In mid-July an ambiguous post popped up on Paddy Cosgrave's busy Twitter feed. A "couple of people" he knew, the Web Summit founder said, "would do well to read Section 228 of the Irish Companies Act".
Not many people flick through the Companies Act, consolidated legislation dating back to 1963. Possibly confused, most of his followers would likely have scrolled on to his next musing on politics, corporate tax or such like.
In reality, and while naming no names, the tweet possibly offered a snapshot of a simmering corporate standoff that this week crashed into the public realm via court documents filed in the US. The two people Paddy Cosgrave knows are almost certainly Web Summit co-founder David Kelly and fellow-fund manager Patrick Murphy.
A link to the legislation in Cosgrave’s tweet opens a page setting out the various responsibilities of company directors.
Earlier this year it emerged the pair had branched out from the venture capital fund established with Web Summit and Cosgrave – Amaranthine – to set up a new $50 million fund named Semble II (even the name Semble has proven contentious due to its ties to Web Summit conferences).
The source of tensions lies in Cosgrave’s previous involvement and how three men who had agreed to form a new fund ended up being just two. The nature of the dispute, and ultimately the split, is detailed in a 31-page Superior Court of California filing whose contents are hotly disputed by Kelly and Murphy.
Partnership
The battle may have just begun but it marks an inauspicious end to a successful partnership. Kelly, whose involvement with Web Summit stretches back to its humble beginnings in Dublin in 2009, quit the board and his employment at the company earlier this year. Murphy had previously run a venture fund for the Universal Music Group, and had also spent time as an investment banker at Goldman Sachs.
In 2018, almost 10 years after the Web Summit train departed the station, the Amaranthine Fund was established, with Kelly and Murphy at the helm in order to capitalise on, according to the US court filing, “the substantial resources, knowledge, connections and data from hosting Web Summit conferences”. Paddy Cosgrave was a member of the general partner of the fund and along with Kelly, Web Summit’s representative on the management company.
One point of dispute appears to be just how important Web Summit was in the success of the fund. In its legal case, Manders Terrace (the name was taken from the part of Ranelagh where Web Summit was first located) – its operator who reported revenues of almost €48 million in 2019 – takes a clear view, opining that Web Summit was “in a unique position to establish such a fund given its broad and well-established relationships with investors, founders, portfolio companies, and other prominent figures in the technology industry”.
Kelly and Murphy clearly feel differently. In response to the litigation, a spokesman for the pair said Cosgrave and Web Summit were among numerous fund contributors “which was founded and run since inception by David and Patrick as a standalone legal entity with third party capital”.
But why does any of it matter if the fund was successful?
The current falling out is over the creation of Amaranthine’s successor or follow-on fund, how negotiations proceeded and faltered, and what happened, or allegedly happened, afterwards.
Future funds
Kelly and Murphy, who have yet to respond formally in the US case, maintain that last March Cosgrave stated he “no longer wanted to collaborate on Amaranthine’s Fund I, nor on any future funds”. Consequently, the two men “negotiated and entered into a separation agreement on terms favourable to Cosgrave”.
A spokeswoman for Cosgrave rejected this assertion, saying: “Paddy was still going to be actively involved in his capacity as a member of the GP including GP, LP (limited partners) and startup relations until they kicked him out of the fund.”
In a tweet last May, Cosgrave thanked the pair for their work with the fund, saying they were “stepping away from Amaranthine after fund 1 (its initial round) to pursue other interests”. Amaranthine 1 was winding down but what happened next has become the subject of deep contention.
Web Summit maintains that Murphy and Kelly set out to “deceive” it and Cosgrave and “secretly” establish a follow-on fund that would usurp the Summit’s brand, resources and assets.
This point of departure is acrimonious because the trio had intended to follow Amaranthine 1 with a successor fund. This never materialised due to an impasse on division of equity and it appears relations began to crumble.
Cosgrave maintains he had sought a larger slice of the pie for employees of Web Summit, and while Kelly and Murphy have yet to publicly set out their position it is almost certain they will take a different view of the negotiations.
Their spokesman said that following Cosgrave’s decision not to co-operate on any future funds, they negotiated a “separation agreement” with “favourable” terms for the Web Summit chief executive. Other statements then point to a worsening of relations between the former business partners.
Investors
Roll on to September and the legal action – painting in detail one side of the dispute – shows that Web Summit and Cosgrave believe something far more important came into play. Kelly and Murphy may have set up their own fund, Semble, but their former partners believe they did so in an off-hand, covert manner with a view to wooing existing investors and capitalising on the success and track record of Web Summit.
“Unbeknownst to Web Summit or Mr Cosgrave, Kelly and Murphy had been taking steps to covertly establish their own venture capital fund, market it to investors (including the fund’s investors), and obtain binding commitments for certain of the fund’s existing investors to invest,” the court filing states.
“Concealing their efforts was critical as Murphy and Kelly knew that Web Summit was taking its own steps to raise its own follow-on fund – a fund that rightfully would rely on Web Summit’s brand, resources and assets.”
The US lawsuit alleges nine offences including breach of contract, fraudulent misrepresentation, unjust enrichment, violations of unfair competition law and trade libel.
A spokesman for Kelly and Murphy has challenged this overall view of the dispute, saying the “narrative” offered by Web Summit was based on factual inaccuracies and deliberate misstatements.
“This is a meritless case…Patrick and David will strongly defend their position.”
Nevertheless, Web Summit will maintain the pair took credit for the Amaranthine’s record in soliciting investors, some of whom subsequently agreed “binding commitments” to Semble II.
Kelly and Murphy have said little publicly but while the dispute has become entangled in layers of legalise and corporate-speak, it is at heart a falling out of business partners over who should take credit for past success, and who can use it to secure more.
Whether an unwelcome distraction to next month's Web Summit in Lisbon or not, further details of toxic hostilities are almost certain to emerge.
