Infinidat, the high-end Israeli storage startup, is being sued by 29 current and former employees for wrongfully diluting their shares in the company.
The plaintiffs are holders of Infinidat Class B shares, which they had received as stock options, according to the Israeli news site Calcalist, which first reported the news.
Their lawsuit claims that the value of these shares was underpinned by company statute which said: “Class B shares will always receive the first 20 per cent of recompense and rights in the company in the case of an acquisition, without the possibility of dilution by anyone who isn’t an employee or advisor.”
They claim a “secret” dilution has taken place, as the employee stock option holders were told in 2018 that Class B shares were worth $1,290.00 and are now priced a fraction of that.
Infinidat said it will defend the “baseless” lawsuit and seek damages and costs from the plaintiffs, who “have chosen to sue it with an idle claim, the goal of which is to cause the company damage and to place invalid pressure on it”.
Infinidat in 2020
Infinidat produces high-end storage arrays that use disk drive for bulk storage and DRAM caching for high-performance faster than all-flash arrays according to the company and less expansive per TB of capacity. Earlier this year it said it had more than an exabyte of installed capacity.
The venture-backed company appears to have had a difficult time navigating its way through the pandemic. The company furloughed some 100 employees without pay in March 2020, some of whom were subsequently laid off.
In May 2020 Moshe Yanai, the founder, chairman and CEO of Infinidat resigned as CEO in May 2020 and becoming its Chief Technology Evangelist. He was pushed out by the board because of Infinidat’s poor business performance, according to Calcalist sources. Two co-CEOs were appointed; Nir Simon who runs R&D and Operations, and CFO Kariel Sandler.
In June 2020, the company raised an undisclosed sum in D-series funding round, to add to the $325m-plus already raised. Existing investors, including TGP, Goldman Sachs, Claridge Israel, ICP, and Yanai, put in fresh capital. Accompanying the round was Yanai’s relinquishment of the chairman’s position and the appointment of outsider Boaz Chalamish as executive chairman.
Class B share shock
The Class B shareholders were then told that “whoever holds Class B shares and no longer works for the company will have their share diluted so that it would be worth one thousandth of its former value… and that current employees will be offered a new option program (combining a new class of shares with a new maturation process) that would be worth 6 per cent of the previous value of their holdings.”
The ex-employees Class B shares were now worth $1.29 and the employees’ Class B stock was valued at $7.40. This suggests that the number of class B shares was increased by a number between 16x and 1,000x.
The lawsuit alleges the registered capital of Class B shares was increased in the June 2020 funding round. There were two reasons for the increase; firstly; ”To allow an anti-dilution mechanism for two companies (Claridge Israel and ICP), who probably invested in the company in return for Class B shares and are meant to hold 54 per cent of Class B shares in any situation,” and secondly, to issue thousands of new Class B shares for the company’s employees.
This dismayed the Class B shareholding employees and several dozen left, taking Infinidat’s headcount to less than 400 and more than 20 per cent down on its 2018-2019 era peak of 500 employees. Infinidat told Calcalist it is recruiting.
Now read our story Actifio squashes employee shareholders ‘like cockroaches‘.