Skype, Founders Settlement in the Works

The ongoing legal scuffle between Skype, a division of eBay (s EBAY), and its founders, Janus Friis and Niklas Zennstrom, may soon see a resolution, according to someone familiar with the situation. The parties are in discussions to resolve the various issues. The talks are described to be at a sensitive stage and can break down without any conclusion. If the founders and the company can come to an agreement, Skype will be able continue to use JoltID’s technology to power Skype and not disrupt the service that is currently used by hundreds of millions consumers.

The Skype Timeline
Sept. 11, 2005: eBay buys Skype for $4.1 billion.
Oct. 1, 2007: Zennstrom quits Skype.
June 4, 2007: Mike Volpi joins Joost as CEO
Nov. 19, 2007: Skype may be for sale, with Google as a likely buyer.
Feb. 25, 2008: Josh Silverman takes over as CEO of Skype.
April 1, 2009: JoltID sues eBay, Skype in UK.
April 6, 2008: Joost cuts jobs, shifts focus to web-based video delivery to compete better with Hulu.
April 13, 2009: Skype founders rumored to be talking to private equity groups for Skype buyout.
May 7, 2009: ebay CEO thinks $2 billion is low price for Skype.
June 30, 2009: Joost starts to unwind.
July 6, 2009: Mike Volpi joins Index Ventures
Sept. 1, 2009: 65 percent of Skype to be sold for $2 billion.
Sept. 16, 2009: Skype founders sue eBay.
Sept. 18, 2009: Joost sues Volpi, Index.
Oct. 14, 2009: Skype founders file injunction against Volpi, Index Ventures.

I have some further information on the talks, but I am currently trying to pin down the details, as well as waiting to hear back from Skype and other parties involved in the deal, including the Skype co-founders.  It was pretty evident from the get-go that Skype didn’t have any other option but to come to some sort of an understanding with the founders.

About two months ago, eBay announced that it was spinning out Skype, and the deal valued the Internet telephony division at $2.75 billion. Skype founders had been trying to find a way to buy back their startup, but instead, eBay decided to sell 65 percent of the company for nearly $2 billion to a group of investors led by Silver Lake Partners, Canada Pension Plan, Index Ventures and Andreessen Horowitz. (Marc Andreessen declined to comment on the deal.)

Skype’s co-founders sued eBay, Skype, and pending investors for using Global Index, a core technology held by their company, JoltID. eBay, at the time it purchased Skype, didn’t buy the JoltID technology and instead opted for a long-term contract. The end of that contract has led to the current legal mess of suits and countersuits between eBay, new investors and Skype founders.

One of the key people in this deal was Mike Volpi, once regarded as the heir apparent at Cisco Systems (s CSCO). In his column today, San Jose Mercury News’ Chris O’Brien has more details about Volpi’s current spate of legal troubles. Volpi helped put together a deal that essentially made Skype founders sue him and the venture firm he joined in July of 2009, Index Ventures. If you read through the various emails exchanged between Volpi and Danny Rimer, a principal at Index Ventures, you can understand why the Skype founders are angry, especially since he was the CEO of Joost, a failed video startup founded by Skype’s  co-founders. Volpi was sued by Joost because, he “learned how to modify JoltID’s proprietary software to run on the web without the aid of a peer-to-peer software when he was transitioning Joost from a peer-to-peer service to a web-based Hulu clone.”

In October 2009, the two co-founders filed an injunction that made it virtually impossible for Skype to continue its spin-out. Stacey summed it up nicely:

In addition to preventing Volpi and Index from using confidential information in general, the injunction specifically asks that the judge keep Volpi and Index from using such information to operate Skype or engage in any strategic planning for the service; from talking about that info with the other members attempting to purchase Skype from eBay; from soliciting employees of Joost and Joltid with offers to join Skype; from communicating with current or former employees of Joost or Joltid regarding the companies’ confidential information; and from further participating in the Skype acquisition or assuming any position with Skype until a final adjudication of the merits of the case.

What that means is that in order for Skype to exist it had two options: Do a deal with the Skype founders, or switch to SIP-based architecture. The latter may be an expensive and difficult option. Skype faces various challenges if it tries to switch to using a SIP-based architecture, Ian Bell outlined in his post earlier today. Jeff Bonforte, former CEO of Gizmo5, disagrees and believes that challenges are not unsurmountable, as he outlines in a comment to Ian’s post.

I guess Skype’s buyers and current management might be going with option No. 1. I will be back with more details soon.