Sandeep Kapoor’s art of returns on patronage

For one, Sequoia isn’t just another venture capital (VC) firm. Its heritage, resources, networks and success are formidable. Founded in 1972, Sequoia is a blue-blooded Silicon Valley VC firm, with $80 billion in assets under management globally. It has backed generations of technology leaders, including Atari, Apple, Google, Cisco, YouTube, Stripe, Dropbox and Airbnb.

In India, starting in 2006, it has been one of the most active VC firms, deploying $6 billion in capital in more than 300 portfolio companies, including marquee names such as Byju’s, Ola, Freshworks, Zomato, Unacademy and Pine Labs.

Effectively, what Sequoia said in June was it no longer trusts Sandeep Kapoor, the founder of Algo Legal, who worked as the firm’s general counsel in India between 2010 and 2019. During his nearly decade-long stint, Kapoor would have been key to due diligence and privy to the inner workings—warts and all—of numerous portfolio companies.

The falling out, which has extended to a lawsuit now (Kapoor has sued Sequoia, social media firm Twitter and a number of media companies that have reported the spat, including HT Media, the publisher of Mint), has exposed a critical faultline in Sequoia’s India journey.

But the genesis of the relationship, its course and eventual descent into acrimony ran parallel with a saga rife with conflicts of interest, one that’s egregious considering Kapoor’s role as the firm’s legal officer, and one that also raises questions about whether Sequoia was sufficiently vigilant against the alleged abuse of power by a top official.

How could the powerful VC firm have not known what was going on under its own nose?

Web of entities

To understand the conflict of interest at the root of Sandeep Kapoor’s Algo Legal, it’s necessary to go into a complex set of transactions dating back to 2010, through which outside firms that benefitted from Sequoia’s business and patronage during Kapoor’s tenure there eventually materially benefitted him.

But before we unspool the network of firms, a quick recap of the allegations and sums involved.

Kapoor fundamentally faces two allegations. One is that Zilingo, a Singapore-based Sequoia portfolio firm under a cloud for financial mismanagement, paid Kapoor and affiliated entities a sum of ₹68 crore between April 2020 and March 2022. This was found during a probe by forensic audit firm Kroll, Sequoia said in a court filing on 18 June.

Second, as Mint reported on 6 June, Kapoor solicited business in an aggressive manner from the founders of a Bangalore-based Sequoia portfolio firm, who reported the matter to the members of its board, including a Sequoia representative. The matter was eventually escalated to Doug Leone, the VC firm’s managing director at the time, setting off alarm bells across the firm.

Several concerns rose to the fore soon after. Given the brazen nature of the reported conversation, how many other founders of Sequoia portfolio firms might similarly have been approached, and could some of them have acceded to such demands for business? Was Kapoor’s knowledge of the inner workings of Sequoia’s portfolio firms becoming bargaining leverage? And were the payments made by Zilingo, which Sequoia in a court filing said had been found unjustified by the investigator Kroll, an outcome of similar negotiations?

In June, Sequoia cautioned portfolio firms against doing business with the following entities: Kapoor’s Algo Legal, Themis, Quant Legal Tech India Pvt. Ltd, One Delta Technology Solutions Pvt. Ltd and One Delta Synergies Singapore Pte.

Make a note of these names as the interplay between them and their role in the saga will move centre-stage soon in this story.

‘Note of Termination’

In January, five months before Sequoia sounded the extraordinary public alarm, it terminated all business with Algo Legal.

On 31 January, a Sequoia executive sent an email to Dhruv Nagarkatti, the then chief operating officer at Algo Legal, according to court filings reviewed by Mint. The subject line read: “Note of termination”.

“I write in relation to the upcoming expiry/renewal cycles of engagements between SCI entities and Algo/Quant Legal, to let you know that the SCI entities wish to terminate all engagements.”

Three weeks after Sequoia received the termination notice, on 23 February, Nagarkatti replied.

“While this decision is unfortunate and shocking, the team is already planning (and supporting) in this transition both at Algo and Quant,” wrote Nagarkatti, according to court filings.

At 11pm on 3 June, Nagarkatti sent his resignation letter to Kapoor, asking to be relieved immediately, after news of Sequoia cautioning its portfolio companies against Algo Legal emerged in the press. He joined a stream of staff exits from Algo Legal in the aftermath of the Sequoia note.

An unusual relationship

If the firm is now faced with an exodus of staff, in August 2019 it was facing the reverse—a sudden influx of staff. That month, a week or so after Kapoor started working at Algo Legal after stepping down at Sequoia as general counsel, 32 out of the 40 lawyers at the Bangalore law firm Themis Associates left and joined Algo Legal, according to multiple people close to the situation at the time.

