June 14 (Bloomberg) -- Groupon Inc. Vice Chairman Ted Leonsis’ venture firm is an investor in rival LivingSocial and has ties to its board, a relationship that could pose a conflict, according to corporate-governance experts.
Leonsis has been a director at daily-deal site Groupon since June 2009 and vice chairman since April 2011. He’s also a partner at Revolution Growth, Steve Case’s investing fund, which owns stock in LivingSocial. Leonsis has no personal financial stake in that company, according to Revolution.
While venture firms often have competing startups in their portfolios, Leonsis’ situation involves two dominant companies in a market that may generate $3.9 billion in the U.S. alone by 2015. His relationships also will face more scrutiny now that Groupon has filed to go public. Corporate-governance experts say Groupon should have disclosed Leonsis’ ties to Revolution in its IPO prospectus -- something it failed to do.
“It puts him in a cross-loyalty position,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “He has to be loyal to his employer, and he has to be loyal to the board on which he serves.”
Groupon, founded in 2008 by Andrew Mason, announced plans earlier this month to raise $750 million in an IPO. The Chicago- based company pioneered the deal-of-the-day market, which offers discounts of as much as 90 percent at restaurants, sporting events and hotels. Groupon’s first-quarter revenue jumped more than 14-fold to $644.7 million.
U.S. daily-deal sales will grow more than fourfold by 2015, up from $873 million in 2010, according to research firm BIA/Kelsey in Chantilly, Virginia. LivingSocial Chief Executive Officer Tim O’Shaughnessy said in December that Groupon and his company control more than 90 percent of the market.
Julie Mossler, a Groupon spokeswoman, declined to comment, as did Maire Griffin, a spokeswoman for Washington, D.C.-based LivingSocial. Leonsis also declined to comment, said Allyson Burns, a spokeswoman for Revolution.
Leonsis has gained renown as an Internet entrepreneur, sports-team owner and film producer. He runs Monumental Sports & Entertainment LLC, which owns the National Basketball Association’s Washington Wizards and the National Hockey League’s Washington Capitals. He also produced the films “Nanking,” “Kicking It” and “A Fighting Chance.”
As a Groupon board member, Leonsis owns 924,385 Class A shares, according to the IPO filing. He’s identified as chairman and CEO of Monumental Sports, former vice chairman of America Online, and director at American Express Co., Rosetta Stone Ltd. and Nutrisystem Inc. He’s also on the board of several closely held Internet and technology companies, according to the filing. Revolution isn’t mentioned.
“The key thing is revealing potential conflicts and then people can wrestle with them and decide if they’re real,” said Alfred Osborne, senior associate dean at the Anderson School of Management at the University of California, Los Angeles. “Disclosure is the great antiseptic.”
Leonsis and Case were top executives at AOL during the 1990s. Case, 52, formed Washington-based Revolution LLC in 2005 to invest in fast-growing companies and dedicated $200 million to a unit called Revolution Growth, where he’s made six investments, including a 2008 bet on LivingSocial. Tige Savage, a managing director at Revolution Ventures, which is also part of Revolution LLC, is on LivingSocial’s board.
Leonsis and Case made several investments together, before Leonsis joined Revolution Growth in March of this year. The LivingSocial investment happened before he arrived. Leonsis doesn’t serve as an adviser to the company and has no financial interest, Revolution’s Burns said.
“The Revolution Growth team is highly sensitive to the competitive nature of both businesses and take great care to ensure that confidential and competitive information is not compromised,” Burns said in an e-mail.
Apple Inc. and Google Inc. coped with board conflicts in 2009, after the companies emerged as competitors in the smartphone operating system market. Google’s chairman and former CEO, Eric Schmidt, resigned from Apple’s board in August of that year. Genentech Inc. Chairman Art Levinson, who also was on both boards, resigned from Google’s in October 2009.
Leonsis should be able to avoid that problem through proper disclosure and ensuring that he and Case keep their respective financial and strategic matters confidential, said Charley Moore, founder of Rocket Lawyer Inc., a San Francisco-based startup that provides Web-based legal services.
Such conflicts are hard to avoid in technology, he said.
“If Groupon didn’t have the flexibility to have a board member in a competitive position now or in the future, it would restrict their ability to attract talent and expertise within their market,” Moore said. “We’d have a very difficult time populating boards with the smartest, most capable people.”
--With assistance by Brian Womack in San Francisco. Editors: Nick Turner, Jillian Ward
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