Sequoia’s RockYou Jolted by Injunction

Lance Tokuda asked me to leave the one year anniversary party for Web2.0 startup RockYou last night. He didn’t want to answer questions about the injunction a U.S. District Judge slapped on his startup, prohibiting the use of programming code he may have developed while working at another company.

Rock You Party Picture

Tokuda is in danger of losing the startup he launched a year ago. And his investors, Sequoia Capital, Lightspeed Venture Partners and First Round Capital may lose their $1.5 million investment.

What’s worse, the investors may have known Tokuda was the target of an IP theft lawsuit when they invested in RockYou. Tokuda’s former company, Iconix, brought the complaint against him and his nascent company nearly two months before RockYou signed its first round financing.

It’s not as though that information is hard to find. It’s public record.

But even a telephone call to his former employers would have told a discerning VC something was up. While Tokuda and co-founder Jai Shen were looking for capital, their former employers at Iconix were digging through their company-owned laptops. Iconix found source code that looked a lot like the product Tokuda and Shen were trying to launch, a PowerPoint presentation to investors for the new company, a list of registered users and a slew of damning instant messaging conversations.

Did the VCs ignore the evidence or just fail to do their homework?

I caught Jeremy Liew, the RockYou investor from Lightspeed, at the party last night. He declined to comment, saying “I’m not working tonight.” Sequoia and First Round didn’t return my calls.

Silicon Valley is treacherous ground for nascent companies. So many things can go wrong. VCs can’t afford to back companies with pending litigation.

I thought we learned that with Napster.

Private Equity Week subscribers can read the whole story here.

Behind the velvet rope, you’ll get the glut of sordid IM conversations; you’ll learn when the trial moves to its next court phase; and you’ll get the details of RockYou’s fundraising process, as laid out in the CEO’s personal blog (Emily Melton, Mike Brown, Mark Sherman, you might be interested in this).