DOJ tests 112-year-old board law against a16z's two seats
Ben Horowitz sits on Databricks' board. Martin Casado sits on Fivetran's. The two companies now compete, and prosecutors have reportedly spent almost a year looking at what that means.
Andreessen Horowitz has partners on the boards of two companies that now sell against each other.
Ben Horowitz sits on the board of Databricks. Martin Casado sits on the board of Fivetran.
The US Department of Justice has reportedly been investigating the arrangement for almost a year, according to TechCrunch's Equity podcast.
The instrument being used is a clause from 1914 on interlocking directorates, a provision 112 years old and rarely turned on venture firms.
The clause exists to stop the same people directing competing companies. It was written for railways and steel, not for a partner who took a board seat at Series B.
The awkward part is the timing. Databricks and Fivetran were not necessarily direct competitors when a16z first invested in them.
They became competitors afterwards, as both expanded into the other's market. Nobody had to do anything improper for the conflict to appear.
That is the mechanism founders should watch. A board seat that was clean on the day the term sheet was signed can become a legal problem two product launches later, without a single new decision by anyone at the table.
Venture firms concentrate in sectors on purpose. In data infrastructure and AI, portfolio companies drift towards one another as a matter of course.
For a founder, the practical question is not whether an investor is honourable. It is what happens if a regulator decides the seat is unlawful and it has to go.
Board seats are usually written into investment documents. Ask now what the agreement says about a partner resigning a seat, who replaces them, and whether the firm keeps information rights when the seat disappears.
Ask also what your investor's other portfolio companies are building, and whether the answer has changed since they invested.
No outcome has been announced in the a16z matter. The cost to founders arrives earlier than any outcome, in the form of governance that has to be renegotiated while the lawyers argue.