BetterWorks Systems Inc. isnât a well-known name in Silicon Valley, but the startupÂ achieved a moment of infamy last year that it hasnât been able to shake. AÂ former employee sued the company in July, claiming the chief executive officerÂ sexually harassed and assaulted herÂ and thatÂ management failed to take proper disciplinary action. The allegations were levied as the #MeToo movement was mushrooming,Â and the fallout atÂ BetterWorks was widespread.
Kris Duggan, the 43-year-old CEO, has disputed the allegations butÂ resigned from the company he co-founded.Â Fundraising effortsÂ were derailed. AÂ dozen customers severed business relationships with the startup, which makes human-resources software. The events also torpedoed plans byÂ Penguin Random House to publish a book co-written by Duggan and John Doerr, a prominent venture capitalist at KleinerÂ Perkins Caufield & Byers and a director at BetterWorks.
BetterWorksÂ has beenÂ trying to resolve the scandal and move on. Last month, it settled the case with Beatrice Kim, the former employee. The company selectedÂ Doug Dennerline, a BetterWorksÂ board member who runs a company called Alfresco Software Inc.,Â to replace Duggan as CEO. BetterWorks and Dennerline declined to comment.
Doerr and Duggan, too, are looking to put the episode behind them. The VC removed the entrepreneurâs nameÂ from their book, Measure What Matters.Â Penguin plans to finally publish it next month with a foreword written by Googleâs Larry Page. Meanwhile, Duggan is starting a new company in Palo Alto, Calif.
But theyâre on the cusp of another legal battle. A second ex-employee filed a claim with the state of CaliforniaÂ and was granted the right in DecemberÂ to sueÂ for alleged sexual harassment. The complaint names BetterWorks, Kleiner Perkins, Doerr, DugganÂ and two otherÂ executives. It claims thatÂ eachÂ turnedÂ a blind eye to the allegedÂ behaviour, according to people with knowledge of the claim and a copy of the filing obtained by Bloomberg through a public information request.
Major shareholders, business associates and current and former employees described lost business and fundraising struggles that resulted. The accounts show the toll that a perceived lack of corrective corporate action can have
Lynne Hermle, an attorneyÂ who represents BetterWorks, said the new claim is financially motivated and meritless. âNaming individual defendants who played no role in the alleged wrongful treatment of an employee is a shakedown, plain and simple, and that is precisely what it was here,âÂ she said. âThe supposed claims were legally and factually defective in every respect.â
DugganÂ wasnât aware a second claim had been made. After hearing the complaint, he expressed frustration.Â âItâs not true, and itâs all to makeÂ money,âÂ DugganÂ said. âWeâve worked really hard to make a great company with a great working environment. I canât control that there are opportunists out there.âÂ Kleiner Perkins declined to comment.
Major shareholders, business associates, and current and former employeesÂ also described lost business and fundraising struggles that resulted from Kimâs lawsuit. The accounts show the toll that accusations of harassment and a perceivedÂ lack of corrective corporateÂ action can have on aÂ company.
More businesses are likely to face claims of sexism and harassment as women feel empowered to speak out, saidÂ Pamela Mason, whose companyÂ provides insurance against such lawsuitsÂ for hundreds ofÂ startups and about 100 venture capital firms. âAs the entire #MeToo movement has grown, my clients have this more and more on their radar screen,â she said.
Before the lawsuit last summer, BetterWorksÂ was preparing to raise as much as US$40 million from investors, nearly doubling its funding, according to people with knowledge of the matter, who asked not to be identified because the negotiations are private. Then came the suit, which put a hold onÂ fundraising efforts. The allegations were a shock to several current and former employees who spoke to Bloomberg. They described an inclusive, merit-based work environment that encouraged those values by using the five-year-old companyâs own software to foster open communication and manage staff. Kim was well liked and respected by colleagues.
The fundraising freeze was a real problem.Â BetterWorks was burning through almost US$1 million in some months, one of the people said. Without more capital coming in, reserves were running low, and an extra frugal mindset took hold among management. The office refrigerator broke, and executives made the decision not to fix it for several weeks. Mark Lambert, the chief financial officer, acknowledged the incident on company review website Glassdoor, calling the budget-conscious move âa bit much.â
Di Wu, who started the company with Duggan, left last summer but said his departure was unrelated to the allegations. TheÂ negative reaction to Kimâs suit did play a role in the departures of manyÂ employees who left during that period. Half of the six-person executiveÂ team has also exited since the case was filed.
About a dozen corporate customers abandoned BetterWorks software, citing claims made by Kim, peopleÂ familiar with the matter said. That droveÂ a five per cent to 10 per cent dropÂ in annual recurring revenue, to US$10 million. Several long-term clients, including Intuit Inc., A+E Networks and BMW have remained loyal,Â continuingÂ to use the software to set goals for employees and track progress on their work. Attracting new business was even tougher. Bookings, which areÂ the value of customer commitments over time,Â last year dropped by at least 30 per cent, another person said.
The settlement with Kim last month gave her about US$1 million in exchange for signing aÂ non-disclosure agreement prohibiting her from discussing the suit, according to people with knowledge of the terms. Kim, an early investor in the startup, now operates diversity and inclusion consultancy Awaken.Â BetterWorksÂ and Kim declined to comment.
Fighting these cases can be expensive. In the technology epicentre of California, a loss in court means a company pays for the aggrieved partyâs attorney fees in addition to whatever damages a judge sets. Even if a company wins the case, usually itâll still be on the hook for its own legal costs. Thatâs why most settle. Some say itâs as high as 90 per cent.
NDAs, which almost always come as a condition of a settlement, can create a chilling effect for alleged victims, shielding bad actors who sometimes go on to repeat their behaviour. LawmakersÂ in California, New York and Pennsylvania have introduced legislation in recent monthsÂ toÂ ban confidentiality provisions. âThe way the system is set up now,Â it basically allows rich guys to buy their way out of bad behaviour,â saidÂ Connie Leyva, a California senator who introduced a bill last month addressing this issue.
In recent months, BetterWorksÂ has provided unconscious-bias training to staff, formed a company-wide diversity and inclusion initiative, and instituted an alcohol policy designed to limit consumption, according to Dennerline. BetterWorks hopes to name DennerlineÂ as its new CEO in the next few weeks. Dennerline,Â a former president of software maker SuccessFactorsÂ before SAP SE purchased the company for US$3.4 billion, would need to win back customers, find new ones, restore morale and raise more venture capital.
HeâdÂ also need to handle the latest harassment complaint left over from his predecessor. According to paperwork filed with the California Department of Fair Employment and Housing obtained by Bloomberg, the woman claimed she was harassed and discriminated against because of her gender, and subjected to a hostile work environment. She said she reported it to a law firm BetterWorks hired to investigate the earlierÂ harassment and discrimination complaint from Kim, and accusedÂ the probe of having a bias because it was overseen byÂ Doerr, an investor with a stake in the outcome.Â After her complaint, sheÂ was then retaliated against and set up for termination, sheÂ alleged.
First published at http://business.financialpost.com/entrepreneur/fp-startups/sexual-harassment-scandals-weigh-down-hr-startup-betterworks