture capitalist at Kleiner Perkins Caufield & Byers and a director at BetterWorks.
BetterWorks has been trying to resolve the scandal and move on. Last month, it settled the case with Beatrice Kim, the former employee. The company selected Doug Dennerline, a BetterWorks board member who runs a company called Alfresco Software Inc., to replace Duggan as CEO, though he has yet to formally accept the role, people with knowledge of the matter said. BetterWorks and Dennerline declined to comment.
Doerr and Duggan, too, are looking to put the episode behind them. The VC removed the entrepreneur’s name from their book, Measure What Matters. Penguin plans to finally publish it next month with a foreward written by Google’s Larry Page. Meanwhile, Duggan is starting a new company in Palo Alto, California.
But they’re on the cusp of another legal battle. A second ex-employee filed a claim with the state of California and was granted the right in December to sue for alleged sexual harassment. The complaint names BetterWorks, Kleiner Perkins, Doerr, Duggan and two other executives. It claims that each turned a blind eye to the alleged behavior, according to people with knowledge of the claim and a copy of the filing obtained by Bloomberg through a public information request.
Lynne Hermle, an attorney who represents BetterWorks, said the new claim is financially motivated and meritless. “Naming individual defendants who played no role in the alleged wrongful treatment of an employee is a shakedown, plain and simple, and that is precisely what it was here,” she said. “The supposed claims were legally and factually defective in every respect.”
Duggan wasn’t aware a second claim had been made. After hearing the complaint, he expressed frustration. “It’s not true, and it’s all to make money,” Duggan said. “We’ve worked really hard to make a great company with a great working environment. I can’t control that there are opportunists out there.” Kleiner Perkins declined to comment.
The settlement of the first harassment suit and emergence of a second potential legal challenge haven’t been previously reported. Major shareholders, business associates, and current and former employees also described, for the first time, lost business and fundraising struggles that resulted from Kim’s lawsuit. The accounts show the toll that accusations of harassment and a perceived lack of corrective corporate action can have on a company.
More businesses are likely to face claims of sexism and harassment as women feel empowered to speak out, said Pamela Mason, whose company provides insurance against such lawsuits for hundreds of startups and about 100 venture capital firms. “As the entire #MeToo movement has grown, my clients have this more and more on their radar screen,” she said.
Before the lawsuit last summer, BetterWorks was preparing to raise as much as $40 million from investors, nearly doubling its funding, according to people with knowledge of the matter, who asked not to be identified because the negotiations are private. Then came the suit, which put a hold on fundraising efforts. The allegations were a shock to several current and former employees who spoke to Bloomberg. They described an inclusive, merit-based work environment that encouraged those values by using the five-year-old company’s own software to foster open communication and manage staff. Kim was well-liked and respected by colleagues.
The fundraising freeze was a real problem. BetterWorks was burning through almost $1 million in some months, one of the people said. Without more capital coming in, reserves were running low, and an extra frugal mindset took hold among management. The office refrigerator broke, and executives made the decision not to fix it for several weeks. Mark Lambert, the chief financial officer, acknowledged the incident on company review website Glassdoor, calling the budget-conscious move “a bit much.”
Di Wu, who started the company with Duggan, left last summer but said his departure was unrelated to the allegations. The negative reaction to Kim’s suit did play a role in the departures of many employees who left during that period. Half of the six-person executive team has also exited since the case was filed.
About a dozen corporate customers abandoned BetterWorks software, citing claims made by Kim, people familiar with the matter said. That drove a 5 percent to 10 percent drop in annual recurring revenue, to $10 million. Several long-term clients, including Intuit Inc., A+E Networks and BMW, have remained loyal, continuing to use the software to set goals for employees and track progress on their work. Attracting new business was even tougher. Bookings, which are the value of customer commitments over time, last year dropped by at least 30 percent, another person said.
The settlement with Kim last month gave her about $1 million in exchange for signing a non-disclosure agreement prohibiting her from discussing the suit, according to people with knowledge of the terms. Kim, an early investor in the startup, now operates diversity and inclusion consultancy Awaken. BetterWorks and Kim declined to comment.
Fighting these cases can be expensive. In the technology epicenter of California, a loss in court means a company pays for the aggrieved party’s attorney fees in addition to whatever damages a judge sets. Even if a company wins the case, usually it’ll still be on the hook for its own legal costs. That’s why most settle. Some say it’s as high as 90 percent.
NDAs, which almost always come as a condition of a settlement, can create a chilling effect for alleged victims, shielding bad actors who sometimes go on to repeat their behavior. Lawmakers in California, New York and Pennsylvania have introduced legislation in recent months to ban confidentiality provisions. “The way the system is set up now, it basically allows rich guys to buy their way out of bad behavior,” said Connie Leyva, a California senator who introduced a bill last month addressing this issue.
In recent months, BetterWorks has administered unconscious bias training to staff, formed a companywide diversity and inclusion initiative, and instituted an alcohol policy designed to limit consumption, according to Dennerline. BetterWorks hopes to name Dennerline as its new CEO in the next few weeks. Dennerline, a former president of software maker SuccessFactors before SAP SE purchased the company for $3.4 billion, would need to win back customers, find new ones, restore morale and raise more venture capital.
He’d also need to handle the latest harassment complaint left over from his predecessor. According to paperwork filed with the California Department of Fair Employment and Housing that was obtained by Bloomberg, the woman claimed she was harassed and discriminated against because of her gender, and subjected to a hostile work environment. She said she reported it to a law firm BetterWorks hired to investigate the earlier harassment and discrimination complaint from Kim, and accused the probe of having a bias because it was overseen by Doerr, an investor with a stake in the outcome. After her complaint, she was then retaliated against and set up for termination, she alleged.
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