With a jury trial looming, Compass is trying to lessen the windfall Avi Dorfman could reap if he proves he co-founded the firm.
The brokerage has asked the court to restrict Dorfman’s damages to cash instead of stock. Further, it urged the court to base Dorfman’s damages on Compass’ value in 2012, when he claimed to have worked with CEO Robert Reffkin.
“Dorfman’s recovery should not vary based on fluctuations in the value of Compass stock during the nearly eight years since his claim accrued,” the company, last valued at $6.4 billion, argued in an Aug. 31 motion.
Dorfman sued Compass in 2014, claiming Reffkin used a concept they worked on together in 2012 as the foundation for the brokerage. Dorfman said Reffkin reneged on an early job offer and 2.5 percent stake in the company; Compass maintains that Dorfman turned down the offer only to seek a “do-over.”
This summer, the case took a turn when Judge Andrea Masley said valuation questions would not be part of the trial. Rather, she said, the jury would decide whether Dorfman is entitled to “present … shares” of Compass stock.
The brokerage has raised more than $1.5 billion from investors, including SoftBank. The New York-based firm has more than 15,000 agents nationwide and claimed to have sold $88 billion in real estate last year.
When it comes to Dorfman, the brokerage says equity should be off the table. “He has consistently sought money damages — and only money damages — in this case,” its Aug. 31 motion said.
But Dorfman’s legal team claims that is simply not true. “We believe a jury will find that Avi Dorfman was a founder of Compass, and as a founder he’s entitled to equity in the company,” said Jonathan Harris.
A spokesperson for Compass said the firm looks forward to its chance to “disprove Mr. Dorfman’s false claims that he should receive any compensation for the limited hours of work he alleged to have performed in 2012.”
In the tech world, founder disputes are not new.
Facebook’s Mark Zuckerberg fought off several, including one from Eduardo Saverin and another from brothers Cameron and Tyler Winkelvoss, who settled for just $65 million. Martin Eberhard, a former CEO of Tesla, threatened a defamation suit over CEO Elon Musk’s founder title.
In general, such suits allege breach of contract and the plaintiff, if successful, is compensated with monetary damages.
But in situations where cash is deemed insufficient, the court may award other forms of damages, said Jonathan Gworek, a startup attorney at Morse, Barnes-Brown & Pendleton in Waltham, Mass.
An impending IPO could be one reason a monetary award is deemed insufficient, Gworek said.
“I can see the plaintiff saying, ‘If you give me cash, I won’t be able to turn around and buy the stock. So I’m not going to benefit from the run-up in value when it goes public,’” he said.
For Compass, the financial stakes are high either way. Randall Baron, a partner at Robbins Geller Rudman & Down, surmised the firm is probably “trying to deny him the appreciation” of its shares over the past few years. Sources said the firm may be betting that a jury will have a harder time awarding a staggering sum than mere shares, even if they are just as valuable.
But there are other drawbacks to Compass awarding new shares.
After six years of litigation, the brokerage likely wants to avoid a fiduciary relationship with Dorman. With shares, Dorfman would be empowered to request financial information, and it’s possible his vote would also be needed to approve a company sale. “If the court awards him cash, their relationship is contractual and short-lived. They rip the Band-Aid off,” said Ed Zimmerman, chair of the tech group at Lowenstein Sandler.
What’s more, issuing new equity could have a “cascading effect” by diluting the ownership of other shareholders, Gworek noted. In all likelihood, the company would have to issue additional shares to investors to preserve their position. “That could wreak havoc on the company’s capitalization table,” he said.
In an Aug. 24 letter to the judge, Compass’ attorneys said as much. “While Defendants disagree that Dorfman can recover ‘the current valuation’ of Compass stock as opposed to its 2012 value, the point remains that Dorfman was clearly seeking the value of the shares as money damages, not the shares themselves,” they wrote.
The original complaint, however, says Dorfman was denied a piece of the company and seeks compensatory damages.
In the original suit, Dorfman didn’t specify the value of his damages, only that he originally believed he was owed 5 percent to 10 percent of a founder’s stake. Compass offered 2.5 percent, then 1.8 percent, which Dorfman turned down because they were insulting. Experts hired by Dorfman said in 2019 he could be entitled to 2.5 million shares.
According to court documents, Reffkin paid only $335.50 for 3.355 million shares in 2012. The value of his shares today isn’t clear given that they were likely diluted over time. Compass’ $370 million Series G priced shares at $154.27 apiece, according to Pitchbook.