The Sleeping Duck case shook up the startup world

“When it comes to bringing investors into your business and assessing fit, my advice to founders is to do a good reference check and due diligence…be sure to talk to other founders that the investor has worked with.”

This masthead report shows that Schiffman has previously sued other company founders with whom he worked.

In 2018, he reached a confidential settlement with the founder of comparison site Compare Forex Brokers, where he was one of the directors. Justin Grossbard, the founder of Compare Forex Brokers, declined to comment, citing a confidentiality clause in the settlement. Schiffman also declined to comment.

Sinnapan said he only learned about the case through his own court proceedings.

“Had we known that in advance, we might have reconsidered some of the decisions we made or done things differently,” he said.

He hopes every startup founder will read Judge Delany’s decision and learn from it.

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For his part, Schiffman said what has happened over the past three years has been heartbreaking.

“I thoroughly enjoyed being deeply involved in building the Sleeping Duck business with the two founders. Together, we were successful, made money, had a lot of fun, and had a great few years with the help of a strong leadership team,” he said.

“Unfortunately, this situation has resulted in an extremely painful breakdown in the previously good relationship we had with the founders.”

“Master of Trading”

Schiffman’s formal partnership with Sleeping Duck began in early 2018, when he sent an email to Sinaphan, identifying himself as a “deal guru” and claiming he was the right person to help the company raise money and turn around its fortunes.

Sleeping Duck’s core product is a customisable mattress – customers can change the firmness of the mattress by replacing the top for free. The company had a somewhat rocky start, including a failed attempt to enter the UK market and having worked with more than a dozen marketing agencies without success.

By all accounts, the partnership worked for about three years: Schiffman provided guidance and advice to Sleeping Duck in exchange for stock and options, and received $10,000 per month in consulting fees between July 2019 and September 2021.

Ultimately, the relationship soured, in part because Schiffman had expected him to take an active role in Sleeping Duck’s management and strategic direction, an approach the company’s co-founders disagreed with and the court ultimately rejected.

Schiffman also disagreed with the co-founders’ decision to reject multiple investment offers, including an investment offer from furniture retailer Temple & Webster in December 2020, an investment offer from private equity firm TA Associates in January 2021 for a 30% stake in Sleeping Duck, an offer from home goods retailer Adairs in February 2021 for a 40% stake, and an offer from CPE Capital in October 2021.

On July 27, 2021, Schiffman sent a message to Lanzer via WhatsApp saying, “If these people say no, I may need to sue them.” Schiffman added that if Lanzer had a conflict of interest, then Schiffman would hire another attorney, and Lanzer agreed.

He grew concerned that if his co-founders continued to reject investment proposals, it would effectively prevent him from cashing out.

He felt they had squandered a golden opportunity, and was further angered when they issued shares to another minority shareholder, Prateek Bandopadhayay, to dilute his stake. The judgment states that before joining Sleeping Duck, Bandopadhayay had worked “as a screenwriter and trainee director, including on the latest Mad Max film.” He subsequently served as Sleeping Duck’s head of narrative, creative head, and marketing head.

The warming of the relationship and subsequent breakdown was detailed in a message sent by Schiffman to Sleeping Duck co-founder Wijeyeratne on October 9, 2021.

“At the 2019 Christmas party you were telling everyone how much I believed in you and Serge when the company was basically bankrupt,” he wrote.

“I have been that way all this time, but it seems now that I am basically irrelevant to you. A few months ago, you chose to kick me out and bring in Prateek, and we both agreed that I would become passive as part of the sell-off.

“Now you appear to have vetoed the deal, I look like an idiot in the eyes of Goldman Sachs, and Searle won’t even respond to emails or texts. So what do I do? I’m backed into a corner and in a state of panic. Very sad and shocked.”

Australian tech insiders say while disagreements between founders and investors are common, they rarely become so acrimonious or end up in the Supreme Court.

“You’ll get into trouble this way.”

Shaun Holthouse, co-founder and former CEO of Catapult, the sports technology company where Schiffman served as chairman, said Schiffman had a good relationship with most of the founders he worked with, but his hands-on approach wasn’t for everyone.

