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Hyperloop founder, accused of nepotism, to cede voting power

Saturday, July 16, 2016 - 10:07

[SAN FRANCISCO] Accused by one of its founders of nepotism and greed, Hyperloop Technologies Inc, a startup dedicated to fulfilling Elon Musk's dream of high-speed transportation, is taking steps to rein in the power of its major stakeholders.

At a series of all-hands meetings in recent weeks, according to two people familiar with the situation, the company told employees it's changing the rules so that co-founder Shervin Pishevar and board member Joe Lonsdale each will control 20 per cent of voting shares, down from a combined 78 per cent.

The two men decided to pare down their voting control to show goodwill toward employees, one of the people said.

The company, known as Hyperloop One, became the latest symbol of tech startup dysfunction on Wednesday when co-founder Brogan BamBrogan filed a lawsuit accusing Mr Pishevar and others of mismanaging the company and lining their relatives' pockets.

Mr BamBrogan, who was the chief of technology before being fired, claims his attempts to expose and correct the mismanagement led to a backlash when Mr Pishevar's brother, Hyperloop One's general counsel, left a hangman's noose on his chair last month.

A lawyer for Hyperloop One called the lawsuit "unfortunate and delusional." Tensions had been mounting behind the scenes for weeks. In late May, several employees, including Mr BamBrogan, wrote to Mr Lonsdale, Mr Pishevar and Chief executive officer Robert Lloyd to complain about voting control and other issues.

"The disproportionate influence that the current ownership structure provides to them, especially in light of how they have used that influence, represents a threat to the success of this great company," the letter said.

The employees said Mr Pishevar's and Lonsdale's behaviour included holding too many distracting parties at Hyperloop One's downtown Los Angeles headquarters.

Of particular concern was what they deemed nepotism. Mr Pishevar named his brother general counsel. He also began dating Hyperloop One's outside public-relations representative, whose fee then jumped from US$15,000 a month to US$40,000, more than any other Hyperloop One employees, according to the lawsuit.

Meanwhile, under pressure from Mr Lonsdale, the company hired his younger brother's nascent advisory firm, Fideras, to provide banking services.

Amid all the turmoil, management began making changes, said the people, who requested anonymity to discuss a private matter. Under the voting proposal, which requires board approval, Josh Giegel, the engineer who replaced Mr BamBrogan to oversee technology, will control 20 per cent of shares, as will Justin Fishner-Wolf, a board member and managing partner of 137 Ventures.

The final 20 per cent slice will go to another board member, who has yet to be determined. In addition to Mr Fishner-Wolf, Mr Pishevar and Mr Lonsdale, board members also include political strategist Jim Messina, CEO Lloyd and X-Prize Foundation CEO Peter Diamandis.

The dual-class shares that gave Mr Pishevar and Mr Lonsdale outsized control aren't unusual at late-stage, venture-backed companies. But generally, early-stage companies - Hyperloop One was founded in 2014 - are less likely to have dual-class stock.

Mr BamBrogan worked at SpaceX, Musk's space exploration company. Mr Pishevar is an early investor in Uber Technologies Inc and Mr Lonsdale helped start Palantir Technologies Inc. Mr Pishevar and Mr Lonsdale didn't respond to requests for comment.

Separately, the company will alter a clause that gave Hyperloop One the right to buy back employees' shares for potentially less than they originally paid.

Currently, the clause says the company can pay either the fair market value at the time of repurchase or the price paid by the employee, whichever is lower. At the recent meetings, in response to a question from an employee, general counsel Marvin Ammori said the board plans to authorise changes to that provision, according to people familiar with the matter.

The company is planning to hold a special board meeting to discuss the proposed changes by month's end.

BLOOMBERG