In terms of staffing, what used to be Themis was now Algo Legal. In partnership practices such as law firms, architecture firms and chartered accounting firms, the people are the product—the legal entity is but an expendable shell to house the practice. If a majority of the architects from firm A leaves to join a new firm called B, it’s effectively a way for firm A to migrate into a new shell.

Themis Associates, the firm that lawyers left to join Kapoor at Algo Legal, owed its success largely to a decision Kapoor made when he was at Sequoia. More than 90% of the VC firm’s legal work would go to one law firm, which acted as kind of a captive unit—Themis Associates.

Kapoor started at Sequoia in June 2010. In July that year, a lawyer by the name Rasmeet Charya co-founded Themis group, which went on to set up three group firms—partnership law firm Themis Associates, Themis Lex India Pvt Ltd and Themis Lexsol Pvt Ltd.

Themis Associates started working with Sequoia Capital India at the beginning of 2011 and its last engagement with the VC firm was in October 2019, according to former employees who spoke on the condition of anonymity.

The contracting of all legal work to one firm—especially one with not much of a track record—should have struck Sequoia management as unusual.

“Why did Sequoia only do business with one tiny legal firm when there are many established corporate law firms?,” asked a person familiar with Themis’ activities in the early years, who spoke on the condition of anonymity.

It was a tight-knit relationship. Themis, with a 40-member team, was the only external law firm hired by Sequoia. More than 90% of all the revenues at Themis came from Sequoia.

Sequoia Capital India’s current general counsel, Siddharth Rao, who worked at Themis Associates between September 2012 and April 2014, decided to retain the services of five law firms instead of one after he succeeded Kapoor in April 2019. Algo Legal was one of the five law firms chosen by Sequoia.

“By now, Sequoia should have at least asked why the majority of partners left Themis and joined Algo. Instead, it (Sequoia) retains Algo Legal as one of the five law firms with which it works,” said another executive familiar with the sequence of events, referring to the conflict of interest here.

It’s akin to a senior executive at a large company meting out preferential treatment to one vendor for nearly a decade only to then step out and start a company into which most of the staff of the vendor immediately migrates. The expectation of an arms-length relationship with vendors is a key tenet in the fiduciary duties expected from a senior officer of a company. In companies with robust corporate governance practices, executives’ relationships with key vendors are governed by strict codes of conduct which expressly prohibit personally benefitting in any way from them.

It doesn’t end there. Charya, the founder of Themis, was also the person who set up Algo Legal, along with another executive who also benefitted from Kapoor’s decisions at Sequoia. We’ll come to the second executive in a bit.

So Kapoor got into business with the founder of the firm that benefitted from his patronage for nearly a decade. The financial relationships between the two are unknown.

Compliance conundrum

This pattern, of Kapoor extending Sequoia patronage to a firm, repeats in another company.

Less than two years after Themis Associates was founded, another entity called One Delta Synergies Pvt Ltd sprang up with its registered office at the same premises as Themis near the old Airport in Bangalore. It offered a compliance management software product called Complius to startups. This company, as well as Themis group companies, also had a common managing director. KTS Anand was the managing director of Themis Associates, Themis Lex India, Themis Lexsol Private and One Delta from April 2015 until mid-2017.

When reached for comment, Anand said he could not remember who the owners of Themis and One Delta were.

Starting sometime in 2017, Sequoia started recommending that its portfolio companies use Complius software, according to two executives with direct knowledge of the matter, who spoke on the condition of anonymity.

“Sequoia started recommending Complius software to its portfolio companies. It was not obligatory but this recommendation was made in documents whenever Sequoia made a new investment or a fresh investment round in a startup,” said a third executive.

Kapoor, who was general counsel at Sequoia at the time and responsible for compliance, would have, fathomably, had a role to play in the recommendation.

“Sequoia in its letter to portfolio companies (the June letter when it cautioned against working with Algo Legal and other entities) said it does not endorse any firm as a preferred service provider. But for years the VC firm used to ask startups to use Complius software,” said a former Sequoia executive.

Around the time Sequoia started recommending its portfolio startups to start using Complius, One Delta Synergies was acquired by a Singapore-headquartered firm owned by a long-time friend of Kapoor.

On 27 March 2017, One Delta Synergies Singapore Pte was set up by John Matheson, a former senior legal executive at Intel Corp, along with another executive.

