When the Big Competitor Sued My Startup
You might face it someday...and may even look forward to it after reading this
Welcome to the latest entry in The Workaround. You’re in good company with thousands of fellow entrepreneurs and innovators!
I’m Bob, your host. My mission here is to share personal, behind-the-scenes stories of the ups and downs of my career leading tech startups, corporate innovation, and tech-enabled service businesses.
I write to make you think, smile, and discover a shortcut to success or a trap to avoid.
Here we go…
No one starts a company expecting to be sued by their biggest competitor. Maybe we should…
Almost no one publicly shares what it’s like to go through it when it happens. I know because I remember Googling like crazy that day when a lawsuit landed in my lap, hoping someone wrote a blog post about how to handle it.
But it happened to me, and I’ve long wanted to pay it forward by sharing my story. With most players retired from my battlefield by now, I’m ready to serve this dish.
I hope to leave you more ready to handle such situations if and when they arrive. You might even learn a little something about yourself in the process. I sure did!
The Fed-Ex Drops
It’s March 2018, and I’m walking through the office with a spring in my step. I’m co-founder/CEO of a fast-growing, profitable influencer marketing startup.
We launched our company in 2012 and almost shuttered it in 2015, but we finally found a successful business model and doubled sales two years in a row. We’re doing so well that two companies want to acquire our firm for a handsome sum.
I pop out of a huddle room where we’ve just been chatting with our investment banking team about the latest offer from one of the potential suitors. We think they will go higher. We don’t need to sell, but the timing and dollar amounts are compelling.
I’ve never negotiated anything like this, with tens of millions of dollars at stake. It’s “exciting” in every blessing and curse meaning of the word. There are so many moving pieces in the term sheet details that it’s hard to keep track of them all. And I continue thinking of the many people impacted by my mere words in the negotiation process—investors, customers, our employees, and their families.
I sit, take a deep breath, and look around at my team at their desks. It’s Friday afternoon, and we’ve got dance music playing and beers being poured. Most seats are still filled as people work to wrap up projects before the weekend. I’ve got a few minutes to enjoy the moment before my next meeting, when our Head of HR, Jeff, will take us through options for a new office location downtown. We’re outgrowing this space and eager to create the workplace of our dreams.
My gaze across the room falls on Sarah, our Office Manager, walking toward me from the front door with a large Fed-Ex package in her arms. She hands it to me, shrugs her shoulders, and walks back to her desk. I have no idea what it is, but I curiously peel back the sealing tape to discover it is a large pile of paperwork. Then, the words and formatting of the cover page come into my focus:
Uh…this document is a lawsuit. Our closest, largest competitor—let’s call them “BigCo”—is suing us.
I say, “Uh, oh” out loud, then look up to see if anyone heard me.
My first complete thought pops up: “Well, I expected something bad to happen before this acquisition process was done…” After all, most of the M&A stories I’ve heard are about deals falling apart before the finish line. Would this kill our deal?
Then I read the summary of the lawsuit…and I start laughing out loud. People are definitely looking at me this time.
Now my second thought arises: “Bring it on, motherfuckers.”
Always Check the Appendix
We considered this scenario seven months earlier when we hired “William,” who worked at BigCo then. This lawsuit accused our company and William of violating the non-compete section of his employment agreement.
Back then, the recruiting agency we hired suggested William for an opening they hoped to fill for us. We loved his background and industry knowledge and needed experienced people like him to keep powering our growth.
But we were wary of hiring someone from BigCo. Almost all of our revenue was coming from their (previous) clients. BigCo had dominated this niche of influencer marketing, where we were the new upstart. Their quasi-monopoly in the market bred arrogance—leading to higher prices, poor service, and a lack of innovation. Most clients told us that “BigCo doesn’t bring us anything new anymore.”
Since our product was a quarterly media buy rather than an annual software subscription, it was easy for customers to move a test budget to us. The quality of our content, ideas, and service blew them away. Those $25k tests led to +$250k relationships, prompting BigCo to start wondering what the hell was happening in its market.
We interviewed William and were eager to put an offer together. But to cover ourselves, we asked for a copy of his current employment agreement, especially the non-compete clause. It was pretty standard: He wasn’t allowed to work for a competitive business for one year after leaving. Ugh.
However, we continued to flip through the document and found an Appendix listing the companies BigCo considered competitors. William explained that this was added when BigCo was purchased by another company a few years earlier. Employees complained about signing their rights away for no personal benefit or consideration, so HR added this list to the Appendix.
I’ve never seen a company do that before—and it’s a pretty dumb thing to do. Products and competitors come and go too quickly to list and update them in employees’ contracts.
But, lo and behold, our little startup wasn’t on the list! As the Bard said, “Ha, Ha!”
We ran it by our attorney. He cautioned us that nothing is without risk, but this was a significant point in our favor. My COO, Ryan, and I agreed that we were willing to go for it. We made William an offer, and he quickly accepted.
