VC Firm Sues Former Partners Over Sales of Tinder Stake

By Douglas MacMillan 

Dating app Tinder is about bringing people together, but a battle over an early ownership stake in the app has torn apart a Canadian venture-capital firm.

Extreme Venture Partners and its founding partners are suing two former partners in an Ontario court, claiming the pair schemed to take Extreme's stakes in Tinder and other startups.

Tinder, majority owned by IAC/InterActiveCorp., is among the most popular apps in Apple Inc.'s App Store. A recent fundraising valued the three-year-old business at close to $1 billion, making Extreme's initial 10% stake worth roughly $100 million.

According to the suit, the two investors helped engineer the sale of an app incubator without telling the partners that it contained stakes in Tinder and other startups. Another defendant who bought the Tinder stake claims in an interview he didn't even know about the app at the time of the sale because the service had not yet launched.

Legal disputes over the early ownership of startups aren't unusual, but they typically involve founders, not investors.

"This case is about appropriation of corporate opportunity," Ray Sharma, co-founder of Extreme Venture Partners, said in an interview. "We were never told that we had that equity stake" in Tinder.

Mr. Sharma and his two remaining partners at Extreme are seeking more than 240 million Canadian dollars ($189 million) in damages from former partners, Amar Varma and Sundeep Madra, and their advisers, including Chamath Palihapitiya, a former Facebook Inc. executive and well-known Silicon Valley investor.

Messrs. Vamra and Madra couldn't be reached for comment. A lawyer representing them said in an email: "The allegations in the claim are entirely unfounded and we will be defending vigorously against them."

Mr. Palihapitiya said he paid more than Extreme Venture Partners was asking for the accelerator. "I'm not sure why we're now wasting the court's time with this frivolous sellers' remorse lawsuit when there is more important work to be done," he said in an emailed statement.

The suit, filed last July in Ontario Superior Court last year, alleges Messrs. Palihapitiya, Varma and Madra conspired to acquire Xtreme Labs, an app accelerator, from Extreme Venture Partners at a bargain-basement price. Xtreme Labs helped create Tinder and held an equity stake in the app, as well as other startups.

Mr. Sharma, a former financial analyst and angel investor in tech startups, formed Extreme Venture Partners in 2007 with two other Canadian investors. The trio brought on Messrs. Varma and Madra as directors in the fund, to oversee its investments and to run Xtreme Labs.

The pair helped make investments in several startups, including social gaming developer J2Play Inc., which sold to Electronic Arts Inc. in 2009, and location-data startup Locationary, which was acquired by Apple.

Perhaps the most valuable piece of the original portfolio was a stake in Tinder. The dating app was created in 2012 by Hatch Labs, a startup incubator set up by IAC. Xtreme Labs held equity in Hatch and therefore owned a piece of the startups it created.

Tinder was derived from another dating app created by Hatch Labs during a hackathon in February 2012.

A month later, Mr. Palihapitiya offered to acquire Xtreme Labs in a deal that would value the company at C$12 million, according to a copy of his letter of intent reviewed by The Wall Street Journal. In that letter, he said he would use his capital and business connections to compete with Xtreme Labs if he couldn't buy it.

In April 2012, the two sides agreed to transfer Xtreme Labs for C$18 million. The deal closed in August, the same month Tinder launched in Apple's App Store.

A year later, Tinder had become one of the world's fastest-growing mobile apps. Mr. Palihapitiya sold his stake in Hatch Labs that included 10% of Tinder to IAC for about $55 million in October 2013, according to the complaint.

Mr. Palihapitiya, who now runs venture fund Social+Capital Partnership and is a part owner of the Golden State Warriors basketball team, then sold Xtreme Labs to software consultant Pivotal Labs for $65 million. He says he remains a limited partner in Extreme Venture Partners.

Mr. Palihapitiya said in an interview he wasn't aware of Tinder when he bought Xtreme Labs. The app didn't show any outward signs of success at the time, though it did have a promising pedigree: Co-founder Sean Rad had previously created social-media ad company Ad.ly, and IAC was the market leader in dating apps.

Mr. Sharma said he believes Messrs. Varma and Madra intentionally hid the stakes in Tinder and other young companies. Mr. Sharma said he believed at the time that Xtreme Labs only held shares in one startup, diabetes-management software maker Glooko Inc.

A spokeswoman for Tinder declined to comment on the lawsuit or make Mr. Rad available for an interview.

Extreme Venture Partners also accuses Messrs. Varma and Madra of using its name to operate a secret "shadow" fund to siphon off investment opportunities. According to Mr. Sharma's lawsuit, the pair incorporated a new fund in 2011 and called it EVP Annex Fund--a name chosen to deliberately mislead potential business contacts that it was directly connected to Extreme Venture Partners.

The pair left Extreme Venture Partners before the suit was filed.

The plaintiffs claim EVP Annex Fund invested C$2.6 million in companies picked from Extreme Venture Partners' existing portfolio. Messrs. Varma and Madra used information about these companies gleaned from their roles at Extreme Venture Partners to "cherry-pick" the best investments for their own Annex Fund, the lawsuit alleges.

Mr. Sharma said he only began to catch on to the alleged scheme in 2013, when he said EVP Annex attempted to charge more than C$50,000 in expenses to Extreme Venture Partners, including consulting fees and other charges.

Write to Douglas MacMillan at [e-mail]

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