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In 2021, Genius Sports proudly announced its acquisition of Spirable, a maker of dynamic ads for social media that allow, for instance, live betting odds to be updated inside display ads on Facebook. Less than three years later, Genius and executives from the startup are caught up in a fight over earn-outs, the incentive payments increasingly being used in the tech world—and increasingly sparking lawsuits.
At the time of the purchase, Genius was ascendant: Its stock traded near its all-time highs and the company was excited at how its expanding stable of tech, including Spirable, would allow the company to compete for league and sportsbook business. “When you take all of the assets of Genius Sports, including Second Spectrum and Spirable, along with the gaming business, we’ll have a great opportunity to really push the envelope in terms of technology and integration,” Steve Bornstein, head of Genius’ North American business, said in late 2021.
Spirable was a coveted target: The business counted Coca-Cola, DraftKings, Flutter Entertainment, Heineken and Procter & Gamble among its blue-chip client list. Genius paid $37.5 million cash for Spirable, founded in 2014 in Cork, Ireland, by brothers Dave and Ger O’Meara. The premium Genius paid for the company attests to the excitement around its technology: Spirable had revenue of £2.8 million with a net loss of £2.1 million in 2021, according to a regulatory filing, about $3.8 million and $2.8 million, respectively. Genius also agreed to $17.5 million in earn-outs for both hitting technical targets and if it retained executives after the merger, according to documents filed in a U.K. lawsuit between the O’Mearas and their VC investors and Genius Sports.
Use of such sweeteners in buying tech firms has been rising sharply in the venture capital world, according to a paper written by six Jones Day attorneys earlier this year. In 2022, earn-outs were used in some 21% of acquisitions of non-life-science firms, up from 13% of transactions five years earlier, according to the law firm.
“The use of earn-out provisions, which buyers and sellers often use to bridge differing views of value, is on the rise,” the Jones Day paper stated. “So have lawsuits between buyers and sellers. Sometimes the parties dispute whether an earn-out provision’s performance target was satisfied at all … [or that the buyer] intentionally slowed progress to keep the target out of reach.”
The dispute between Genius and Spirable appears to contain a bit of both.
By November 2022, about a year after the acquisition closed, Spirable executives argue in the lawsuit that Genius was already seeking to undermine the earn-outs as a consequence of Genius stock losing about 75% of its value, which sparked a mandate to slash cost and save cash. Genius executives, they contend, indicated earlier that year some targets were satisfied, but then changed course by saying they weren’t met, and refused Spirable the resources to meet them. Spirable also contends Genius fired just enough executives to get below the percentage needed to trigger executive retention earn-outs, moves which also deprived Spirable of talent that would help it meet other earn-out targets.
“The Defendant has taken every opportunity to attempt to reduce further the total consideration payable to the Sellers by any means possible,” Spirable executives stated in the complaint to the U.K. courts. “While the Defendant may consider that it struck a bad bargain due to the economic circumstances that followed the acquisition, that does not allow them to avoid their contractual obligations.”
David O’Meara declined to comment in an email and said the other plaintiffs—his brother, and VC firms Frontline Ventures and Smedvig Capital—also declined to comment.
Genius didn’t respond to numerous requests for comment.
In its response filed with the court, Genius says its initial $37.5 million was money poorly spent.
“The acquisition was not a success. The Defendant was unimpressed with the output it received from Photospire,” Genius said, referring to Spirable by its original, legal name. “Individuals at Photospire were slow to grasp the technology employed by [Genius Sports], and made slow progress on their various projects. Simultaneously, they placed greater and greater demands upon [Genius’] resourcing, and displayed an inappropriate fixation on achieving the various Earn-Outs.”
Genius said in the filing that the Spirable deal included five earn-outs, two of which were revenue-based and were missed and not in dispute. Based on filings by both parties, the specific meaning of the language covering the timing and requirements of the three earn-outs at issue are hotly disputed.
That‘s not unusual, according to Jones Day. “Experience teaches that the particular language chosen has enormous ramifications for both parties should litigation ensue. … This change of control over the business, as well as the competing incentives between buyer and seller, create an environment ripe for disputes.”
For now, the dispute between Genius and the Spirable co-founders and their VC backers goes on, according to court filings. Arbitration between the parties failed this spring, and discovery is now underway, with witness statements expected to come and eventually, a trial.