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The cofounder of a food packaging startup acquired by SoftBank-backed Zume is suing, alleging he was misled about Zume's financial health and never got millions in promised payouts

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  • John Lilley, a cofounder of Pivot Packaging, filed a lawsuit against Zume, the troubled robotics startup backed by SoftBank, on April 16.
  • The suit, filed in San Francisco Superior Court, alleges that Zume committed fraud by misrepresenting its financials during the acquisition process and didn't pay Pivot Packaging founders according to the original deal.
  • Zume acquired Pivot Packaging in February 2019 for roughly $20.5 million, and has since shuttered every other part of the business besides the compostable packaging division as Zume cofounder and CEO Alex Garden failed to land significant funding deals to keep the business alive.
  • Multiple sources told Business Insider that Garden had lobbied to keep its packaging facility in Camarillo, California, open as an essential business as legislators began ordering statewide closures in March. It was not granted essential status, but two sources have said that Garden is trying to retrofit the plant to produce masks amid the nationwide shortage of personal protective equipment.
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The cofounder of a compostable packaging company is suing Zume, the troubled, SoftBank-backed food startup, alleging that Zume misrepresented its financial health when it acquired his company and that he never received millions in payments related to the deal.
The lawsuit, filed in San Francisco Superior Court on April 16, is the latest predicament for Zume and represents a potentially significant setback to its turnaround plans following major layoffs earlier this year. Zume has laid off hundreds of workers and abandoned plans to develop pizza-making robots and high-tech delivery trucks, shifting its focus to producing compostable food packaging instead,
Zume's plan to focus on food packaging is based on its 2019 acquisition of Pivot Packaging, a Chino, California-based company that Zume paid $20.5 million to buy.
According to the lawsuit, filed by Pivot Packaging cofounder John Lilley, Zume overstated its financial resources, and was unable to deliver the promised assistance needed to meet the objectives for the business and for Lilley's performance-based payouts.
"Within weeks of Closing, it became clear that Zume did not have access to hundreds of millions [of dollars] in cash to readily deploy towards the Milestones, as represented by Alex Garden, which significantly delayed all capital projects for Pivot and the achievement of associated Milestones," the lawsuit alleges, referring to Zume CEO Alex Garden.
If successful, the lawsuit could also bar Zume from using the machinery that creates the compostable packaging that its business ambitions are not entirely tied to. According to the lawsuit, the patent for the machines used to produce the compostable packaging was among the payments that never materialized.
Zume did not respond to Business Insider's request for comment.

Another Pivot gone wrong

According to the lawsuit, Garden began courting Lilley and the Pivot Packaging team in November 2018 over dinner at his home in Tiburon. The group began hashing out terms of the acquisition that evening, the suit alleges, and began negotiations shortly after.
Ultimately, the team was absorbed into Zume on February 25, 2019. Two days later, Garden reprimanded Lilley in an email exchange for not implementing changes fast enough.
"As the man says, s--- rolls down hill [sic]," Garden wrote in the email to Lilley, which was included in the lawsuit. "If we whiff on March, the board will have my ass and then ... I need your commitment that we will have no more dropped balls. The team of glass eating ninjas on our team... they are animals. they [sic] will help get this done but need you to hold up your end of the bargain. No more excuses, OK?"
The lawsuit alleges that Garden and the Zume team misrepresented the startup's financial position during the initial negotiations, claiming that Garden repeatedly assured the Pivot team that Zume's $2.2 billion valuation was enough to provide material assistance for the team's development, including installing machines necessary to completely production milestones outlined in the agreement.
Once Lilley became privy to the company's financials, it became clear that the business was in dire straits, the complaint alleges. The Zume's board of directors had not cleared Garden to spend more than $10 million to acquire Pivot Packaging, according to the lawsuit. Lilley alleges that Garden knew of the capital constraints ahead of time and misled the Pivot team of the capital commitments during negotiations.
It's not clear how the deal closed given the allegations that Garden — who sources say often acted with minimal oversight — contravened the conditions of Zume's board of directors.
Garden is not personally named in the lawsuit. Garden did not respond to Business Insider's request for comment.

Pivot to PPE

Multiple sources told Business Insider that Garden is now personally overseeing the production facility in Camarillo, California, a small industrial center in Southern California. The sources said that Garden unsuccessfully lobbied the state of California to consider the manufacturing business essential and continue production while requiring office workers in Mountain View, Calif. and elsewhere to work remotely. The request was ultimately denied.
Garden is now exploring whether he can ramp up production of face masks using the machinery in the Camarillo facility, sources said. The pivot comes amid a nationwide shortage of personal protective equipment for healthcare workers as the coronavirus pandemic rages on.
But Lilley's lawsuit could derail Garden's attempt if it's successful. The lawsuit requests that the court nullify the acquisition and return ownership rights over the proprietary materials under consideration — namely, the machinery patents that Pivot owned prior to the acquisition — back to him.

Rough markets ahead

All this comes as Zume employees were asked to sign non-disclosure agreements on Friday following layoffs that affected roughly 200 employees on April 15, the day before the suit was filed. Multiple sources told Business Insider that they were told they were required to sign the agreements in order to receive one month's severance and four months' worth of healthcare benefits.
The remaining 100 employees represent roughly 14% of the startup's total workforce at its peak in late 2019, and are all now working on developing the production arm of the business as Garden scrambles to get the Camarillo facility up and running for PPE production. However, many of the remaining employees were based in Mountain View, California, several hours away from the facility in Southern California. It is not clear whether the facility is fully retrofitted to meet the strict requirements for producing PPE, or whether Zume employees are working to implement those protections as of press time.
Before leaving on Friday, multiple laid-off employees told Business Insider that Zume executives had offered them the option of purchasing their computer equipment, with a new MacBook Pro going for a little over $400, according to documents reviewed by Business Insider.
Do you work at Zume or another SoftBank-backed startup and want to share your story? Contact this reporter via encrypted messaging app Signal at +1 (331) 625-2555 using a nonwork phone, email at mhernbroth@businessinsider.com, or Twitter DM at @megan_hernbroth.
SEE ALSO: Leaked memo: Troubled SoftBank-backed robotics startup Zume just conducted a 2nd round of sweeping layoffs after funding fell through
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