New York City-based Blink Health, a well-funded digital health company that makes an app and online tool to help consumers find low prices on medications, is the target of a $30 million lawsuit filed by one of its early investors, Michael Karsch, who is claiming the company and its founders are guilty of a number of illegal actions including fraud, concealment, breach of contract, unjust enrichment, fraudulent misrepresentation and violation of securities laws.
The lawsuit alleges Blink Health founders Geoffrey and Matthew Chaiken purposely misled Karsch, a hedge fund manager, when he made a $1 million investment in the company in 2014. Karsch, who the lawsuit notes was the company’s “first significant seven figure outside venture capital investor,” claims he was promised by the Chaiken brothers his investment would be converted to equity ownership stake at no less than 5 percent. With Blink’s most recent funding of $90 million, the company’s current valuation is at $600 million, which would out the equity stake at $30 million.
But, the lawsuit alleges, Karsch was deceived into believing he was making a venture capital bridge financing that would convert to equity, when in actuality the Chaikens took it as $1 million loan which "they merely re-paid even though the agreements are devoid of any cash re-payment terms, or in an alternative scenario, the venture flops and Karsch gets zero for his $1 million unsecured debt."
“In actuality, the Chaikens used Karsch’s seed capital to build upon the valuation of their venture, only to then re-sell Karsch’s equity behind his back to other venture capitalists who were not willing to take the risks that Karsch did,” the lawsuit claims.
Along the way, the lawsuit alleges, the Chaikens misrepresented the makeup and intentions of other investors and board members in order to entice Karsch. They did not inform Karsch he was the only sole investor in the Schedule 1 notes, for starters (and allegedly furnished a list of investors who they knew would not actually be investing at the same time), and that the other seed investors were “offered back-door deals for the issuance of Series A shares in subsequent rounds of financing behind Karsch’s back.” Those include Joe Lonsdale’s firm 8VC, which is now Blink Health’s largest investor.
But a statement from Blink Health implies Karsch has regret, not justifiably illegal treatment by the company, guiding the lawsuit.
“Michael Karsch repeatedly demanded that his loan to the company be repaid with interest, and the company had the contractual right to do so,” a Blink Health spokesperson wrote to MobiHealthNews in an email. “After years of watching Blink’s success, including our latest round of financing, he now regrets his decision to ask for his money back over two years ago. This is an attempt to shake down an innovative company that is creating value for its customers, employees and shareholders. The allegations in the complaint are demonstrably false, and we will defend ourselves vigorously against these baseless claims in the court of law.”
This is the second lawsuit for Blink Health, which was launched a little over a year ago. In November, the company’s former CFO Eugene Kakaulin alleged Blink Health had fired him in retaliation of his alleged whistleblower behavior when he alerted them to securities violations. The case was eventually settled.