January 2013
Ross Ulbricht was not the only Bitcoin entrepreneur who had gotten himself into something bigger than he could have ever imagined. In January Charlie Shrem’s BitInstant was taking in over $250,000 in commissions each month on record transaction volumes.
But the growth obscured strains that were threatening to tear Charlie’s company apart. The fights with David Azar that had started almost as soon as BitInstant took David’s investment had grown worse and usually ended in a shouting match or a slammed-down phone. In December, Charlie and Erik Voorhees had looked to David’s investment partners, the Winklevoss twins, to help foster a more productive relationship.
The brothers had been relatively hands-off after putting in their $550,000. But they had grown concerned from afar. The e-mail chains between Charlie and David signaled that the twins were not dealing with the cool, calculating entrepreneurs of their Harvard alumni circles. They saw that Charlie’s initially attractive energy came with a distressing inability to concentrate on one task. Between constant travel and media appearances, Charlie was relishing, perhaps too much, the elevated social status that Bitcoin was giving him. When Charlie did talk business, he often seemed more intent on selling the idea of Bitcoin than of his own company.
There was another more immediate problem that the twins hadn’t bargained for. Earlier in the year, Erik and a friend he had brought into BitInstant, Ira Miller, had started an independent company called Satoshi Ltd. with a number of subsidiaries. One was a technology called Coinapult that BitInstant used to send Bitcoins via e-mail. Another, Paysius, allowed merchants to accept virtual currencies.
The Winklevoss twins asked how Erik and Ira could run those businesses at the same time that they were working full-time for BitInstant. Erik and Ira proposed solving the issue by merging Satoshi Ltd. with BitInstant in exchange for a higher equity stake in BitInstant—all that David and the twins had to do was give up 1.5 percent of their own stake in the company.
Around the New Year, Erik wrote up a lengthy strategy document listing how a merger could be handled, allowing the company to go after new markets like mobile payments in Africa and poker sites in need of payment networks around the world. The document reflected the team’s big ambitions. Erik and Ira didn’t want BitInstant to be just a place to buy Bitcoins. They wanted to offer all the services that banks did, in a new, cheaper, and more democratic way.
But the Winklevoss twins and David Azar were thinking in more immediate and practical terms. Glancing at the pages of long-term strategy, they blanched at the value that Erik and Ira assigned to Satoshi Ltd.
The twins wrote increasingly peeved e-mails to Charlie, pushing him to resolve the situation without giving in to Erik and Ira. The conversations between the twins and Charlie began to end with the same sort of recriminations that had been so common between Charlie and David weeks earlier. Charlie and his team appeared to the twins like inexperienced entrepreneurs who didn’t know how to put business interests above social and political allegiances. The Winklevoss twins, meanwhile, confirmed the fears of the BitInstant team regarding what happened when people who didn’t care about the big principles underlying Bitcoin tried to make money in the space.
Charlie and Erik reached out to Roger Ver, Charlie’s first investor, hoping he might be able to resolve things from Tokyo. Their idea was that Roger could buy out the stake that the twins and David had taken in BitInstant.
“My one hope was that perhaps the Winklevii would be far more helpful and productive, but a long insult-filled call between Cameron and Charlie today proved that my hope was naive,” Erik wrote to Roger in early January.
Charlie and Erik wrote a lengthy, acerbic letter to the twins, pleading for a resolution that would allow both sides to go their separate ways.
“If we’re all being honest, then it’s clear we neither need nor want your money, and you neither need nor want to be risking your money with a team that you believe to be childish and 2/3rds expendable,” the letter said. “Let’s be gentlemen and move on. If you are so interested in building a Bitcoin business, and you are so skillful at navigating these waters, then I welcome you to go and do it.”
The twins considered selling to Roger. But they also believed BitInstant was a good idea that could work under the right management. In January BitInstant had its best month ever, processing almost $5 million in transactions. The price of a Bitcoin, meanwhile, had risen from $13 at the beginning of the month to around $18 at its end. Some of this was due to the twins themselves. They had asked Charlie to continue buying them coins with the goal of owning 1 percent of all the Bitcoins in the world, or some $2 million worth at the time. This ambition underscored their commitment to sticking it out with Bitcoin.
The tension came to a breaking point at the end of January. Patrick Murck, the general counsel at the Bitcoin Foundation, flew in from Seattle to see if he could help Charlie and Erik make their argument to the twins. In a meeting in the BitInstant conference room, Charlie, Erik, and Patrick, sitting on one side of the table, offered to provide Maguire Ventures, the entity put together by David and the twins, with a full refund for the money they had put in. The twins responded angrily that they would accept no less than five times what they had put in. They also said that the technology being offered by Erik’s company, Satoshi Ltd., was worth little. Erik and Ira responded by walking out of the room as the twins “continued with emotional insults and absurdities,” Erik wrote in an e-mail after the meeting.
The next day Erik and Ira sent in their resignations and moved into the offices of Larry Lenihan and FirstMark Capital; Lenihan had always been more interested in investing in Erik than in Charlie.
Charlie, Roger, and Erik were in constant conversation, contemplating whether Charlie should join Erik, and if the whole group should sue the Winklevoss twins. They ultimately decided not to sue—mindful of the way the twins had responded when Mark Zuckerberg left them out of Facebook.
Charlie decided he couldn’t leave the company he created, but when he went to work the next day, he did not go in peace. He demanded that Maguire Ventures deliver the final installment of the investment it had agreed to make the previous fall:
“You guys are screwing up my company, and Ira and Erik left because of it. Give me my money or I will wire it all back to you today.”
Roger, who still had a 15 percent stake in the company, continued pushing the twins to sell their stake in the company or let Roger sell his:
You guys obviously don’t understand Bitcoin, or BitInstant.
You are destroying your equity and mine, and I don’t want to be any part of it.
If you disagree, then make me an offer for my 15% of BitInstant.
Name your price.
I will gladly sell it to you for less than the valuation you bought in at.
There was some confirmation of Roger’s assessment a few days after Erik left, when Charlie got a letter from the latest bank to decide that it would no longer service BitInstant’s accounts. It was unclear if BitInstant would have anywhere to put all the money customers were sending it. As the value of Bitcoin continued to shoot up, the value of Charlie’s idea seemed to be falling apart before his eyes.