Barry Diller's IAC Sued by Tinder Co-Founders for $2 Billion

Barry Diller Sean Rad - Getty - H Split 2018
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Former CEO Sean Rad alleges that Tinder's parent companies intentionally undervalued the popular dating app to deny early employees billions in stock options.

A group of Tinder co-founders and current and former employees is suing IAC and Match Group over the valuation of the popular dating app. 

The lawsuit, filed Tuesday in New York, alleges that Barry Diller's IAC and its Match Group subsidiary intentionally undervalued Tinder to deny early employees billions of dollars in stock options. The plaintiffs, including co-founders Sean Rad and Justin Mateen, are seeking at least $2 billion in damages. 

At the heart of the lawsuit is a question over the true value of Tinder, which was founded in 2012 out of IAC-run startup incubator Hatch Labs. It offers a rare look into the early days of a fast-growing startup and the complications that can arise between founders and their investors. Most consumer technology startups would seek outside investments from venture capital firms or other investors, setting an established valuation each tine a new investor buys an ownership stake. But Tinder's corporate history is unique because of its early relationship with IAC. 

The lawsuit alleges that in 2014, IAC and Match agreed to award Tinder's employees with a total of 20 percent of the company in stock options. As part of the agreement, IAC and Match agreed to have Tinder independently valued in 2017, 2018, 2020 and 2021, which would give employees an opportunity to sell their stock options. 

But the lawsuit claims that Tinder's owners "had an illicit motive to undervalue and eliminate" the value of those options and used a "pattern of deception" to undervalue Tinder in 2017 at $3 billion. After that initial valuation occurred, IAC "secretly and without notice" merged Tinder with the rest of its dating properties at Match and canceled the remaining scheduled valuations.

After the merger, Tinder shareholders saw their stock converted to shares of Match. Per the lawsuit, because that conversion happened based on a Tinder valuation of $3 billion, employees "received far fewer Match options, and a far less valuable stock option, than they had been promised." 

Rad and the other Tinder employees believe that the company is worth significantly more than $3 billion today. They point to IAC's most recent quarterly report, in which the company noted that Tinder is expected to exceed $800 million in revenue this year. IAC CEO Joey Levin specifically noted that the app, which popularized the function of swiping to accept or decline a potential match, has continued its "amazing growth run." The lawsuit does not provide an alternative to the $3 billion valuation.

The lawsuit further claims that amid the alleged effort to manipulate Tinder's valuation, IAC and Match intentionally removed Rad as CEO in an effort to "deprive Tinder optionholders of their right to participate in the company future success." Match chairman and CEO Greg Blatt was named interim Tinder CEO. 

The lawsuit also alleges that while he was serving as interim CEO, Blatt "groped and sexually harassed" Tinder vp marketing and communications Rosette Pambakian, also a plaintiff in the case, during a holiday party. Rad, who reported the incident to Match's general counsel, alleges that Blatt later threatened him and told him not to take the claims public. Once Tinder's merger into Match was complete, IAC announced Blatt's retirement and, per the lawsuit, rewarded him with a rich golden parachute. 

An IAC spokeswoman shared a statement responding to the lawsuit calling the allegations "meritless" and pledging that IAC and Match will "vigorously defend against them."

The statement continues, "Since Tinder's inception, Match Group has paid out in excess of a billion dollars in equity compensation to Tinder's founders and employees. With respect to the matters alleged in the complaint, the facts are simple: Match Group and the plaintiffs went through a rigorous, contractually-defined valuation process involving two independent global investment banks, and Mr. Rad and his merry band of plaintiffs did not like the outcome. Mr. Rad (who was dismissed from the company a year ago) and Mr. Mateen (who has not been with the company in years) may not like the fact that Tinder has experienced enormous success following their respective departures, but sour grapes alone do not a lawsuit make. Mr. Rad has a rich history of outlandish public statements, and this lawsuit contains just another series of them. We look forward to defending our position in court.”

The lawsuit is the latest in a turbulent history for the six-year-old Tinder. Rad has had multiple stints running the company. He stepped down as CEO to become chairman in 2016, only to be reinstated as CEO a few months later. In 2014, co-founder Whitney Wolfe Herd sued Tinder over sexual harassment and discrimination. The lawsuit was settled without admission of wrongdoing by either party and Mateen resigned from the company.