LexShares Case #678: When a Giant Copied the Startup
A trade secrets case generated 1.76x in 15 months — via a plaintiff buyout
The Numbers
| Invested | $150,000 |
| Returned | $263,269 |
| Net Profit | $113,269 |
| MOIC | 1.76x |
| IRR | 58% |
| Holding Period | 456 days |
The Case
Cosmetic injections are a $4+ billion global market. The problem: poorly trained providers were causing blindness, drooping eyelids, and disfigured faces. A former pharmaceutical sales rep saw this firsthand and left to build a solution.
She created a sophisticated training mannequin with 3D tracking, augmented reality overlays, and real-time feedback. Physicians could practice injections without using patients as guinea pigs. The startup secured seven patents.
Then a Fortune 500 company came knocking.
A major cosmetics conglomerate approached the startup. Over three years, they:
- Signed exclusivity agreements, tying up the startup for 9 months
- Extracted extensive confidential information under the guise of “due diligence”
- Repeatedly promised a deal was imminent — but never delivered a term sheet
- Had executives sign NDAs assigning any resulting IP back to the startup
Then they launched their own version.
The defendant released a nearly identical mannequin — down to the same beauty marks and scrub hat. They also launched a competing VR training system. The startup sued for theft of trade secrets, patent infringement, and breach of contract.
Timeline
| Date | Event |
|---|---|
| Oct 2018 | Complaint filed; LexShares offering posted |
| Nov 5, 2018 | My investment — $150,000 |
| May 2019 | Amended complaint filed |
| Jul 2019 | Case transferred; motions to dismiss filed |
| Nov 2019 | Oral argument on motions to dismiss |
| Dec 2019 | One defendant dismissed; primary defendants remain |
| Jan 28, 2020 | Case referred to mediation |
| Jan 29, 2020 | Plaintiff buyout — full accrued value |
| Feb 3, 2020 | Received $263,269 |
Why It Worked
Compelling visual evidence. The defendant’s mannequin was nearly identical to the plaintiff’s — same beauty marks, same scrub hat. This wasn’t subtle IP theft; it was blatant copying that any jury could understand.
Paper trail of bad faith. The defendant signed NDAs, exclusivity agreements, and IP assignment clauses. Three years of documented promises to do a deal — while secretly building a competitor — created a strong breach of contract case.
Deep-pocket defendant. The parent company was a Fortune 500 conglomerate with tens of billions in revenue. They could pay a substantial judgment if the case went to trial.
Deal closed in 3 hours. The $2.25M funding round filled immediately. When sophisticated litigation finance investors move that fast, it signals strong case fundamentals.
Return Breakdown
| Item | Amount |
|---|---|
| Buyout Amount | $4,687,000 |
| Fund Expenses | ($9,798) |
| Net to Fund | $4,677,202 |
| My Share (6.67%) | $311,813 |
| Carried Interest (30%) | ($48,544) |
| My Net Return | $263,269 |
Gross MOIC: 2.1x | Net MOIC: 1.76x | Net IRR: 58%
The Unusual Exit: Plaintiff Buyout
This case didn’t settle in the traditional sense. The plaintiff bought out the litigation financing at its fully accrued value.
Why would a plaintiff do this? Likely because:
- The case was gaining momentum (survived motions to dismiss, heading to mediation)
- The plaintiff expected a larger settlement or verdict than the buyout price implied
- Taking back full ownership avoided sharing future proceeds with investors
Risk mitigation bonus: Only 55% of my capital was ever at risk. LexShares held $1M in reserve pending litigation milestones. This structure protected investors if the case collapsed early.
Epilogue: The Case They Kept Fighting
After buying out LexShares in January 2020, the plaintiff continued the lawsuit on their own. They lost.
In October 2023, the court granted summary judgment to the defendant. The ruling found that the defendant’s competing product didn’t actually infringe the plaintiff’s patents or misappropriate trade secrets. The plaintiff also couldn’t prove damages from lost business opportunities — including a potential $100M deal with another major player that fell through.
The case the plaintiff paid $4.7M to keep? It went to zero.
The lesson: The plaintiff buyout that felt like “leaving money on the table” actually protected investors from total loss. We captured 1.76x while the underlying case ultimately failed.
What I Learned
Visual evidence wins cases. When a jury can see two nearly identical products side by side — same details, same design elements — you don’t need complex expert testimony to prove copying.
Plaintiff buyouts are a valid exit. Not all returns come from settlements or verdicts. If the plaintiff believes the case is worth more than the financing cost, they may buy out investors to capture future upside.
Buyouts can be the best outcome. This case proved it. The plaintiff was confident enough to pay $4.7M to buy out investors — then lost on summary judgment three years later. The “early exit” turned out to be the only exit.
Structured deals reduce risk. The $1M reserve meant only 55% of my capital was deployed initially. If the case failed early, I would have recovered nearly half my investment regardless.
Fast fills signal quality. A $2.25M round closing in 3 hours suggests institutional investors saw strong fundamentals. Speed of funding can be a due diligence signal.
This was my 12th LexShares investment and my largest single position at the time. The case had everything — blatant copying, a paper trail of broken promises, and a Fortune 500 defendant. The plaintiff buyout felt like an early exit at the time. In hindsight, it was the perfect exit.
