$12 billion startup caught spying

What's up, everyone? This is Alex, the host of Founders Journal. As you may know, I built Morning Brew from my senior year of college until we sold the business in 2020. And now I'm building a variety of businesses in different spaces and different stages. I'm basically averaging 1 to 2 new businesses per year. And because of that, I have had the opportunity to test a ton of different products and services, ultimately landing on a core software stack that serves as my business operating system whenever I start a new company. I have my go-to banking service. I have my go-to formation service. I have my go-to domain hosting service. But probably the most important of them all is my HR service, Gusto. If you're a longtime Founders Journal listener, you know how much I think about people in the context of business. A business is nothing without its people, which means a platform that helps me manage and take care of my people is invaluable. And that means I've tried every HR platform under the sun, always with the same exact goals in mind. First, I want a product that's intuitive and delightful to use. As a non-HR person, I find the intricacies of payroll, benefits, taxes, compliance, and expenses to be painful. So I just want something that makes my life easier. Second, I want it to be affordable.

I'm a bootstrapper at heart.

I started Morning Brew with $0 and I started StoryArc with $0 as well, which means I don't have infinite dollars to drop on SaaS products. And third, I want a platform that acts as my one-stop shop for all things people. I want it to handle payroll, benefits, hiring, onboarding, and taxes, all while integrating with all of the other tools in my business stack, whether it be QuickBooks, Slack, or Google Workspace. Well, Gusto hit the trifecta, which is why I am a customer and use it for every single one of my businesses. Yes, this is a paid sponsorship by the amazing team at Gusto, but I would sing their praises even if I wasn't being paid to do so. So if you're looking for a platform that takes the pain out of payroll benefits and HR, I highly recommend you check out Gusto. And if you sign up at gusto.com/alex, you will get your first 3 months free. Now onto the episode.

What's up everyone? This is Alex Lieberman and this is Founders Journal. For those who are longtime Founders Journal listeners, welcome back. For those who are new to the show, here's the deal. Founders Journal is my audio diary made public for the world. My goal is to increase your odds of success as an entrepreneur by sharing the stories, lessons, and tactics that I experience as I build my businesses. You can expect the podcast Monday and Wednesday with episodes that are under 20 minutes in length. And if you ever want to get notified when a new episode comes out, make sure to subscribe wherever you listen. Today on the podcast, I'm talking about some big drama in the startup world that feels like a movie waiting to be written. I'll walk you through the timeline as well as my big takeaways for entrepreneurs. Now let's get into it. Parker Conrad, the CEO of Rippling, the HR software platform, tweeted on March 17th that Rippling was suing its competitor Deal for running a corporate espionage scheme and stealing trade secrets from Rippling for months. You literally have an HR company that is accusing another HR company of stealing trade secrets. The irony of this entire story is biblical. Also, poor Parker Conrad gets into the craziest startup drama ever. First, he was ousted from Zenefits for regulatory and compliance issues, which David Sacks then took over. And now he's dealing with competitors having spies infiltrate his company. So here's how Rippling claims that things went down. On June 20th, 2023, Rippling hires the Deal Spy, which from this point on we're going to call DS, as a global payroll compliance manager. DS worked in Ireland and was responsible for hiring payroll specialists and setting up payroll operations in several countries. From being hired until October of 2024, so almost a year and a half of being in the role, DS showed no unusual behavior. Beginning in November of 2024, that's when DS allegedly started the spying operation. He began searching for the keyword deal in Rippling Slack channels 23 times per day and began taking internal info, including sales pipeline data, which included prospective customers and what pricing Rippling was offering them. He also got access to Rippling's competitive Intelligence battle cards, which were 80 playbooks that trained Rippling sales team on how to position their offer against competitors. And obviously, one of these battle cards was for Deal. DS also got access to churn risk data that showed existing customers considering leaving Rippling that Deal could try and poach. One of the ways that DS tried to stay under the radar while spying on Rippling secrets was by previewing Slack channels instead of joining them. So what he'd do is he would search key terms like deal, and he would be able to preview messages in channels that he wasn't in without having to