WILMER CUTLER PICKERING HALE AND DORR LLP Nell G. Moley (SBN: 295498) . nell.moley@wilmerhale.com 950 Page Mill Road Palo Alto, CA 94304 Telephone: (650) 858-6000 Fax: (650) 858-6100 Attorney for Plainti?s KHOSLA VENTURES SEED, L.P. KHOSLA VENTURE SEED SIDE FUND, L.P. KHOSLA VENTURES IV, L.P. KHOSLA VENTURES IV (CF), L.P. V1 SUPERIOR COURT OF THE STATE OF CALIFORNIA IN THE COUNTY OF SANTA CLARA KHOSLA VENTURES SEED, L.P., a CASE NODelaware limited partnership, KHOSLA VENTURES SEED SIDE FUND, Delaware limited partnership, KHOSLA VENTURES IV, L.P., a Delaware limited partnership, and KHOSLA VENTURES IV (CF), L.P., a Delaware limited partnership, COMPLAINT FOR DAMAGES FOR: (1) CONSTRUCTIVE FRAUDULENT (2) INTENTIONAL FRAUDULENT Plaintiffs, and v. (3) BREACH OF FIDUCIARYDUTY. NEXGEN POWER SYSTEMS, INC, a California corporation, DINESH RAMANATHAN, an individual, and DOES 1-99, inclusive, FOR JURY Defendants. 1 Complaint for Damages ?zl' 'aylor 1 NATURE OF THE ACTION 2 1. This is an action for fraudulent transfer and breach of fiduciary duty against Defendants 3 NexGen Power Systems, Inc. (“NexGen”), Dinesh Ramanathan (“Ramanathan”), and DOES 1- 4 99 (collectively, “Defendants”). Plaintiffs Khosla Ventures Seed, L.P., Khosla Ventures Seed 5 Side Fund, L.P., Khosla Ventures IV, L.P. and Khosla Ventures IV (CF), L.P. (collectively 6 “Plaintiffs” or “Khosla”) bring the breach of fiduciary duty cause of action as an equity holder 7 and creditor of Avogy, Inc. (“Avogy” or the “Company”). 8 9 2. Defendants developed and implemented a fraudulent scheme to strip the Company of its key intellectual property assets, vest those assets in Defendant Dinesh Ramanathan’s newly- 10 formed entity, NexGen, and then use those assets in an improper attempt to extract a cash 11 payout. In particular, in December 2016, Defendant Dinesh Ramanathan, acting as President and 12 Chief Executive Officer of the Company, assigned the Company’s assets to Avogy (ABC), LLC 13 (“Avogy ABC”), a wholly-owned subsidiary of The Brenner Group, LLC (“The Brenner 14 Group”), only to concoct a scheme to repurchase the Company’s intellectual property assets 15 months later through NexGen, at a substantially below-market price by, on information and 16 belief, fraudulently misrepresenting information to Avogy ABC, even though Avogy ABC had 17 received at least one other higher and better offer for those assets. After purchasing the assets, 18 on information and belief, NexGen and Dinesh Ramanathan essentially blackmailed another 19 Khosla portfolio company by attempting to coerce a large cash payment from that company. 20 3. By the causes of action asserted herein, Plaintiffs seek monetary damages, including 21 punitive damages, for the wrongful acts of Defendants, as well as the avoidance of the transfer to 22 NexGen. Plaintiffs also seek recovery of all of their costs incurred in bringing and prosecuting 23 this suit, including their attorneys’ fees. 24 25 26 JURISDICTION AND VENUE 4. This Court has jurisdiction because the matter in controversy exceeds the sum or value of $25,000. 27 28 2 Complaint for Damages 1 5. Venue is proper in this Court pursuant to California Code of Civil Procedure Sections 2 395 and 395.5. One or more of the Defendants has its principal place of business in the County 3 of Santa Clara, State of California. The tortious conduct at issue took place in California, 4 including in the County of Santa Clara, State of California. 5 THE PARTIES 6 6. Plaintiffs Khosla Ventures Seed, L.P., Khosla Ventures Seed Side Fund, L.P., Khosla 7 Ventures IV, L.P. and Khosla Ventures IV (CF), L.P. are each Delaware limited partnerships 8 with their principal place of business in California. 9 10 11 7. Plaintiffs are informed and believe and on that basis allege that Defendant NexGen is a California corporation with its principal place of business in California. 8. Plaintiffs are informed and believe and on that basis alleges that Defendant Dinesh 12 Ramanathan is an individual residing in California, is the sole director, President and Chief 13 Executive Officer of Avogy, and is the President and Chief Executive Officer of NexGen. 