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Kleiner investors blindsided by discrimination suit

May 22, 2012: 4:54 PM ET

Kleiner Perkins blew its response to lawsuit.

FORTUNE -- "You're kidding. Send me a copy of the complaint."

That was the 10-word email I received earlier today from a limited partner with Kleiner Perkins Caufield & Byers, after I asked for his reaction to the VC firm being sued by one of its partners for gender discrimination and retaliation related to sexual harassment.

In other words, Kleiner Perkins didn't tell its own investors about the complaint, despite having been served with it 12 days ago. This includes institutions that made commitments to the firm's new early-stage fund after the suit was filed.

Incredible.

It seems that the firm decided to look at this purely from a legal standpoint of "what do we need to disclose?" This is in stark contrast to the more pertinent question, which is "What should we disclose?"

The former question worries about things like SEC disclosures, and determines that the suit is not material to Kleiner Perkins because any awarded damages would almost certainly represent less than 10% of the firm's assets under management. Moreover, plaintiff Ellen Pao remains a full-time Kleiner Perkins employee, so there was no reason to warn prospective investors of personnel changes.

But even if Kleiner Perkins is within the letter of the law, it acted far outside the spirit of the general partner-limited partner relationship.

Limited partners invest in teams, and should have been made aware that not all was copacetic at Good Ship Perkins-pop. First, the lawsuit must be creating serious tension within the firm's Menlo Park headquarters. If not, then the firm is staffed by robots.

Second, Pao claims in the suit that she was not alone in alleging some sort of gender-related improprieties. Instead, she claims that another junior female partner made similar complaints to superiors, as did three executive assistants. And Kleiner Perkins itself virtually validates this claim, by acknowledging that it conducted an investigation (which it says turned up no wrongdoing). Even if the discrimination claims were invalid -- and I'm not qualified to take a position -- there clearly is dysfunction and distrust running through the Kleiner Perkins hallways.

Third, it will be limited partners who indirectly foot the bill if Kleiner Perkins is found liable for gender discrimination. Yes, Pao sued the firm's management company rather than a specific fund. But where do you think the management company's money originates?

Finally, this suit is almost certainly going to damage the firm's reputation with certain entrepreneurs (particularly female ones). Even if Kleiner Perkins is able to mitigate certain specifics via its legal response -- or quickly reach an out-of-court settlement -- the word in Silicon Valley today is that the firm treats some of its female partners as inferiors (or worse). The suit also suggests that Kleiner has, at least once, put a partner on a portfolio company board more for that partner's own ego than for the company's best interests.

The best entrepreneurs have their choice of investor, with their decision often coming down to who they feel most comfortable working with. If all else is equal -- and it often is, in terms of price -- Kleiner Perkins is now at a marked disadvantage in certain entrepreneurial eyes. And that's something that its limited partners deserved to know, because it could impact the future performance of their investment.

Instead, its investors learned about the suit from folks like me. It was an arrogant decision, perhaps prompted by years of easy fundraising and compliant investors (don't rock the boat, or else someone else might get your allocation).

Again, I don't know who's telling the truth. Or what Kleiner Perkins will say in its legal defense. But I do know that the firm blew its response, and did wrong by its investors. Even if it acted by the letter of the law.

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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