Startup accelerator sues Coinbase CEO Brian Armstrong, saying he poached startup’s key knowledge and staff

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Coinbase (NASDAQ: COIN) CEO Brian Armstrong promised to invest in blockchain token project Knowledgr in order to “steal” its work for his own ResearchHub project, according to a new lawsuit. Startup accelerator MouseBelt, which had previously invested in Knowledgr, filed the suit in California’s Supreme Court last week.

MouseBelt is suing Armstrong, Coinbase, and ResearchHub for fraud, intentional and negligent interference in contractural relations for economic advantage, and “unjust enrichment” at its expense.

It highlights an ethics problem common in the cryptocurrency sector and wider technology industries: major players with large bank balances use investment promises to gain access to information held by much smaller startups they see as potentially lucrative or as rivals. They then either call off the deal or poach key staff from the smaller project to benefit their own.  

MouseBelt alleges Armstrong went behind its back in contacting Knowledgr founder Patrick Joyce privately, indicating a US$740,000 to $1.5 million investment from Coinbase Ventures. He later changed this to a 1% personal investment in Knowledgr for just $50,000 but added the incentive that Coinbase could list Knowledgr’s token on its platform. 

The problem is, MouseBelt’s accelerator had already signed a contract and invested in Knowledgr itself. The startup promised to open and crowdsource scientific research and could have been the first project of its kind to launch.

MouseBelt suggested Joyce was both naive in his business dealings and desperate for any investment, as he was facing a large student debt that was stopping him from completing a medical degree. Joyce then gave Armstrong and Coinbase “free access to everything Knowledgr possessed,” including confidential information. 

The suit alleges Armstrong used Joyce’s “financial anxiety and greed” as leverage, offering to pay off Joyce’s student debts as part of a deal to take a controlling interest in Knowledgr and effectively shutting out MouseLabs. 

The two had initially tried to keep the arrangement hidden, but Joyce later admitted to MouseLabs what had happened. He rejected Armstrong’s offer due to MouseLab’s arrangement, but the accelerator said he had already transferred a substantial amount of key information to Armstrong and made commits to ResearchHub’s GitHub repository. He also accepted an offer to later take a position at ResearchHub while still serving as Knowledgr’s founder. 

In January 2020, Joyce finally admitted all this to MouseLabs and joined ResearchHub, cutting off all communication with MouseLabs. Without its founder and competitive advantage as a first mover in its space, Knowledgr effectively became worthless to MouseLabs. Joyce’s official title is now ResearchHub’s Chief Scientific Officer, a title the suit says he formally accepted while still working on the Knowledgr project.

MouseLabs is requesting a full jury trial, and the first case management conference is set for May 18, 2022.

Race to build an incentive platform for open research

Knowledgr and its predecessor Co-Lab LLC intended to be a platform for crowdsourcing academic research. It promoted collaboration over competition, using tokenized incentives for publishers and scientists instead of the traditional “paywall” approach on most research repositories. This would hopefully lead to greater transparency and diversity of thought in scientific research by providing more access to funding for less well-known researchers.

Armstrong’s ResearchHub, according to the suit, took a very similar approach. Before the project was officially announced or even had a name, Armstrong had floated the concept on a public forum to seek opinions. Joyce had contacted Armstrong to inform him of Knowledgr’s work, at which point the two began corresponding regularly. 

Armstrong used his power and influence deliberately and in a covert manner to gain knowledge and kill off a potential rival to his own project, the suit alleges.

Having Armstrong and/or Coinbase as an investor would be a big foot in the door to gaining an asset listing on Coinbase’s exchange. A major exchange listing is also seen as a golden ticket to riches in a world where most blockchain projects languish on minor platforms and struggle to gain the attention of active traders.

In the face of an offer from these prominent players, it’s difficult for struggling startup founders to resist, and they may disregard or be unaware of contractual obligations to earlier investors. While MouseLab’s allegations have yet to be tested in court, the story is familiar in the business world, particularly in crypto, where business ethics often takes a back seat.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—a from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple, 
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.