ex-Myspace exec sues VCs

Social networking website Myspace.com has seen substantial growth in the past couple years, and has even reached cult status among US teenagers. The website is said to have 2.5x the traffic of Google, and based on total page views, is the fourth most frequented website on the internet.

Myspace.com has been a hit with web surfers and invest-ors alike.

Its success, however, is bittersweet for Brad Greenspan, an early collaborator in the website and founder of Intermix Media (formerly eUniverse), the umbrella company under which Myspace was launched. After being pushed out of Intermix in 2003, Greenspan has been at war with his former employer. He tried to spearhead a buyout of the company late last year, in an attempt to block an agreed-upon merger with News Corp., and is now suing the company and its VC backers.

Earlier this week, Greenspan filed an amended lawsuit. His chief claim in the complaint is that he was forced out of his role as chairman and CEO of Intermix, a move, the suit states, that was impelled by his attempts “to protect company shareholders from a predatory and dilutive stock investment” from its venture capital backer, VantagePoint Venture Partners.

VantagePoint initially invested in the in the summer of 2003. The lawsuit claims that the firm’s investment took the form a $2 million debt facility and the right to make an additional $8 million preferred stock investment and provide a $20 million line of credit at a later date. As part of the initial debt financing, VantagePoint also bought an option to takeover the equity that had been controlled by the former VC arm of Sony Corp.

Greenspan’s contention is that VantagePoint waived the second part of the deal when it tried to turn the $20 million line of credit into an equity purchase. When the deadline for the follow-on investment rights had passed, Greenspan moved to find alternative financing, and for that, he claims VantagePoint colluded to have him ousted as chairman and CEO.

“Greenspan made clear to VantagePoint that he was not going to accede to their financing plan because it was on unfair terms,” the suit alleges, adding, “Greenspan was a threat to VantagePoint’s interest in getting the financial gain that would result from VantagePoint’s financing offer.”

Greenspan also claims that after his dismissal, the Intermix board breached its fiduciary duties by accepting a merger with Rupert Murdoch’s News Corp. The suit calls both the sale process and price, at $580 million, “unfair”, and claims the impetus for the deal was to secure the “acceleration of stock options and broad indemnification for [management’s] past wrong actions”.

Other accusations lobbed in the lawsuit include claims that executives at the company traded on insider information and that during the sale process, the sellers “avoided good faith negotiations with Viacom” and other suitors that had expressed an interest in buying the business.

Andrew Butcher, a spokesman for News Corp., told PEO that the amended lawsuit “has no more merit than the original lawsuit,” while calls to VantagePoint and Greenspan were not returned by press time.

For VantagePoint, the deal was an unmitigated homerun. Bill Burnham, of Celsius Capital, estimated in his blog Burnham’s Beat that VantagePoint was able to realise a return of 9.1x its invested capital, with an IRR of over 220 percent.

In a statement, Greenspan notes, “It is my goal to see News Corp. ‘square up’ with the rest of the Intermix shareholders by either voluntarily unwinding the Myspace transaction and allowing a proper auction process to occur, or paying us what we deserve via providing several billion dollars of compensation.”

Greenspan had controlled roughly 10 percent of Intermix’s shares prior to the sale to News Corp., and through the lawsuit, he is pursuing additional claims related to equity he says he was promised in Myspace, gaming website Skilljam and Intermix.