Kapoor got to know Matheson when he worked at Intel between 2005 and 2010 and before he joined Sequoia.

“Right from his days at Intel, Kapoor has always looked at John as his mentor,” said another executive who spoke on the same conditions as the others. “I remember Sandeep introducing him to folks at Themis when John was in India”.

On 17 May 2017, the Singapore entity One Delta Synergies Pvt Ltd set up an Indian subsidiary named One Delta Technology Solutions Pvt Ltd. Subsequently, the Indian subsidiary acquired One Delta Synergies Private Limited, the maker of Complius that shared office space and a managing director with Themis, for ₹92.72 lakh, according to company filings with the Registrar of Companies in India and Accounting and Corporate Regulatory Authority (ACRA) of Singapore.

Themis’s co-founder Charya, who had moved out of the law firm she founded in July 2016, started as a strategic advisor at One Delta Technology (the Singapore firm’s wholly-owned Indian subsidiary, which had acquired Complius by then) in April 2018 and would work there until July 2019.

Charya is not the only one with linkages to the Themis-Delta network that got business from Sequoia who eventually ended up setting up Algo Legal.

Common directors

In 2014, lawyer and company secretary Unnikrishnan Venugopalan joined as a director at Themis Lexsol Private Ltd, a firm founded under the Themis Group in 2010. Soon after, Venugopalan quit and later emerged as the owner of a single share of One Delta Synergies Pte, the Singapore-headquartered company founded by Matheson in 2017.

Charya, the founder of Themis Group, and Venugopalan, both of whom had linkages to firms that benefitted from Sequoia’s business via Kapoor, teamed up once more when they set up a partnership firm on 1 March 2019.

This law firm was Algo Legal.

When Charya and Venugopalan inked the partnership document, Kapoor was still serving his notice period at Sequoia.

Venugopalan agreed to work at minimum remuneration of ₹50,000 a month at Algo Legal and would get 95% of the share of the profits, while Charya would get the remaining 5%, according to Algo Legal’s filings in a Bengaluru city court.

Less than four months later, on 15 July 2019, Kapoor, whose Sequoia stint was now over, replaces Charya as a partner at Algo Legal. Charya becomes the chief innovation officer at Algo.

The share of profits between the two partners changes: Kapoor will earn 99%, while Venugopalan is to get the remaining 1%. Kapoor stands to get a minimum remuneration of ₹15 lakh a month while Venugopalan would now earn at least ₹3 lakh a month.

About two years later, on 1 June 2021, Charya replaces Venugopalan as the second equity partner at Algo Legal. This time, Kapoor’s minimum remuneration is revised to ₹25 lakh a month, while Charya would earn at least ₹1 lakh a month.

Sharing in Singapore

After Algo Legal, in February 2020, Kapoor set up a Singapore-based company called Quant Legaltech Pte. The second co-founder of Quant Legaltech Pte was Matheson, who, it is important to recall, had acquired (through One Delta Technology) Complius software that Sequoia had been recommending to startups during Kapoor’s tenure there.

Quant Legaltech began to sell Complius, according to a former executive at the company who asked not to be named. It’s unclear what the legal arrangement between Quant Legal and One Delta is but with Matheson as the common shareholder, it’s not hard to imagine that there might have been a rights sharing agreement or even a transfer of ownership that permitted Quant Legal to sell Complius. Yet again, Kapoor emerged as the beneficial owner in a product that gained from the patronage of Sequoia during his tenure, which he fathomably had influence over.

One Delta Synergies Pte and Quant Legaltech Pte Ltd, both of which have Matheson has a common shareholder, share the same office space in Singapore at BS Bendemeer Centre on Bendemeer Road.

“Hiring employees from old firms is a normal practice,” said a former executive at Sequoia. “But if you set up a company with people who were directors or equity owners in companies in the past, and whose companies were the big beneficiaries, it raises questions of potential conflict of interest. (Moreover) did Sequoia undertake any probe to establish if Kapoor or any of his family members had any interest in Themis Group or One Delta when he was at Sequoia?” asked the former Sequoia executive.

A questionnaire sent to Kapoor went unanswered. Sequoia did not offer a comment. Message to Charya and calls to Venugopalan, too, went unanswered. Matheson did not respond to an email requesting comment.

In the end, what emerges is a sobering picture. The hands entrusted with ensuring the legal compliance, due diligence, integrity and governance through more than 1,000 funding transactions at hundreds of Indian startups at India’s most active VC firm, operated with blatant disregard for integrity and governance norms. And a powerful VC firm was either blindsided or chose to shut its eye.

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