TV advertising startup Spot Runner really is running on fumes. According to a lawsuit filed by one its irate investors, advertising giant WPP, Spot Runner has “expended all but approximately $20 million of its investor capital, while losing money at the rate of $35-$45 million a year.” The company has raised $100 million since 2006, and at one point employed more than 500 people before a string of layoffs cut that number down significantly.

The lawsuit states that the company had a loss of $45 million in fiscal 2008, on revenues of only $9 million. And in fiscal 2007, it lost $35 million on revenues of $5 million.

And here’s the zinger. While Spot Runner was losing all that money, its founders and two early investors (Index Ventures and Battery Ventures) sold shares worth $54 million. CEO and founder Nick Grouf took the lion’s share of those proceeds, netting $26.7 million in five transactions between Feb/March, 2006 and March, 2008. Battery and Index each sold $11.7 million worth of shares (nearly doubling their initial investments of $6 million each). While co-founder David Waxman walked away with only $3.6 million and investor Bob Pittman $365,000 worth of shares. The main complaint of the lawsuit states:

Rather than working to make Spot Runner a successful and profitable venture, they perpetuated a “pump-and dump” scheme in which they aggressively promoted the Company to new investors (often by promoting that WPP was an investor in and supporter of the Company) and then sold new investors large quantities of their own secondary shares at ever-increasing valuations.

WPP alleges that they did this “surreptitiously” and without disclosing it to other investors. As one of Spot Runner’s largest investors, WPP put a total of $11.8 million into the company. But it is hard to feel sorry for WPP. Basically, it argues in the suit that it should have been able to sell its shares to greater fools as well. It is suing because it wasn’t told about the secondary share sales and wasn’t invited to participate until the very last one, and even then only after it complained (WPP was allowed to sell $900,000 worth of stock at that time, while the defendants made off with $17.8 million).

What is not clear from the suit is how much of that $54 million in proceeds, if any, came from fundraising rounds for the company itself versus private secondary sales. Spot Runner won’t comment on any of these numbers other than to say “the complaint contains many inaccuracies.”

With the IPO window closed for many startups, secondary private sales of stock are becoming more popular, especially for founders. That practice is fine if the company succeeds. Nobody is going to care if the founders took some money off the table along the way if everyone gets rich in the process. It is when things don’t go so well that investors start to complain and the lawsuits start flying.

Regardless of the merits of the case, it is not a good sign when one of the largest investors of a startup decides that the best shot it has at ever getting any of its money back is in court instead of in the market. WPP is seeking $13.2 million in damages. And it is not the only one who is angry. Both former and existing employees also feel shafted (read some of the 135 comments on my post about the last round of layoffs, which somehow became an unofficial forum for employees to vent). They never got a chance to sell any of their shares.

Full complaint embedded below, via PaidContent.

WPP Sues Spot Runner WPP Sues Spot Runner ContentNext Ad agency WPP sues TV ad firm Spot Runner in U.S. District Court. Filed April 9.

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