See Ya in Court
Now I’m on the phone with our attorney, setting up a meeting for his defense team to strategize and build an action plan. I proceed to get personal tutoring on business law and the court process. And I’ll be honest, it’s pretty fascinating.
The attorneys are immediately confident in our case. They see many holes in the charges. They’ve been up against the other side before and know the Northern District of Illinois and the judge assigned to our case very well. Having been through such situations many times, they share something that surprises them:
If hiring William was so threatening, why did they wait seven months to file a lawsuit? His non-compete would expire long before the case even went to trial.
Usually, when you lose a key employee to a competitor and want to challenge, you immediately send a warning letter. That sometimes scares off the hiring firm—especially when they are little fish. You don’t even have to hire a lawyer for that.
It’s also strange because I met the President of BigCo a little over a year ago. Ironically, our attorney had introduced me to John, a local entrepreneur who sold his company to BigCo. After a few good chats, John wanted his President to meet me and learn about our company as a potential partner. The meeting went nowhere, but we had established friendly lines of communication. Usually, you start with a phone call to sort things out and avoid giant legal bills if at all possible. But they decided to go all the way to Defcon 1. Fine.
My next big call is with the company that has made the winning offer to buy our startup. I’m nervous that this could kill our deal, but we must discuss this material issue. And I’ve been prepared for the worst anyway.
Thankfully, our contact, Sunny, barely bats an eye after I explain things. He tells me they already have a couple of lawsuits with BigCo in progress, and their legal team isn’t worried. Any costs would be covered under the escrow money kept aside before the final acquisition payment. I feel better about the deal—and the company that made the offer. They passed this partnership test with flying colors.
Two weeks later, our attorneys meet their attorneys in Chicago. No clients are in the room, but I badly wish I had been there. A few hours later, Ryan and I are in a huddle room for the debriefing. Most of what they report is typical posturing on behalf of their clients. Each side gauges if the other is serious about this whole thing. But then our attorneys tell us a priceless nugget:
“As we were wrapping up the meeting, we asked why their clients waited seven months to challenge this hire—and their counsel replied,
‘Well, BigCo is tired of losing to them in the market and will try anything to slow them down.’”
And at that moment, another last shred of my innocence is lost.
I never thought about how a company might use their big wallets and the courtroom as a strategy. I know it happens every day, but never to me or my company over something so silly.
I laugh out loud once again. These guys just showed us two important “tells” in this game:
First, they are unethical. A lawsuit with little merit aimed at slowing down a small competitor is legal—but it's a spineless, softball strategy. I’ll file that away for future dealings with any executives working at BigCo. This is my company. It’s personal for me. And my memory is long.
Second, they are weak. They don’t have any better ideas. Instead of upgrading their business to put a better product in the market, they resort to the courtroom. That means we will keep crushing them in the market while this case drags on.
The Wheels of Justice Grind On
And drag on, it does…
The next few weeks include motions, countermotions, and postponements. I learned that lawsuits take time, and you can do nothing to speed them up. So trust your attorneys to manage things and go back to your business.
In May, BigCo execs ask to “have a sit down” with our team, but won’t give us any context. Our attorneys say this is very odd and advise us to pass. We take their recommendation, despite my desire to say to their faces that we’re coming to take all of their business now.
Besides, we don’t have time for a meeting—we’re about to announce our company's $50 million acquisition!
Time flies as we integrate with our acquirer; suddenly, it’s December. As our team celebrates another year of doubling revenue, our attorneys finally get quality time before the judge. The judge throws out most of BigCo’s claims, and our attorneys are high-fiving.
Then April rolls around, and we’re in the Discovery Process for our trial. This, too, is fascinating to me. Essentially, it involves a negotiation in which each side asks for evidence from inside the other company's files, texts, and emails. I was ready for this way back when we hired Willliam. We said, did, or wrote nothing about stealing people or information from this competitor. I could proudly point to our conversations about The Appendix.
Big BigCo is slow to agree to share its internal communications. Our attorneys say this is unusual because plaintiffs tend to push hard on discovery to cause expense and pain for the defendant—hoping they will crack. Maybe their delay is because they must answer questions like, “Show us how this hire caused damages to you.” They will also have to let us crawl through their email servers, searching for comments like, “Let’s use this seven-month-old hire as an excuse to scare these guys away.”
Alas, on the eve of the deadline for their side to agree to Discovery—over a year since the Fed-Ex hit my desk and almost two years after we hired William—both sides “resolved their differences.” I’ll leave it at that.
At this point, we probably won $25 million in revenue that would have been theirs if we had not brought a superior solution to the market. Case closed.
Pro Tips for Your Business
Mark Suster writes, “You know your startup is a success when the big player sues you.” He also notes that startups are increasingly in the crosshairs of legal threats. So you might as well go into the game ready for lawsuits to come flying. Here are a few best practices:
Don’t do unethical and illegal stuff - (Duh) I’ve had investors and employees offer to “go undercover” to get information. I never want it, and trash it if it comes to me in nefarious ways. It’s not worth the legal risk or the ethical weight. Just go beat them fair and square—it’s more fun that way.