14 9. The true names and capacities, whether individual, corporate or otherwise, of Defendants 15 DOES 1-99, inclusive, are unknown to Plaintiffs, who therefore sue each and all of them by such 16 fictitious names. Plaintiffs will seek leave to amend this Complaint to allege their true names 17 and capacities when they have been ascertained. Plaintiffs are informed and believe and thereon 18 allege that each of the fictitiously named Defendants is responsible in some manner for the 19 occurrences herein alleged and that Plaintiffs’ damages as herein alleged were proximately 20 caused by Defendants DOES 1-99, inclusive. 21 GENERAL FACTUAL ALLEGATIONS 22 10. This action arises from a fraudulent scheme concocted by Ramanathan, working in 23 concert with Defendant NexGen, to steal the intellectual property assets of Avogy for his own 24 personal gain. Through this scheme, Ramanathan arranged for the transfer all of the Company’s 25 intellectual property assets to his newly-formed venture, NexGen, at a price well below both the 26 market value of the assets, even though at least one other potential buyer submitted a higher offer 27 for those assets. After acquiring the assets from Avogy ABC, Ramanathan and NexGen 28 3 Complaint for Damages 1 approached another Khosla portfolio company in an attempt to essentially extort a seven-figure 2 cash payment relating to a license agreement NexGen purported to have purchased from Avogy 3 ABC as part of the assets acquired. Plaintiffs seek monetary damages, including punitive 4 damages, to compensate them for the substantial damages they have and will continue to suffer 5 as the proximate result of the wrongful acts of Defendants. 6 7 Khosla’s Investment in Avogy 11. From 2010 to 2016, Khosla invested more than $60 million in Avogy, leading two rounds 8 of the Company’s equity financing and providing numerous bridge loans to Avogy. As of 9 December 5, 2016, Khosla was the largest stockholder and creditor of Avogy. 10 The Avogy ABC 11 12. On December 5, 2016, Ramanathan, at the time Avogy’s sole director, President and 12 Chief Executive Officer, signed a written consent of the Company’s board of directors (the 13 “Written Consent to Assignment”) authorizing the general assignment of the Company’s assets 14 for the benefit of creditors (“ABC”) to Avogy ABC, a California limited liability company and 15 wholly-owned subsidiary of The Brenner Group. The Written Consent to Assignment was 16 signed only by Ramanathan, Avogy’s sole director. 17 13. Despite its status as the largest creditor and stockholder of the Company, Plaintiffs did 18 not receive notice of the sale process for the Company’s assets, including its intellectual property 19 assets (the “IP Assets”), until after NexGen had purchased the IP Assets. At no time did 20 Ramanathan provide notice or any other information to Plaintiffs that he or NexGen was 21 interested in purchasing the IP Assets. In fact, on information and belief, Ramanathan took steps 22 to conceal NexGen’s purchase of the IP Assets from Khosla. 23 24 The Fraudulent Transfer to NexGen 14. On information and belief, Avogy ABC marketed the Company’s assets and then sold the 25 assets to various buyers. With respect to the IP Assets in particular, on information and belief, 26 Avogy ABC prepared a description of the assets and sought a sale of the assets on an accelerated 27 timeline, anticipating an auction in January 2017. Avogy ABC ultimately sold the IP Assets to 28 4 Complaint for Damages 1 NexGen, a company newly formed by Ramanathan (the “Conflicted Transaction”). On 2 information and belief, NexGen agreed to pay $200,000.00 for the IP Assets, with $125,000.00 3 paid at closing on or about February 28, 2017, and an additional $75,000.00 due in August 2017. 4 15. At least one other interested party, Soraa Laser Diode, Inc. (“SLD”), submitted a bid for 5 the IP Assets. On information and belief, SLD submitted a bid of $215,000.00 cash for the IP 6 Assets, and transmitted a signed asset purchase agreement on or about February 13, 2017— 7 weeks before Avogy ABC sold the IP Assets to NexGen for $200,000.00 (with only $125,000.00 8 paid upfront). On information and belief, Ramanathan and NexGen pressured and fraudulently 9 coerced Avogy ABC to disregard the SLD bid and to instead close a sale for assets to 10 Ramanathan’s newly-formed company, NexGen. On information and belief, Ramanathan and 11 NexGen did so to purchase the assets and use them to attempt to fraudulently and improperly 12 extract a large cash payment from another Khosla portfolio company. 