join those channels, which would have alerted employees. So that's the way in which DS was getting access to company information. The next part of the complaint details the actual damage that was caused because of the information that he had stolen. On December 19th, 2024, DS searched deal 33 times. He previewed a Slack channel with sales call transcripts from Rippling customers that were considering switching from Deal. One customer was looking to leave Deal for compliance reasons. Shortly after, this prospect unexpectedly signed with Deal instead, and it is suspected that Deal may have used the stolen information to retain the customer. Next major issue came in January of 2025 when Rippling employees started receiving unsolicited job offers from Deal. At least 17 employees on the payroll team were contacted and 10 received job offers, some without even interviewing. But the way this poaching attempt worked is what raised red flags. Deal's COO initially messaged a Rippling employee on LinkedIn. A few days later, DS accessed Rippling's internal HR system to view this employee's phone number. Later that day, the Deal COO contacted the employee via WhatsApp, which obviously you can only do if you have a phone number, and this pattern was repeated several times. There were 3 other potential spy ops referenced in the legal complaint. One was DS searching and feeding info to Deal about a negative press article that The Information was working on about Deal's potential Russia sanction violations. The second was DS accessing a Slack channel about a customer prospect that was choosing between Deal and Rippling. The channel contained concerns about Deal. It included Rippling sales pitch strategy and the date of an upcoming sales call. DS downloaded the files from the channel, and the next day, this customer prospect canceled their meeting with Rippling and picked Deal instead. And finally, on February 21st, according to the lawsuit, DS pulled information on 728 new companies that were requesting demos, 282 in-depth sales notes, and 26 deals in negotiation with customers who were considering switching from Deal to Rippling. This whole saga is insane as it is, but where things got even crazier is on March 11th when Rippling set a trap, also known as a honeypot, to confirm Deal's involvement in the espionage. This honeypot is so freaking badass, and whoever set it up at Rippling deserves a fat raise. Here is the high level on how the honeypot worked. Rippling's general counsel sent a legal letter to 3 Deal executives mentioning a fake Slack channel called D Defectors that had supposed reputationally damaging information about Deal. Prior to general counsel sending this letter, the channel did not exist. Within hours of the letter being sent, DS searched for the D Defectors channel and accessed it. This proved that Deal leadership was directly feeding information to DS because there would have been no other way to know about the fake Slack channel. To pull this forward to today, after the honeypot, Rippling got a court order in Ireland, which is where DS resides, to preserve any incriminating evidence on his phone. On March 14th, a court-appointed solicitor served the spy with the court order. DS then refused to hand over his phone, locked himself in a bathroom, and said, quote, I am willing to take that risk, when being warned that legal action could be taken against him if he didn't comply. DS then fled the building. On March 17th, Rippling officially sued Deal for corporate espionage, trade secret theft, RICO violations, unfair competition, and tortious interference. So that's what's going on. Absolutely wild stuff right now. For quick context, I spoke to Bill Reed, who's a corporate lawyer who has deep experience in startup lawsuits like this, and he shared his quick analysis with me. The first thing he shared: Rippling hired Alex Spiro, who is Elon Musk's personal lawyer, to lead this case. It signals that not only are they willing to take this lawsuit the distance, but they are willing to spend a ton of money to increase their odds of winning. According to Bill, this legal bill will be in the eight-figure range if the case goes to the end. Number two: Bill said that trade secret cases are generally difficult to win and receive damages on because you need to prove two things. First, you need to. Prove the information that was stolen is confidential and constitutes a trade secret. Second, and the harder piece, you need to prove causation, meaning you need to connect the stolen information to actual losses that you suffered as a business. Now, how do I think about this story in the context of my or your entrepreneurial journey? First, I've been thinking about what gets a company to a place mentally that they are running an illegal covert mission against a competitor. Obviously, they must feel threatened. But what I'm curious about is, is this just a lapse in values and morals, or does it also signal the health of Deal's business? If you look at Deal's financials and valuation, at least optically, things feel good. The business grew from $100 million in