Mentally prepare far ahead—In critical decisions with legal risk, expect to defend yourself in court some day. You and your team might even go through a practice exercise. The best training comes from simulation. It helps ensure the initial decision is sound and reduces stress if and when a lawsuit drops. In our case, the Appendix was a strong defense strategy. The rest was just tactics.
Have a good attorney on your team—You don’t want to be phoning friends for referrals when you’re in the middle of the battle. This is why I love having long-term relationships across multiple businesses. Your teams will build knowledge and trust that help things move faster and more effectively when shrapnel starts flying. Yes, it will cost absurd amounts of money in attorney fees. But it’s just a cost of doing business in today’s world.
Protect your team—Almost no one at our company knew about the BigCo lawsuit or that William was personally part of it. They didn’t need to know. We also paid William’s legal bills, including his outside counsel. He took a risk in coming to work for us, and we owed it to him as our team member to go to all ends to protect him. If the news does get out—say by a leak from your opposition—address it transparently with your broader team while respecting impacted employees’ privacy. You might turn it into a rallying cry to double down on crushing them fair and square.
Compartmentalize as best you can - There are all kinds of nightmares that you can conjure up when someone slaps a lawsuit on you. It can feel like a personal attack. Let that go…If you have a strong defense and a quality attorney, let the process take its course—which will likely be extended. Remember that they get what they want if you’re stressed and distracted. Don’t let them win before the trial starts.
The Benefit of Getting Punched
Recently, I was catching up with a friend who shared a story about how his biggest customer and distribution partner had just been raided by law enforcement. This, in turn, was part of a bigger case, and his customer was just a supplier to the real target. Nevertheless, shit rolls downhill, and my friend’s business took a hit. But he’s getting through it.
We laughed together at yet another story for the books. Ain’t startups fun?!
Looking back, I'm glad I had direct experience with the legal system. The next time it happens, I’ll be better prepared for all the stages and key decisions.
But even more, I’m glad to have had the chance to fight for my business and test what my team and I are made of. You can do many hours of training, reading, and planning, but you never know how you will react until someone punches you in the face—or in our case, below the belt. We quickly found our footing and punched back.
Flash forward to today, and one of my companies is back in the game, competing with BigCo all over again. They might even be reading this post. I have no malice toward the employees there, who include friends and previous co-workers. We’re back to fighting—fairly—for the next client RFP. I hope they do the same.
May the best team win.
How we might work together…
Are you interested in launching your own consulting or service business or need help taking your current services business to the next level? Fleet is our holding company for services, and we’re actively looking to build business partnerships with winning leaders. Let’s talk!
Need guidance with revenue alignment or revenue growth management? We built Revelin to serve organizations through fractional and project-based execution, specializing in GTM alignment, CRM optimization, territory design, annual planning, M&A integration, and building your RevOps function to support growth. Schedule your revenue assessment.
My team and I lead Hearty, a boutique recruiting service that helps tech-forward companies hire proven talent. Our senior team of operators sources and screens, saving you time and money. When you need help, let’s chat.
Need help with a software project? Perhaps a product MVP, a project that requires outside help, or a fractional CTO for key strategic decisions? Our team at Shipwright Studio has worked together to build multiple successful startups, and we love helping leaders turn their dreams into reality. We're the team our clients trust for software built to last.
Looking for Influencer Marketing and Content Creation? The team from our previous company is back by popular demand with A2 Influence. We’re ramping up now and would love to share more.
Feel free to schedule a time during my Office Hours to discuss questions, feedback, networking, or any other topic! You can also find me on LinkedIn or email.
BONUS: Cool Content of the Week
A little something I found meaningful. You might agree…
Books that put social change in historical perspective
Yet another election in the U.S. makes us feel that we’re living through intensely interesting times. But we can see bigger patterns if our minds elevate above the media coverage chaos. This can give us understanding…and hope.
Over the past few months, two books have helped me see that what we’re living through today is a natural swing of the pendulum in the complex adaptive system that we call society.
The Fourth Turning Is Here: What the Seasons of History Tell Us About How and When This Crisis Will End. Neil Howe's most recent book. For decades, he has been writing about cyclical generation-driven change. In this book, he discusses three previous shifts in the social fabric of the United States since its founding and lays out some clues to what change is upon us.
The Upswing: How America Came Together a Century Ago and How We Can Do It Again. Author Robert Putnam saw a major shift in his most popular book, Bowling Alone. In The Upswing, he shows a pattern alternating between social togetherness and individualism. Putnam makes the case that we’re at the peak of individualism—just like our country was in the late 1800s—and that we’re due for a shift back toward common beliefs.
Both books predict we’re due for change sometime around 2030—maybe earlier, maybe later. Both expect the result will be a stronger country that has made the necessary adjustments to what the world needs now—until the next big change is upon us. But we’ll be dead by then!
You might rest a little easier seeing the patterns in these books—but at a minimum, you’ll spend several hours away from social feeds.