Former employees of California-based virtual healthcare provider HealthTap have filed a complaint in the State of Delaware against the company, venture firm Mohr Davidow Ventures (MDV), board members and executives, alleging that MDV orchestrated a process to dilute the company's valuation to become a majority controlling shareholder.

The lawsuit also names HealthTap board members and executives Bill Gossman, Bill Ericson, Paul Baldassari, Sean Mehra and David Kopp as defendants.

"MDV and its board of directors, including Bill Ericson, Bill Gossman and CEO Sean Mehra deliberately stripped shareholder value from the employees who built the company into a billion-dollar tech startup to enrich themselves. The plaintiffs seek to restore that value to those who invested many years of blood, sweat, and tears into HealthTap," a source familiar with the lawsuit told MobiHealthNews via email. 

According to the complaint, MDV hand-picked board appointees and the CEO, sabotaged the company's profitable core business, drove down its valuation by nearly 99%, and "manufactured repeated liquidity crises." 

The complaint alleges MDV and its affiliates breached fiduciary duties "in connection with two self-interested financing rounds orchestrated by MDV, the controlling shareholder of HealthTap, Inc. and approved by the MDV-dominated board of directors, on terms grossly unfair to the company's remaining shareholders." 

The action says that after HealthTap gained status as a billion-dollar tech startup, MDV and its affiliates took steps to dilute the plaintiffs' ownership through a "financial 'crisis' they manufactured," engaging in successive self-interested financing, dubbed in the complaint as the "2021 Financing Transaction," which created artificially low valuations and served as a springboard to allow MDV to take over the company. 

The complaint alleges that MDV's first steps to take over the once billion-dollar healthcare startup as majority shareholder involved gutting the company's core business. 

The filing says that in 2018, Ericson and Gossman took over the board and appointed Gossman as the company's CEO, after which the pair allegedly abruptly switched the company from one that provided telehealth solutions to enterprise buyers such as Fortune 500 companies, insurance carriers and other significant healthcare players to a direct-to-consumer model.

The complaint alleges that the move irrationally abandoned and intentionally discontinued the company's lucrative contracts and revenue streams and positioned MDV to acquire HealthTap's business and intellectual property for pennies on the dollar. 

The defendants allege that MDV's decisions intentionally drove the company from a high valuation to the brink of insolvency in just a few short years. Simultaneously, the complaint alleges that MDV and its allies at HealthTap declined to engage with outside funding sources. 

"Instead, MDV and its allies at the company forced the company to borrow from MDV in exchange for convertible notes that would ultimately permit MDV to dilute away the other shareholders and, once its core business is restored, claim the future value of the company for itself," the complaint says. 

The complaint further alleges that on Oct. 25, 2021, the board approved MDV's conversion of notes into "preferred stock with anti-dilution protections at an artificially low valuation and intentionally misled other stockholders into agreeing."

"MDV surrounded the transaction with window-dressing – a purported 'special committee' of one member and a purported 'independent' new CEO and board member – but the transaction was extremely flawed, conflicted, unfair, and plainly designed to funnel the company's value to MDV and its affiliates. Through this orchestrated convertible note exchange and issuance of more than 18 million shares of Series A Preferred Stock to MDV and its affiliates, MDV cemented itself as the majority stockholder of the company's voting shares," the complaint says. 

The plaintiffs then allege that MDV continued to manufacture a liquidity crisis over the next three years and drive down the company's valuation through an additional series of convertible notes. 

The complaint says MDV is "now undertaking to cause the company to issue more than 9 million additional shares of Series A Preferred Stock and over 5.6 million shares of Series B Preferred Stock, both with anti-dilution protection, in exchange of the conversion of those convertible notes and an additional $10 million investment in the company" at a lower valuation than what the company was worth before MDV took control. 

The plaintiffs allege that because of the allegations above, their ownership has been "decimated," and, due to MDV's actions, other shareholders now own a small fraction of the company, while MDV's ownership has increased to the point where MDV now holds the majority of the company's equity.

"This stark reversal is the result of blatant breaches of fiduciary duty by MDV, Ericson, Gossman and the rest of HealthTap's board. Now, before the ink is even dry on the latest financing, these actors have begun a long-planned 'turnaround' of the company that will restore (and likely exceed) the hundreds of millions of dollars in value that they intentionally destroyed, with all of that value now inuring to MDV's own benefit, to the exclusion of other stockholders like the plaintiffs," the complaint says. 

The plaintiffs are requesting "equitable relief and damages against MDV and the Director Defendants," including a declaration that the defendants breached their fiduciary duties, damages in an amount to be determined at trial, award of reasonable costs and expenses associated with bringing the action and other relief the court deems appropriate.