ARR in 2022 to $800 million in 2024 and hit profitability, with its most recent valuation hitting $12 billion after raising a round anchored by General Catalyst. Rippling is slightly smaller revenue-wise and isn't yet profitable. My initial assumption was that Deal must be struggling, which is why they feel such desperation to steal customers from Rippling. But given the limited information on the financial position of the businesses, is it possible that they're just ethically bankrupt and will do anything to win? Maybe. And that leads into my second thought around this entire soap opera. It is kind of crazy that Deal has picked to do something so involved and illegal when there are far easier, non-illegal ways to get competitor intelligence. One of the big trade secrets that DS stole from Rippling was the step-by-step sales funnel that Rippling uses to turn leads into customers. This includes sales meeting scripts, customer pricing, and internal notes on how to objection handle and position Rippling against Deal and other competitors that a prospect is considering. Now, while I generally think it is a waste of time to dedicate internal resources to figure out this information versus just focusing on your product and your customer, there are so many ways that you can acquire this information legally now without needing to do corporate espionage. Deal could simply have gotten a friendly to fill out a lead form and schedule a demo call with Rippling. As long as they didn't have to sign an NDA, which most likely they don't have to since that would hurt lead conversion, that friendly would be able to share everything from sales materials to pricing, sales scripts to positioning against Deal and email cadence. Another thing that the spy pulled for Deal were phone numbers of employees that Deal's COO could reach out to and try to poach. But now with data enrichment tools like Clay or Apollo, You can also just easily get access to employees' personal information legally without having to break into your company's HR system. So overall, it just feels incredibly reckless to me, and the upside isn't even close to what the downside is. The next big learning from this lawsuit actually has nothing to do with the lawsuit. It obviously sucks for Rippling, but the benefit of a 49-page legal complaint is there's some really valuable insight on how a high-functioning, multibillion-dollar company operates. It's kind of like the private version of looking at a public company's 10-K and getting valuable insights on how the business is run in the management's discussion section of the document. A good chunk of this complaint breaks down exactly how Rippling runs its sales and marketing motion to identify leads and ultimately turn those leads into customers. I'm going to cover the high level here quickly, but I also created a ChatGPT instance that allows you to ask questions about the 49-page complaint and dig further into how Rippling runs its business, or just the lawsuit more broadly if you're curious. Step 1 of the sales and marketing motion is spending millions of dollars each year on LinkedIn ads, Google AdSense, and other marketing channels to generate Rippling sales leads, which are defined as companies that are open to hearing about Rippling's products. Rippling considers this the most difficult and expensive part of the revenue generation cycle. For them, a single outbound lead is the work product of hours of outbound phone calls made by a Rippling SDR. Once step 1 is complete, a prospect enters the sales pipeline. Step 2, a Rippling SDR assigns the prospect to a Rippling salesperson who does pre-call research about the prospective customer. Step 3, the salesperson works with the prospective customer to identify the prospect's business challenges, learn why the prospect is interested in learning more about Rippling, and discusses how Rippling can solve those business challenges. This is where those sales scripts and battle cards are really valuable for Rippling, and were really valuable if Deal did in fact get their hands on them. Step 4, depending on the feedback from the customer, the salesperson may further tailor Rippling's solution to the customer's current issues and conduct additional demonstrations to validate those solutions. And step 5, the salesperson and the prospect align on pricing and contract terms. Obviously, this flow is basic, but if you want to dig deeper, I really encourage you to go through ChatGPT and ask specific questions about the entire legal complaint. So that is the deal with Deal and Rippling, one of the wildest startup scandals I've heard about in a long, long time. What happened and what you can learn from it as an entrepreneur. That is it for today's Founder's Journal. Shoot me an email to alex@storyarb.com. That is alex@storyarb.com. Say hi, hola, what's up, or whatever else takes you less than 10 seconds, and I will get the conversation going. I love getting to know my listeners so that I can make this show as valuable as humanly possible. Thanks again for listening to Founders Journal, and I'll catch you next episode.