13 14 15 16 17 18 FIRST ALLEGED CAUSE OF ACTION CONSTRUCTIVE FRAUDULENT TRANSFER PURSUANT TO CAL. CIV. CODE §§ 3439.04, 3439.07, and 3439.08 (against Defendants NexGen and Dinesh Ramanathan) 16. Plaintiffs repeat and re-allege each and every allegation contained in paragraphs 1-15 of this Complaint, and incorporate them herein. 17. Defendants NexGen and Ramanathan are the beneficiaries of the fraudulent transfer of 19 the IP Assets. On information and belief, these IP Assets were transferred to NexGen in 20 exchange for $200,000.00, with $125,000.00 paid at closing, and an additional $75,000.00 due in 21 August 2017. Ramanathan is the President and Chief Executive Officer of NexGen, and 22 Ramanathan also is the former sole director, President and Chief Executive Officer of Avogy. 23 On information and belief, Avogy ABC received at least one other bid for the IP Assets, an all 24 cash offer in excess of the price that NexGen paid. 25 26 18. The transfer of the IP Assets to NexGen occurred at a time when the Company was not able to pay its debts as they became due, including the debts owed by the Company to Plaintiffs. 27 28 5 Complaint for Damages 1 On information and belief, Defendant NexGen neither took the IP Assets in good faith nor paid 2 reasonably equivalent value. On information and belief, Defendants NexGen and Ramanathan 3 knowingly participated in, facilitated and conspired to accomplish this fraudulent transfer. 4 Further, on information and belief, NexGen and Ramanathan only purchased the assets 5 fraudulently to then turn around and use them in an attempt to essentially extort a large cash 6 payment from another Khosla portfolio company. 7 19. At all relevant times, these transfers were voidable under Cal. Civ. Code §§ 3439.04(a) 8 and 3439.07 by one or more creditors who held or hold unsecured claims against the Company. 9 These creditors include Plaintiffs. 10 11 12 13 14 15 16 17 20. As a proximate result of the wrongful acts alleged, Plaintiffs have been generally damaged in an amount to be proven at trial. SECOND ALLEGED CAUSE OF ACTION INTENTIONAL FRAUDULENT TRANSFER PURSUANT TO CAL. CIV. CODE §§ 3439.04, 3439.07, and 3439.08 (against Defendants NexGen and Dinesh Ramanathan) 21. Plaintiffs repeat and re-allege each and every allegation contained in paragraphs 1-20 of this Complaint, and incorporate them herein. 22. On information and belief, the Company and Ramanathan caused the IP Assets to be 18 transferred to NexGen with actual intent to hinder, delay, steal from or defraud creditors, 19 including Plaintiffs. 20 23. Several indicia of fraud demonstrate that NexGen and Ramanathan acted with actual 21 fraudulent intent. The IP Assets were transferred to an insider—a newly formed company 22 owned by the former sole director and officer of the Company, Dinesh Ramanathan—at a time 23 when the Company was insolvent. Creditors, including Plaintiffs (at the time the Company’s 24 largest creditor), were not made aware of the conveyance when it occurred. In addition, on 25 information and belief, Defendants NexGen and Ramanathan neither took the encumbrances in 26 good faith nor paid reasonably equivalent value. On information and belief, Defendants NexGen 27 28 6 Complaint for Damages 1 and Ramanathan knowingly participated in, facilitated and conspired to accomplish this 2 fraudulent transfer. Further, on information and belief, NexGen and Ramanathan only purchased 3 the assets fraudulently to then turn around and use them to attempt to improperly obtain a large 4 cash payment from another Khosla portfolio company. 5 24. As a proximate result of the wrongful acts alleged, Plaintiffs have been generally 6 damaged in an amount to be proven at trial. In addition, Defendants intentionally, willfully, 7 fraudulently, and maliciously did the things herein alleged in order to defraud the Company’s 8 creditors, including Plaintiffs. Plaintiffs therefore are entitled to punitive damages. 9 THIRD ALLEGED CAUSE OF ACTION BREACH OF FIDUCIARY DUTY (against Defendant Dinesh Ramanathan) 10 11 12 25. Plaintiffs repeat and re-allege each and every allegation contained in paragraphs 1-24 of this Complaint, and incorporate them herein. 13 26. By reason of his position as a director and officer of the Company, once the Company 14 became insolvent, Defendant Dinesh Ramanathan owed the Company and its creditors fiduciary 15 obligations. 