Binance Founder and CEO Changpeng Zhao Targets Sequoia Capital China for Reputational Harm

Changpeng Zhao is known to the world as the founder and CEO of Binance. However, in a recent case, it looks like Zhao’s reputation could soon be tainted. A report from CoinDesk shows that Zhao was involved in an investors case with Sequoia Capital, though he is now filing a direct case against the China unit of the VC firm, saying that the entity kept him from raising valuations as a result of the harm to his reputation. He demands now that the VC firm compensate him.

The filing [HCMP 2770/2017], which reached the High Court in Hong Kong by May 20^th, says that an application was sent by Zhao’s attorney, ordering “immediate summary of assessment of damages.” The hearing won’t be held until June 25^th, involving both Zhao and SCC Venture VI, which is the Sequoia Capital China special purpose vehicle.

During the application process, there will be an inquiry that discusses if Zhao has actually “sustained any and what damages,” based on the details in the injunction order from December 27th, 2017 that Sequoia obtained, which Zhao alleges kept him from raising capital until March 1^st, 2018 from other investors.

As the filling states on behalf of Zhao:

“The injunction order has caused loss to me for which I am entitled to reasonable compensation by Sequoia. In particular, I have suffered i) a loss of chance to raise capital through successive rounds of financing at increasing high valuations; and ii) damage to my reputation.”

The actions of Zhao come after a decision made by the Hong Kong International Arbitration Centre in December 2018. At the time, the entity dismissed all of the claims that Zhao had violated the exclusivity agreement when they were in the process of negotiating a Series A equity financing with Binance. The case actually started a year before, without any notification to Zhao.

Right after the injunction order was initiated, the company then filed a notice for arbitration in January last year. The firm accused Zhao of breaching exclusivity, which they said Zhao did by speaking with IDG Capital when discussions about the Series A round were still in process.

A Deputy High Court Judge ruled that Sequoia “was wrong to pursue the ex-parte application without notice to Zhao,” according to the hearing only three months later. The judge added that there was a significant lack of explanation and evidence to show why there weren’t any actions taken that would’ve simply involved both parties. The judge said that the use of the procedure in this circumstance was “an abuse of the process.”

The following months were filled with arbitration as the company worked to submit evidence to the Hong Kong Arbitration Centre. On December 14^th last year, a final decision was made when the claims by Sequoia were dismissed, since the discussion with IDG Capital was in regard to series B financing, rather than series A as the firm believed.

The Tribunal stated that they found “that that the negotiations with IDG were not in respect of a ‘rival transaction’ to the Series A Financing but were in respect of a proposed Series B financing transaction which was not in competition with the Series A Financing and which did not become a Series A Financing.”

So far, there has yet to be a response from Sequoia Capital to CoinDesk.

CZ has taken to Twitter to let his followers know a little more about the case:

1/10 A few points. Most of you may not know the final outcome of my dispute with Sequoia, but it is public now. In summary, the arbitration tribunal dismissed all of Sequoia's claims. https://t.co/6T7BHng9fI

— CZ Binance (@cz_binance) May 23, 2019

2/ I won, but the case was very damaging. First, Sequoia took out an injunction against me which prevented me from raising finance for Binance at the end of 2017 which was a critical time in the market and when there was huge interest in Binance from other VCs and investors. pic.twitter.com/Y6c5t2ngeb

— CZ Binance (@cz_binance) May 23, 2019

3/ The injunction and Sequoia's serious allegations against me were made public, but I was not able to publicly defend myself because the arbitration was confidential.

— CZ Binance (@cz_binance) May 23, 2019

4/ The Hong Kong courts later determined that Sequoia's actions in obtaining the injunction were an abuse of process. Late last year, the arbitration tribunal finally determined that all of Sequoia's claims were completely without merit.

— CZ Binance (@cz_binance) May 23, 2019

5/ Sequoia (China) paid $2,400,000 in legal fees for their part, and lost the case. I had to front USD $779,043 for over a year to cover my legal expenses, which eventually was paid by Sequoia because they lost. But I had to front it.

— CZ Binance (@cz_binance) May 23, 2019

6/ This case illustrates a few points. For most entrepreneurs, they will not be able to: front $779,000 to fight a lawsuit; secure additional funding for their startup given a pending lawsuit, even one that’s clearly without proper base and where the claimant will surely lose.

— CZ Binance (@cz_binance) May 23, 2019

7/ It is also a huge distraction to have a legal case while running a startup. Many start-ups would have had no choice but to give in to the unfair terms / practices employed by the VC, a very famous VC at that.

— CZ Binance (@cz_binance) May 23, 2019

8/ Even after winning the award, I was not allowed to make the results public, while the fact I got sued was made public right away. A loophole in the legal system. I have to counter sue to make the results public.

— CZ Binance (@cz_binance) May 23, 2019

9/ For VCs, this tactic would have worked in most cases. It is a tool legally available to them. It is a weakness in our legal system, and unprofessional behaviour by VCs. VCs are supposed to help entrepreneurs. I don’t know how many other cases like these are out there.

— CZ Binance (@cz_binance) May 23, 2019

11. Finally, luckily for today’s entrepreneurs now, there are other options available now. Welcome to blockchain based fundraising.

— CZ Binance (@cz_binance) May 23, 2019

What are your thoughts?