“You only bring someone into your business if you want to,” he said. “That’s what you’re looking for, someone who can complement your skills and help you solve some of these problems. Of course, that’s not right for every business.”

“I have a lot of sympathy for investors who are involved in private companies and hold a minority stake. Because there’s a big trust factor there, and at the end of the day, if the founder has a majority stake, they can still do whatever they want. I’m not sure there are enough regulations to protect that.”

Investors in prominent Australian venture capital funds such as Blackbird and Square Peg acknowledge that while many tech start-ups fail, the general expectation remains that the start-ups they invest in will deliver outsized returns, with some growing into “unicorns” with thousands of employees and valued at billions of dollars.

Dan Krasnostein, a partner at investment firm Square Peg, said his firm often takes board seats at the startups it invests in — and therefore has a degree of control — but always stays aligned with the founders and existing investors.

While declining to comment specifically on the Sleeping Duck case, Krasnostein said a key lesson for startup founders and their investors is constant communication.

“No doubt there will be disagreements and you’ll find ways around them,” he said, “but I think if there’s a misunderstanding about who plays what role, then you can get into trouble.

“If you have disagreements about the type of business you want to build and how you want to build it, then that’s a barrier for us and we’re not going to make that investment.”

Tom Humphrey, a partner at Blackbird Ventures, has taken a similar approach. Humphrey also declined to comment specifically on the case but said he had never been in a situation where a founder had to be forced to sell a company or return Blackbird’s money.

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“We would never force founders to choose a business direction they don’t want to take…We want to work with founders to think hard about which path is right,” he said.

“We ultimately invest in the founder and the company as a whole, so it’s critical to make sure the founder is present and motivated and that we’re there to support them.

“Things can always go wrong. You can never predict, it could be a founder breakup, a business pivot, growth or cash flow pressures, or just the general trench warfare of building a company from scratch. This puts a huge amount of pressure on founders. And our job as VCs is often to understand those pressures and try to alleviate them and cheer founders up when they’re feeling down.”

Lucy Lloyd is no stranger to disagreements with investors over the direction of her company. She is the co-founder and CEO of Mentorloop, a startup that connects mentors and mentees through an online platform.

Lloyd and her co-founder Heidi Holmes raised about $1 million in funding from investors including Blackbird in 2017 before deciding in 2020 to stop raising investment and focus on profitability instead.

For Lloyd, investors have a business reality of getting a return within a set time frame, a goal that often conflicts with entrepreneurs who are more committed to changing the world.

“Venture capitalists may publicly promote a philosophy or a unique mission, but all are subject to the investor’s requirement for at least a 10x return,” she said.

“It’s hard to really achieve full alignment of goals between founders and venture capitalists, and any alignment can be easily undermined by business imperatives, such as large market forces that threaten returns.”

Lloyd said she had “frank and fearless” conversations with investors like Blackbird when she and Holmes decided Mentorloop was better off as a normal-sized business than as a world-class, high-growth startup.

“At the end of the day, it’s still your business. Investing in your business doesn’t just happen; you need to be intentional about how you use it, the opportunities it presents and what it’s going to cost you,” she said.

Judge Delany found that Schiffman had not been “prevented from realizing the value of his investment.” Delany said he had no doubt that Schiffman did believe he was unfairly excluded from Sleeping Duck’s decision-making.

“He felt he was being treated unfairly by the founders.”

Despite the ruling, the issue is not completely resolved. Schiffman still owns 9.4% of Sleeping Duck through his company BBHF.

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The court heard that Schiffman teamed up with the co-founder of rival Eva in 2022. Schiffman denied the allegations and said he no longer has a role at the company.

Schiffman continues to work with startups and said he ultimately won’t change his approach regardless of the Sleeping Duck ruling. He left the door open to an appeal.

“I’ve thought long and hard about this and have concluded that any success I’ve had with founders has ultimately been based on extremely high levels of mutual trust and close, active engagement,” he said.

“It would be a mistake to change who I am because of this extremely unusual situation, and I still enjoy the relationships I have with some great founders building profitable businesses.

“I remain a significant shareholder and option holder in the company and continue to be hopeful that the company can repeat its previous success.”

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