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Jury finds a Silicon Valley financial backer orchestrated a plot to take down a rising startup

San Jose CA, commercial hub of silicon valley and its network of freeways.
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Imagine you could turn back the clock and put money into Nvidia when Jensen Huang was first dreaming up the chipmaker at a Denny's in Silicon Valley. Or into Facebook before Mark Zuckerberg found a way to generate revenue from all the eyeballs on his social network. You'd be extremely rich. 

But for every Nvidia or Facebook, there are many more flameouts. Some hardly get off the ground, while others raise money at lofty valuations before vanishing into obscurity. 

And sometimes there's lots of drama. It's as much a part of the fabric of Silicon Valley as the enigmatic billionaire founders, though not every scandal makes the front page. 

Denis Grosz and Taso Du Val exist in that realm of startup lore. 

More than twelve years ago, Grosz, a Bay Area tech investor, put money into a tiny but profitable startup with a novel mission: Matching talented freelancers around the world with companies looking for the most affordable skilled labor. 

A few years later, Grosz told other investors he expected a healthy return on his early bet. The company was called Toptal, which is short for top talent, and his investment marked the beginning of a soap opera that has soiled reputations, caused turmoil within a promising startup, and sparked a battle that today is raging in court. 

Du Val is founder and CEO of Toptal. He launched the company in 2010 after working engineering jobs at other startups. Du Val didn't go to college, deciding instead to gamble on himself.  

Taso Du Val, the founder and CEO of Toptal, sits down with CNBC's Jon Fortt.
CNBC
Taso Du Val, the founder and CEO of Toptal, sits down with CNBC's Jon Fortt.

Toptal got speedy traction, and Du Val was determined to run it as a lean operation. Less than two years in, word of the company's success started getting out, and financial backers began looking to invest.  

Then Du Val met Grosz through a mutual friend.  

Du Val describes Grosz as a sophisticated investor, having backed startups including Thumbtack, Udemy, and Apartment List, according to Grosz's website.  

The two men were on a mission together – to turn the tiny business with fewer than 50 employees into an industry powerhouse. In 2012, Grosz loaned Toptal $1 million at a 4% interest and also signed an advisor agreement with the company that stated that Grosz was prohibited from "competing or preparing to compete" with Toptal and from "soliciting any employee or consultant" of the company. As an advisor to Toptal, Du Val said Grosz provided expertise on search engine optimization to assist growth.

And the company grew. Du Val says Toptal now has more than 600 employees. By 2021, the business was generating more than $200 million in annual revenue and was valued as high as $3.6 billion, court documents show.  

In addition to the advisor agreement, Grosz signed a second agreement with Toptal called a convertible promissory note. According to this document, Grosz's million-dollar loan could convert into shares of Toptal, but only if certain conditions were met. One of the stipulations was that an equity capital raise needed to occur before the loan's maturity date to trigger the conversion of the loan to equity.   

Grosz claims he had a handshake agreement with Du Val: Toptal would convert from a limited liability company to a C-Corporation in the process of raising equity. If this happened, it would convert Grosz's loan into a stake in the company. However, it didn't take place before the maturity date in May 2014. So, Du Val maintained 100% control of the company, and he says Grosz had no legal claim to an ownership stake. Grosz disagrees.  

In 2023, Grosz argued in court that Du Val built a successful company with the help of early employees and investors, who all expected equity in exchange for their efforts. He testified that Du Val repeatedly assured him that the million-dollar loan would become a stake in the company.    

Denis Grosz, a Silicon Valley investor, in the Second Judicial District Court in Nevada.
David Mayers
Denis Grosz, a Silicon Valley investor, in the Second Judicial District Court in Nevada.

"He gave me full confidence that this was not something I needed to worry about," Grosz said in court. "I couldn't imagine someone would do a deal like this and not live up to their side of the deal."  

It was Grosz's actions at that point that eventually led to the lawsuit, which Du Val filed in Nevada in 2021. Du Val said that in 2019 he was sent a document from a mutual contact showing that Grosz had formed a company called Mechanism Ventures, which describes itself as a startup studio that partners with entrepreneurs to launch tech companies.  

"I knew he wasn't up to any good at that point in time," Du Val told CNBC.  

According to the complaint, Grosz initiated a complex scheme to cripple Toptal, seeking to force a hostile buyout or receive an equity stake in the company.  

