Compass, Avi Dorfman Settle Legal Dispute

After a seven-year legal battle, Compass has rewritten its history to include tech entrepreneur Avi Dorfman as one of the brokerage’s founders.

Dorfman sued Compass and CEO Robert Reffkin in 2014 after Reffkin allegedly reneged on an agreement to acquire Dorfman’s rental startup, RentJolt, cutting Dorfman out of a founding stake in the company. The case was headed for trial until the parties settled this month for an undisclosed sum, court records show.

Neither Compass nor Dorfman would comment on the specifics of the deal because of confidentiality terms of the settlement. Compass, however, reported a $21 million legal charge related to the case in its third-quarter earnings last week. But the full sum of the settlement is unclear as the company previously set aside an undisclosed amount for future liabilities including the lawsuit.

Court documents show what the best-case scenario for Dorfman might have been. A compensation expert for Dorfman argued that as of June 2017 Dorfman was entitled to between 2 million and 2.2 million shares, or roughly 6 to 7 percent of the company, based on Reffkin and co-founder Ori Allon’s stock agreements.

At the time, that would have put Dorfman’s stake between $68.4 million and $79.2 million. In 2019, when Compass’ valuation shot up to $6.4 billion after its Series G round pricing shares at $154.27, Dorfman’s stake would have penciled out to north of $300 million. The company argued that he was entitled to nothing.

As the company was gearing up for its initial public offering in April, it was aiming for a $10 billion valuation, which would have put Dorfman’s requested stake even higher, but Compass did not meet its goals, slashing its share price to $18 for the IPO, valuing the company at just under $7 billion.

Since April, the company’s value has dropped by more than 40 percent, with its share price hitting an all-time low of $11.16 on Monday before closing at $11.18. Based on Compass’ market cap at Monday’s close, the stake Dorfman sought would be worth between $224 million and $246 million. Following the IPO, Reffkin’s shares were worth $173.5 million while Allon’s were worth $348.8 million.

The settlement, however, is surely for an amount lower than what Dorfman sought and higher than the $21.3 million set aside in the firm’s recent disclosure, and would be in cash, not shares. (Had the case gone to trial and Dorfman had been awarded a stake in the firm, its value would have depended on the share price at the time.)

The lengthy dispute goes back to a few months in the summer of 2012. A mutual friend introduced Dorfman, who’d founded a software company focused on digitizing the process of renting an apartment, and Reffkin, a former investment banker looking to capitalize on “inefficiencies” in the New York real estate market, in July 2012, according to Dorfman’s complaint.

Over the next three months, Dorfman shared trade secrets from his company, RentJolt, that laid the groundwork for Compass’ back end, prepared Reffkin to pitch Goldman Sachs for the brokerage’s seed funding and introduced him to Compass’ first major hires, such as founding engineer Paul Groudas.

In return, Compass would acquire RentJolt and Dorfman would become a founding member of the new brokerage, according to Dorfman’s suit. But the company argued that no such agreement existed. By September, Dorfman sent Reffkin and the nascent company a cease-and-desist letter over stolen trade secrets, court documents show.

Compass (then known as Urban Compass) launched in spring 2013 and locked in another two rounds of funding, bringing the firm’s valuation to more than $360 million after just 14 months of operation. Dorfman filed his suit in July 2014, demanding compensation and damages.

In a statement, Dorfman said he was “pleased” to resolve the dispute and be “recognized as a member of Compass’s founding team. I wish Rob and the Compass community only the best.” Dorfman has since founded two health care startups, Salvo Health and Clearing, where he is CEO.

Compass pointed to the same statement that the company had offered after the company’s earnings call last week, which foreshadowed the settlement.

“We are pleased to have resolved this dispute in a manner that is satisfactory to both sides,” said a Compass spokesperson. “We acknowledge Mr. Dorfman’s work in the early days of Compass as a founding team member of the company.”