Mattress maker Sleeping Duck deny founders freezing out angel investor

A venture capitalist was paid ‘quid pro quo’ and not frozen out of a start-up, a court has heard in a legal stoush with $60m in the balance.

Adir Shiffman says he was ultimately promised a 20 per cent shareholding in the business. Picture: Wayne Taylor

The founders of e-retailer Sleeping Duck have denied freezing out an angel investor from active involvement in their company and realising his 20 per cent shareholding.

Selvam Sinnappan and Winston Wijeyeratne agreed serial entrepreneur Adir Shiffman contributed expertise and value to their business from 2018 but say he was paid $10,000 per month for the work he did, the Supreme Court of Victoria heard on day two of a trial brought by the venture capitalist.

The founders of the company, which was reportedly valued at north of $300m in about 2020, are represented by barrister James Peters, KC, who told the court Dr Shiffman’s “modus operandi” was to “get in, grow and sell out.”

Sleeping Duck founders Winston Wijeyeratne and Selvam Sinnappan at their warehouse in Melbourne. Picture: David Geraghty

“He is highly intelligent, he is wealthy and he understands what he is offering,” Mr Peters said.

On Monday, Dr Shiffman’s barrister Michael Borsky, KC, said his client was always an “active” partner to Mr Sinnappan and Mr Wijeyeratne.

He says he was ultimately promised a 20 per cent shareholding in the business for his work before being slowly excluded in favour of another shareholder — Prateek Bandopadhayay — who diluted Dr Shiffman’s stake.

But Mr Peters refuted this.

“Dr Shiffman’s case is he has been denied legitimate expectation of having an ongoing role. Dr Shiffman knows that role was not immutable, it was time based and remuneration dependent,” he said.

And although Dr Shiffman said in an email to the founders that being a “passive” investor was not his style, in other exchanges he said he was “comfortable” being a passive investor and have coffee every few months, Mr Peters told the court.

Mr Peters said his clients denied Dr Shiffman’s claims he was treated with “coldness” and was not shut-out of the company.

Further, Mr Peters presented evidence that Dr Shiffman believed the company would earn “millions” in revenue refuting his claims they were facing bankruptcy.

If Dr Shiffman is successful in his case that he is owed a 20 per cent shareholding, that would amount to $60m at a valuation of $300m.

Earlier, the court heard the founders treated Dr Shiffman poorly and in “bad faith” due to a “merry-go-round” of issuing shares to Mr Bandopadhayay.

Michael Borsky KC, for Dr Shiffman, told the court while the founders refused for months to allow him to execute his options and realise his value in the company.

Mr Borsky said unbeknown to Dr Shiffman, the founders supplied a loan of $1.3m to Mr Bandopadhayay so he could purchase 3000 shares in the company.

It meant he had 10 per cent equity in Sleeping Duck, the threshold required to become a director, which he said diluted Dr Shiffman’s stake in the company.

As well, it meant Dr Shiffman needed to secure the agreement of the founders and Mr Bandopadhayay to execute his deed, Mr Borsky said.

“They were not executing that deed until their ducks were in a row for Mr Bandopadhayay,” he said.