In 2021 Genius Sports announced the acquisition of Spirable. Spirable is a maker dynamic ads for social media, which allows, for example, live betting odds can be updated within display ads on Facebook. Genius and the executives of the startup are involved in a dispute over earn-outs. These incentive payments are increasingly used in the tech industry, and they’re causing lawsuits.
The company was excited about the potential of its expanding tech, which included Spirable. This would allow it to compete with leagues and sportsbooks. Steve Bornstein, the head of Genius North American business , said that in late 2021, “we’ll have an opportunity to really push forward in terms of technology, integration, and integration when you take all the assets of Genius Sports including Second Spectrum, and Spirable along with the gaming businesses.”
Spirable was a highly sought-after target. Its client list included Coca-Cola and DraftKings. Genius paid $37.5m cash for Spirable. The company was founded in Cork, Ireland in 2014 by brothers Dave and Ger o’Meara. Genius’ premium for the company is a testament to the excitement surrounding its technology. Spirable, according to regulatory filings, had revenue of PS2.8m and a net loss in 2021 of PS2.1m, which is about $3.8m and $2.8m, respectively. Genius agreed to earn $17.5 million for achieving technical targets and retaining executives after the merger. Documents filed in a U.K. suit between the O’Mearas, their VC investors, and Genius Sports show that Genius Sports also agreed to earn $17.5 million if they retained executives following the merger.
According to a paper authored by six Jones Day lawyers earlier this year, the use of such sweeteners for buying tech companies has increased sharply in venture capital. Earn-outs will be used in 21% of acquisitions for non-life science firms by 2022. This is up from 13% five years ago, according to law.
The Jones Day newspaper reported that “the use of earn-out clauses, which buyers and vendors often use to bridge different views of value,” is on the increase. “Lawsuits between buyers & sellers have also increased.” Sometimes the parties dispute if an earn-out clause’s performance target has been met at all… [or] that the buyer intentionally slowed down progress to keep the goal out of reach.”
The dispute between Genius vs Spirable seems to have a little of both.
Spirable executives claim in the lawsuit filed in November 2022 that Genius had already sought to undermine the earnouts due to Genius stock having lost about 75% of its original value. This led to a mandate for Genius to cut costs and save money. They claim that Genius executives had earlier in the year stated that some targets were met, but then changed their tune and refused to provide Spirable with resources to meet those targets. Spirable claims that Genius only fired enough executives to fall below the threshold needed to trigger executive retain-outs. This, they claim, also deprived Spirable’s ability to meet other earn-out goals.
In the complaint filed with the U.K. court, Spirable executives said that the defendant had tried to reduce the total consideration due to the Sellers in any way possible. “While the Defendant might consider that it made a bad deal due to the economic conditions that followed the acquisition of the company, that does allow them to avoid their contract obligations.”
David O’Meara refused to comment via email, and said that the other plaintiffs – his brother and VC firms Frontline Ventures & Smedvig Capital – also declined to comment.
Genius has not responded to many requests for comment.
Genius’ response to the court argues that its initial $37.5m was money badly spent.
“The acquisition was a failure.” Genius stated that the Defendant wasn’t impressed with the output received from Photospire, referring to Spirable under its original legal name. “Photospire employees were slow to grasp [Genius Sports’] technology and made slow progress with their various projects. Simultaneously they increased the demands on [Genius Sports’] resources and displayed an inappropriate focus on achieving Earn-Outs.
Genius stated in its filing that Spirable’s deal included five earn outs, of which two were revenue-based. These were missed but not disputed. According to filings from both parties, there is a heated dispute over the meaning of the language relating to the timing and requirements for the three earn-outs in question.
Jones Day says that’s not uncommon. The experience teaches us that the language used can have a huge impact on both parties in the event of a lawsuit. This change in control of the business, along with the competing incentives between the buyer and seller creates an environment ripe to disputes.
According to court documents, the dispute between Genius, the Spirable cofounders, and their VC investors continues for now. Arbitration between the two parties failed in spring. Now, discovery is underway. Witness statements are expected, and eventually a trial.