Spark Capital Is Cutting Ties With Dispo After Leading Its Series A. How Does That Work?

Spark Capital led the $20 million Series A round for buzzy photo-sharing app Dispo just last month. Now, the venture capital firm is cutting all ties with the company co-founded by popular YouTuber David Dobrik.

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Spark Capital’s announcement on Sunday came after Insider last week reported on allegations of rape against a former member of Dobrik’s “Vlog Squad,” a group that makes videos together and posts them on YouTube. While Dobrik himself is not accused of sexual assault, he provides the voiceover for at least part of the video in which the alleged sexual assault takes place and it was posted to his YouTube channel, according to Insider’s report. 

Dobrik stepped down from the board of Dispo, The Information reported Monday morning, and Dispo tweeted that it supported the move. Several brands, including HelloFresh and Dollar Shave Club, also dropped sponsorships with the YouTube star.

Spark Capital tweeted on Sunday night that it would “sever all ties” with Dispo. The investment firm added that it stepped down from the company’s board and would make “arrangements to make sure we do not profit from our recent investment in Dispo.” The move was applauded by some investors, founders and tech workers online as the right thing to do. It’s also highly unprecedented. 

Spark Capital did not respond to a request for more information from Crunchbase News about how it would unwind its investment in Dispo. 

Spark’s investment in Dispo was likely a Regulation D private offering, meaning it was a private sale of shares, according to Stephen Diamond, an associate professor of law at Santa Clara University, who teaches corporate finance and securities law. 

“The only way to exit this situation is to shut down the company or to sell the shares to someone,” Diamond said. “So those are the two options. It appears they’re talking about some sort of secondary sales and there is an active market for shares in private companies, sometimes called the secondaries market or the private resales market. To (not) profit off it, they would presumably sell at the price no higher than they bought the sales.”

So, to disassociate itself from the company, Spark would have to step down from Dispo’s board of directors (which the firm said it did), and sell its shares for no higher than the purchase price, Diamond said. But the VC firm could run into issues finding a buyer, given the controversy.

“There’s not much Spark can do if they can’t find a willing buyer,” Diamond said. “Other than that, it’s possible there’s some repurchase right or quit right in their shares, but that’s not likely.”

Other early backers of Dispo have spoken out following Insider’s report on the sexual assault allegations. Unshackled Ventures tweeted that it was “in support of the (company’s) decision to part ways with David and will continue to monitor the situation closely.”

Seven Seven Six, which led Dispo’s $4 million seed round in October 2020, said that it supported the company’s decision to part ways with Dobrik, and would donate any profits from the firm’s investment in the company to an organization that works with survivors of sexual assault. It added that it would continue working with the Dispo team.

Lime CEO Wayne Ting said Tuesday he was pulling out of all future investments in Dispo, and would donate any profit from his investment in Dispo’s seed round to organizations that support survivors of sexual assault, according to Insider.

Crunchbase News has reached out to Unshackled Ventures, Seven Seven Six and Ting for further comment, and we’ll update this story if and when we hear back.

For a venture firm like Spark Capital to sever ties with a portfolio company is something of a “black swan event,” according to Diamond. It’s far more typical for a VC firm that isn’t happy with an investment to simply stop putting money into a startup or perhaps sell off shares. Of course, the situation with Dobrik and Dispo goes beyond the typical reasons a VC might want to write off an investment, like a founder over-promising results or the market for a product changing, for example.

Now, the question is if Dispo can survive without its ties to Dobrik, Diamond said Monday. Often, for small, early-stage startups there’s little separation between the identities of the company and a founder. And since Dispo didn’t exactly pioneer a revolutionary technology — it’s an app that mimics disposable camera technology — it’s unclear if the intellectual property has value separate from the brand of its famous founder. It’s also unclear how many shares of Dispo that Dobrik still holds. So while his separation from the company may solve an immediate image problem, he could still have some power, Diamond said.

“If you have bad behavior by a CEO or another senior figure on a company board, often there are different pathways to separate that individual from the company so employees, others aren’t impacted,” Diamond said. “But companies at this early stage are typically indistinguishable from the key founders. So there may not be enough of a separation between the company and Dobrik.”

Perhaps one of the most well-known cases of a senior figure at a tech company stepping down so the business could move forward was Uber. Then-CEO Travis Kalanick was forced out by the board of directors after the company’s culture drew scrutiny. Kalanick was replaced by former Expedia CEO Dara Khosrowshahi, and the company went public in 2019. 

In Spark Capital’s case, cutting ties with the company was the right move both morally and in terms of reputation management, according to Jason Sherman, president and founder of Sherman Communications and Marketing. The incident in question is linked to Dobrik, and shows bad judgment on his part. And while Spark Capital could likely still be successful even if it didn’t disassociate from Dobrik, it would make it difficult to hire people with “strong moral compasses,” Sherman said.

“I think it was the right thing for their investment, for their reputation, and for their hiring,” Sherman said.

Illustration: Li-Anne Dias