Sequoia’s RockYou jolted by injunction

Sequoia Capital and two other venture firms are poised to lose their investment in Web 2.0 company NetPickle, which they apparently backed after a complaint was filed against it for intellectual property theft.

NetPickle, operator of a photo slideshow company called RockYou, was recently dealt a blow by a U.S. district court judge hearing the complaint filed against it and its two founders, Lance Tokuda and Jia Shen. Judge Saundra Brown Armstrong issued a preliminary injunction that favors Iconix, which formerly employed both Tokuda and Shen. She ruled that there is enough evidence to suggest that Iconix owns the IP underlying NetPickle’s websites, according to court documents obtained by PE Week. A trial is set for April 2, 2007.

RockYou lets users build photo slideshows they can place on blogs and social networking sites such as MySpace. RockYou had as many as 1.1 million registered users as of February, according to court documents. The startup has raised $1.5 million in backing from Sequoia, Lightspeed Venture Partners and First Round Capital, represented by Greg McAdoo, Jeremy Liew and Josh Kopelman, respectively.

The injunction notwithstanding, Palo Alto, Calif.-based NetPickle put on a party to celebrate the one-year anniversary of its launch Wednesday night (Nov. 15). A PE Week reporter crashed the party, in which about 30 to 40 people were enjoying Coronas chilled in a blue ice cooler. Asked about the court injunction, Tokuda said: “We’re not going to talk about that.” He later asked the PE Week reporter to leave, saying it was a “private party.” Lightspeed’s Liew was also in attendance, but he declined to comment, saying “I’m not working tonight.”

Sequoia and First Round did not respond to requests for comment. A spokesperson for Mountain View, Calif.-based Iconix declined to comment.

Sequoia and the other VCs are in an awkward position because they may have known about the suit before they invested. A regulatory document shows that they funded NetPickle on May 23, nearly two months after Iconix filed suit against NetPickle and its founders on March 27.

If Judge Armstrong rules against NetPickle, the company could be required to turn over to Iconix any revenue, profit or proceeds from stock sales. That means the venture funding raised by NetPickle could ultimately go to Iconix.

The evidence underlying the 23-page ruling consists of files that Iconix claims to have found on computers once used by Tokuda and Shen, including the following: source code for an online photo slideshow site; a database of users for a service they had launched while working at Iconix; a bridge loan term sheet; a taxpayer identification form for NetPickle; and Tokuda’s PowerPoint presentation hawking his new company for investors.

Iconix also presented evidence to the judge that Tokuda had an instant messaging conversation about while participating in an Iconix executive meeting. In one of the IMs allegedly saved on Shen’s computer, Tokuda is said to have written: “Yeah, we actually lucked out with iconix being so bad it was an easy call to leave versus trying to save them with our best ideas.”

Another IM conversation allegedly recovered by Iconix suggests that Shen and Tokuda had trouble distinguishing between the work they were doing for Iconix and their side project, Tokuda’s IM name is “phdlance” and Shen’s is “mekateK” in the following alleged IM exchange:

phdlance: basically, a funny slideshow with email distribution support could make us viral

mekateK: huh… oh rms… thats [sic] scary. I can’t tell what ur [sic] talkin [sic] about… rms [rockmyspace] or ico[Iconix]… hehe

The complaint filed by Iconix makes the following claims:

• While he was CTO and vice president of engineering for Iconix, Tokuda came up with the idea to make a slideshow widget that could be plugged into social networking sites in September 2005. The idea was to launch the widget as part of a website called UberFuze, which targeted social network users with the aim of attracting more users to the Iconix email service. Jose Picazo, CEO of Iconix, agreed to add a Flash-based slideshow service, but plans were stymied when MySpace blocked Flash code due to a security breech.

• During late 2005, Tokuda solicited help from other members of the Iconix team for his project, including Shen, the company’s manager of client development. Tokuda had been the only one to interview Shen when he was hired.

• Tokuda registered the domain name in September 2005 to explore the opportunity a Flash slideshow player might offer without telling Iconix. He and Shen launched the website on Nov. 13.

• Tokuda gave notice to Iconix in December 2005. Before he left, he talked with Iconix Vice President of Sales Bill Ames about securing funding for Tokuda asked Ames not to talk about the startup he was planning to launch. Tokuda’s last day was Jan. 23.

Those are the allegations made in the court documents. The following narrative comes from statements Tokuda made in his personal blog which were found by PE Week. In his blog, Tokuda lists a surprising amount of detail about the fund-raising process:

• On Feb. 2, Tokuda wrote that Iconix fired Shen and he joined him at NetPickle. The two met with Derek Idemoto, the managing director of venture investment at ITOCHU Technology and delivered a Series A presentation to a pair of VCs mentioned only as Neil and Laura.

• On Feb. 3, Tokuda wrote that he heard from Auren Hoffman, who offered to lead an investment in NetPickle for 7% to 8% compensation at a $5 million valuation. Tokuda wrote that the deal was attractive because Hoffman knew Jeremy Philips, an executive vice president at News Corp., who had a billion-dollar acquisition budget.

• On Feb. 4, Tokuda said he met with Mike Maples, an early investor in and a former executive vice president at Microsoft Corp. Maples expressed interest in investing, but wanted different deal terms. Tokuda went on to say that he met with Mark Sherman, a general partner at Battery Ventures, but came away feeling that Sherman thought NetPickle was just a MySpace play.

• On Feb. 20, Tokuda wrote:

Sequoia in progress

NEA said they would invest at 15% with any partner we chose

DFJ willing to invest at 15% – we like Emily Melton the most for our team

True – will be low in their offer but they are good people

Bridge with Mike Brown [Partech International], Josh Kopelman [First Round Capital], and Ariel Poler an option.