16 27. As of the date the Company became insolvent, Ramanathan was the sole director and 17 Chief Executive Officer of the Company, and as such he owed a fiduciary duty not only to the 18 Company but also to its creditors. Among the duties he owed is the duty of loyalty, which is a 19 duty to put the corporation and its creditors’ interests ahead of his own and to remain free of 20 conflicts of interests. Ramanathan breached that fiduciary duty when he authorized the general 21 assignment of substantially all of the Company’s assets to Avogy ABC, only months later to 22 form a new entity, NexGen, to effectively steal the IP Assets of the Company by purchasing 23 them for less than reasonably equivalent value. Ramanathan further breached his fiduciary duty 24 by concealing the Conflicted Transaction from creditors, including Plaintiffs, until after it was 25 consummated. On information and belief, Ramanathan further breached his fiduciary duty by 26 continuing to conceal material documents and information concerning the Conflicted Transaction 27 28 7 Complaint for Damages 1 from creditors, including Plaintiffs, even after they discovered the existence of the Conflicted 2 Transaction. Ramanathan has further breached his fiduciary duty by then attempting to use the 3 IP Assets to essentially blackmail another Khosla portfolio company by attempting to coerce a 4 large cash payment from that company, an attempt to extract value from the very creditor and 5 stockholder to whom Ramanathan owed fiduciary duties as an officer and director of Avogy. 6 28. As a proximate result of Ramanathan’s breaches of his fiduciary duties, the Plaintiffs 7 have suffered actual damages and Ramanathan has been unjustly enriched in amounts to be 8 proven at trial. 9 29. On information and belief, Ramanathan’s conduct was willful and malicious insofar as he 10 willfully and deliberately breached his fiduciary duties by orchestrating the ABC and the 11 Conflicted Transaction, intentionally concealing the Conflicted Transaction until it was 12 consummated, and intentionally concealing material aspects of the Conflicted Transaction, 13 including the asset purchase agreement, from further investigation thereafter. Given the 14 willfulness of Ramanathan’s conduct, the Plaintiffs are entitled to exemplary and punitive 15 damages. 16 PRAYER FOR RELIEF 17 WHEREFORE, Plaintiffs pray for judgment as follows: 18 1. That the Court enter judgment in favor of Plaintiffs and against Defendants on all counts alleged herein; 19 20 21 2. For compensatory damages in an amount to be proven at trial; 3. For punitive damages in an amount appropriate to punish each of the Defendants and to make an example of each of them to the community; 22 23 24 4. For avoidance of the transfer of the Company’s IP Assets to NexGen; 5. For all attorneys’ fees and costs incurred by Plaintiffs in bringing and prosecuting this action; and 25 6. For such other and further relief as the Court may deem just, proper and appropriate. 26 27 28 8 Complaint for Damages Dated: August 29, 2017 Of 0 unsel Peter J. Kolovos (pro hac vice forthcoming) peter.kolovos@wilmerha le.com 60 State Street Boston, MA 02109 Telephone: (617) 526-6000 Fax: (617) 526?5000 By: bit/l k/ WILMER CUTLER PICKERING HALE AND DORR LLP Nell G. Moley (SBN: 295498) nell.moley@wilmerhale.co1n 950 Page Mill Road Palo Alto, CA 94304 Telephone: (650) 858-6000 Fax: (650) 858?6100 Attorneys for Plaintiffs KHOSLA VENTURES SEED, L.P. VENTURE SEED SIDE FUND, L.P. KHOSLA VENTURES IV, L.P. KHOSLA VENTURES lV (CF), LP. 9 Complaint for Damages 1 2 DEMAND FOR JURY TRIAL Plaintiffs Khosla Ventures Seed, L.P., Khosla Ventures Seed Side Fund, L.P., Khosla 3 Ventures IV, L.P. and Khosla Ventures IV (CF), L.P. hereby demand a trial by jury on all issues 4 and causes of action alleged against each of the Defendants. 5 Dated: August 29, 2017 6 WILMER CUTLER PICKERING HALE AND DORR LLP Nell G. Moley (SBN: 295498) nell.moley@wilmerhale.com 950 Page Mill Road Palo Alto, CA 94304 Telephone: (650) 858-6000 Fax: (650) 858-6100 7 8 9 10 11 Attorneys for Plaintiffs KHOSLA VENTURES SEED, L.P. KHOSLA VENTURE SEED SIDE FUND, L.P. KHOSLA VENTURES IV, L.P. KHOSLA VENTURES IV (CF), L.P. 12 13 14 15 16 17 18 Of Counsel Peter J. Kolovos (pro hac vice forthcoming) peter.kolovos@wilmerhale.com 60 State Street Boston, MA 02109 Telephone: (617) 526-6000 Fax: (617) 526-5000 19 20 21 22 23 24 25 26 27 28 10 Complaint for Damages