Los Angeles Business Journal

Link to Website Windfall Splits Lawyers

LAW: Davis Shapiro feud shows risk of equity stakes in tech firms. By Alfred Lee Monday, June 23, 2014

Few L.A. companies in recent years have grown as quickly as Swagbucks.

The El Segundo consumer rewards website saw revenues rocket more than 4,000 percent in five years, to $53 million last year – before taking on a single outside investor.

And its sudden rise hasn’t just benefited its founders. Enjoying an unexpected windfall is the company’s law firm, Davis Shapiro Lewit Grabel Leven Granderson & Blake.

While Swagbucks’ sales took off, its outside attorneys held on to a 10 percent stake in its parent company, Prodege. The stake was granted in exchange for legal services during its early days, when cash was tight. Ten percent wasn’t worth much then, but now could be valued at more than $12 million.

Taking equity instead of fees is a practice that has come into vogue in Los Angeles with the emergence of the tech sector. Pioneered by Silicon Valley law firms decades ago, equity as compensation has been attractive to firms here looking to find the next Apple or Google.

But it also has led to problems. Davis Shapiro’s increasingly lucrative stake in its client has been the subject of internal wrangling at the firm, leading to the ouster of its managing partner and years of fighting over which attorneys get to share in the profit.

Daniel Hayes, an L.A. attorney and former managing partner who departed the Beverly Hills office of the New York firm in 2012, claims he was the attorney who originally brought Swagbucks to the firm. Two years later, he remains locked in a fight over his claims that the 10 percent stake should be his.

Peter Zeughauser, a Newport Beach law firm consultant, said that despite the practice’s rising popularity in Los Angeles, only a handful of firms have mastered the tricky art of making equity stakes pay off – and doling them out properly.

“A lot of the firms that have done them wouldn’t do them again if they were starting over,” he said. “These things are not so simple to administer. … The likelihood of success of having a startup exit strategy that pays out is small and there are a lot of spats over who should get how much.”

Prodege declined comment. Representatives of Hayes and Davis Shapiro did not provide comment.

Growing company

Prodege was co-founded in 2006 by entrepreneur Josef Gorowitz and concert photographer Scott Dudelson. The two met through mutual friends and launched a company that provided custom search engines for non-profit organizations, which could then raise money every time someone used the search engine.

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