"They constructed what they called a 'cancer patient strategy,' basically turning Toptal into a cancer patient and then making it so crippled that they could steal the company," Du Val told CNBC. Although Grosz himself did not use that phrase, in an email exchange with Grosz, another investor referred to their plan as a "cancer patient strategy." 

Du Val said part of the scheme involved Grosz's plan to create a company called Cavalry, which although never launched, would have competed directly with Toptal. Grosz poached top employees from Toptal to Mechanism Ventures in preparing to launch Cavalry, according to the trial judge.  

In their agreement, there was another stipulation that said Grosz could also convert his loan to equity "at any time on or after the fifteenth (15th) day prior to the Maturity Date." However, he didn't exercise the option before the note's maturity date, according to legal correspondence between Toptal and Grosz. 

In 2020, Toptal's attorneys notified Grosz that they believed he violated his advisor agreement by soliciting Toptal's employees to Mechanism Ventures, according to a letter presented in trial. At the same time, Toptal ended its relationship with Grosz under their agreement and stated that it would repay Grosz's $1 million dollar loan plus the accrued interest. 

In a response letter, Grosz's attorney argued that regardless of the loan's maturity date, the agreement stipulated that Grosz had to "demand" a repayment before Toptal paid him back. Since Grosz did not demand payment, Toptal's repayment would be a breach of their agreement, the letter said. 

"Considering Toptal's immense success and valuation, for Mr. Grosz to theoretically receive merely principal and interest for that investment after 8 years is insulting and an absurd outcome," Grosz's attorney wrote in the letter. 

Grosz rejected Toptal's attempt to repay his loan, the letter said, and further stated he still had the right to convert his loan to equity, which would give him an 8.333% ownership stake in Toptal. Du Val argued that Grosz's right to do so ended on the maturity date.  

The dispute over whether Grosz had the right to convert his loan to an ownership stake in Toptal eventually landed in front of the judge, who sided with Du Val. 

In a decision granting Toptal summary judgement, in part, the judge wrote, "Mr. Grosz's Note became due and payable on the Maturity Date" and "Toptal was within its rights to return an amount equal to Mr. Grosz's principal and accrued interest". 

Du Val also alleged Grosz orchestrated a media campaign against Toptal. Grosz developed detailed, written outlines memorializing his plans to discredit Toptal in various media outlets, according to the complaint.

While the jury ultimately found that Grosz was not liable on Toptal's claims for business disparagement, defamation, tortious interference and civil conspiracy, in deciding Grosz's motion for a new trial, the Judge noted that Grosz's actions led to "wide-ranging harm" to Toptal. The negative press, the judge wrote, caused Toptal to lose clients, core team members, potential recruits, and members of Toptal's talent network.  

Over a decade after investing in what looked to be a big winner, Grosz not only never got his equity but may be forced to pay up for his actions. 

In a unanimous decision in November 2023, an eight-person jury found Mechanism Ventures liable for intentional interference and awarded Du Val $15 million in punitive damages and $535,270 in compensatory damages. The judge denied Mechanism Ventures' motion for a new trial in April 2024, but did reduce the award of punitive damages to $1.6 million, writing that the $15 million was "grossly excessive" in relation to the compensatory damages. 

According to the jury verdict, Toptal upheld all of its contractual obligations in its agreements with Grosz. The jury also found that Grosz's actions were a breach of his contractual obligations, and because of this breach, Toptal was harmed. 

"The evidence presented at trial revealed a deliberate, purposeful plot — committed to writing — to attack Toptal, with the ultimate goal of bankrupting the company," Judge James Hardesty wrote after the trial. 

But the saga continues, as Grosz and Mechanism Ventures are appealing the case. Toptal still has a $31 million fee petition, the amount of legal fees it is attempting to recoup from Grosz.

Toptal also has a pending lawsuit in New York against a competitor company called Andela. It alleges the company hired at least 30 former Toptal employees, improperly used Toptal's trade secrets, and poached its clients. The lawsuit also says some of Andela's employees previously worked at Mechanism Ventures, the company Grosz co-founded. Andela told CNBC it's committed to "fair and lawful competition" and said it has "full confidence" in its case.  

"We are optimistic both our companies can thrive in the freelance talent space," Andela also wrote in its statement to CNBC. 

— CNBC's Scott Zamost and Agne Tolockaite contributed to this report.

Clarification: Grosz and Mechanism Ventures declined an interview with CNBC. After publication of this article and video, CNBC received a letter from Grosz's attorney taking issue with some of CNBC's reporting and denying he had used the term "cancer patient strategy." This article and video have been updated to clarify some of those points.

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