In 2012, Robert Reffkin paid just $335.50 for his stake in a nascent firm known as Urban Compass.
Today those shares — made public in a recent court filing — are worth $517.5 million based on Compass’ latest funding round in July. And while Reffkin’s stake was likely diluted over the years, the CEO’s original stock amounts to roughly 8.5 percent of what is now a $6.4 billion firm.
Such agreements are typically held close to the vest, but Reffkin’s was submitted this month as evidence in a case brought by Avi Dorfman, who is suing to be recognized as a Compass co-founder. Dorfman argues that he worked with Reffkin in the startup’s early days but was elbowed out. A compensation expert hired by Dorfman backed him up with a report claiming he is entitled to Compass equity near or equal to what Reffkin and Chairman Ori Allon received.
The rare disclosure sheds light on how startups divvy up equity among founders — a practice that’s particularly relevant for Compass, which is known for luring agents with big bonuses and stock options. (Agents are able to purchase stock options in lieu of accepting commission payouts.)
Reffkin’s agreement is relatively standard fare in the startup world. According to the filing, he purchased 3.355 million shares of common stock when Compass was founded seven years ago. The stock was subject to a vesting agreement that bound him to the company for several years. Specifically, 7.5 percent of his shares vested immediately and the rest vested monthly over a three-year period.
However, any “change in control,” including a sale or IPO, would cause any unvested shares to vest immediately. Under the agreement, Reffkin was permitted to sell his shares on the private market, but Compass could exercise a right of first refusal and buy them. And in connection with any eventual IPO, Reffkin agreed to a six-month lockup period.
Compass declined to comment.
Turning weeks into a windfall
The revelation of Reffkin’s stock agreement comes five years into Compass’ legal battle with Dorfman, the founder of now-defunct real estate startups RentJolt and iRent, who alleged in his 2014 suit that Compass built its product using his proprietary software and real estate expertise. This month, a New York judge ruled that Dorfman is entitled to a jury trial — a decision Compass has appealed.
But with a trial looming, Compass filed a motion Oct. 28 asking the court to preclude a jury from granting Dorfman an equity stake on the grounds that Dorfman “seeks to transform a few weeks of time into a windfall.” Compass also argued that a jury should not hear testimony from Dorfman’s two compensation experts.
A 2017 report by one of the experts said Dorfman is entitled to between 5.96 percent and 6.91 percent of Compass equity (based on the dilution of equity over time). The expert’s conclusion was based on a capitalization table provided by Compass during discovery, in addition to Reffkin and Allon’s stock agreements. (Allon’s is not yet public.)
The report noted that like other tech founders, Reffkin and Allon “gave themselves certain protections,” including control of the board of directors. In practice, that meant the two “could not be terminated from the company.”
According to Compass’ cap table, Reffkin and Allon each got just over 3 million shares (or 25.3 percent) of Compass equity in 2012. Ugo Di Girolamo, a co-founder and lead engineer, got 560,000 shares, representing a 4.31 percent stake.
Dorfman is entitled to between 2 million and 2.5 million shares, his expert concluded.
Dilution of shares
The dollar value of Dorfman’s desired stake has fluctuated as Compass raised $1.5 billion in funding from investors including SoftBank.
According to Pitchbook, Compass’ Series A round priced shares at $10 per share. Its $370 million Series G, which closed in July, priced shares at $154.27.
Taking into account the dilution of shares, Dorfman’s expert concluded that in 2017, when Compass was valued at $1 billion, the stake he is seeking would have been worth between $68.4 million and $79.3 million. Based on the current $6.4 billion valuation, Dorfman is seeking damages north of $200 million.
In its Oct. 28 motion, Compass said those figures are “grossly out of proportion” with the role he played.
“Even if the Court were to allow Dorfman to seek damages based on an expected equity stake in Compass (which, to be clear, it should not do as a matter of New York law),” Compass argued in the motion, “the value of that equity should be fixed at the time Dorfman’s claim accrued.”