Why funds get named
Plaintiffs in portfolio company disputes often name the venture fund alongside its board designee, alleging that the designee acted for the fund rather than for the company. The claims frequently involve sales, down rounds, insider-led financings, or the removal of founders. Funds may also face disputes with co-investors, with their own limited partners, or with other investors in the same company over information rights and preferences. Sorting out the separate positions of the fund, the management company, and the individual designee is an early task, because their interests may not fully align. Claims may also come from employees holding common stock or options who feel a sale left them with little.
Coverage and advancement
Board designees usually look first to the portfolio company's directors and officers policy and its indemnification obligations, while the fund may carry its own management liability coverage. Which policy responds first, and whether the company is able and willing to advance defense costs, often becomes an issue of its own. Give notice to every potentially applicable carrier promptly. Gather the financing documents, board materials, and communications that bear on the challenged decision, and suspend routine deletion of relevant email and messages.
Managing conflicts in the defense
When a fund partner is both a fiduciary of the portfolio company and an agent of the fund, the record of how decisions were made is often central. Independent committees, outside valuations, and contemporaneous documentation can help, but their weight depends on how they were actually used. Separate counsel for the fund and the designee may be needed. Funds should also think about how the dispute affects reporting to their limited partners and any other portfolio companies where the same partner serves. Our early work covers the claims, the parties, and the coverage, along with how to coordinate the defense and whether early resolution is worth exploring.
