Founder of China’s Momo hit with misconduct accusations ahead of IPO

VC-backed Momo has set terms to raise up to $266.8 million in its IPO and is scheduled to begin trading in New York on Thursday. Earlier this month, it agreed to sell shares to Alibaba Group and 58.com through a separate private placement.

On Wednesday, NetEase posted a statement that lays out three accusations of wrongdoing. First, Tang started working on Momo when he was still employed at NetEase in July 2011. He used his position to obtain various information and technology resources from NetEase that were used in the creation of Momo. Tang is also accused of breaching a non-compete clause in his contract with NetEase.

Secondly, NetEase alleges that Tang used his position as former editor-in-chief at NetEase's news service to funnel millions of renminbi in economic benefits to his wife's advertising firm - Sidu Beijing Advertising. NetEase regards this behavior as non-governmental corruption, which has damaged the company's reputation.

Thirdly, NetEase said Tang was taken into Chinese police custody for 10 days but did not truthfully inform the company of what had happened. NetEase is now investigating the case and it will reserve the right to pursue further legal action.

Tang worked at NetEase from December 2003 to September 2011. Four other co-founders of Momo also came from the company. Tang's wife, now director and the president of Momo's US operations, is also a former NetEase employee.

Momo responded to the accusations by amending the risk factor in its IPO prospectus. It revealed that Tang received a letter from a Chinese law firm on behalf of NetEase in November. Tang said the claims lack merit and he intends to defend himself.

Momo's venture capital and private equity shareholders are Matrix Partners, Sequoia Capital and Yunfeng Capital, none of which will make a partial exit through the offering.

Momo posted revenues of $13.9 million in the first half of 2014, up from $3.1 million in the final six months of 2013, with membership subscription fees accounting for 63% of the takings. The company has yet to turn a profit. Losses amounted to $3.8 million, $9.3 million and $8.3 million in 2012, 2013 and the first half of 2014, respectively.

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• Topics
• Greater China
• Exits
• Technology
• Consumer
• China
• Exit
• USA
• TMT
• Matrix Partners
• Sequoia Capital
• Yunfeng Capital