Bankman-Fried was 'very resistant' to calls for board seats, Paradigm founder says

Paradigm co-founder Matt Huang (Michael M. Santiago/Getty Images)
FTX co-founder Sam Bankman-Fried was "very resistant" to investors' requests for board seats before its Series B funding, Matt Huang, co-founder and managing partner of crypto firm Paradigm, testified Thursday in Manhattan federal court.

"He told us he didn't think investors had much to add," Huang said when questioned by the defense counsel for Bankman-Fried, who is facing federal fraud charges.

The exchange with Bankman-Fried occurred before Paradigm's decision to back FTX's blockbuster $900 million Series B, according to Huang. Paradigm invested $125 million in the round, which closed in July 2021.

Bankman-Fried's wide latitude to resist investors' calls for a more traditional governance structure, and his ability to secure funding despite his disparaging comments to Paradigm, showcase the extent to which highly desirable startups could set the terms when raising from VCs. Fellow investors in FTX's Series B included Sequoia, Thoma Bravo and SoftBank.

Huang said Paradigm's chief concerns about investing in FTX at the time of its Series B were this lack of a formal corporate governance structure and its relationship with Alameda Research, a cryptocurrency trading firm that was also founded by Bankman-Fried.

Paradigm investors were concerned that Bankman-Fried's role at Alameda would be a distraction from his role at FTX. They also feared "reputational damage" to the company if Alameda, a very active user on the FTX platform, was being given preferential treatment on the exchange, Huang said. Prosecutors allege Bankman-Fried lied when assuring investors that Alameda was not receiving preferential treatment in their crypto trading.

Paradigm wrote down its $278 million stake in FTX and FTX US to zero in November 2022 when the company declared bankruptcy.

The VC firm faced turbulent times in the months that followed: Eight employees, including two investment partners, left the firm between October 2022 and February 2023, The Information reported. Another one of its prominent portfolio companies, BlockFi, declared bankruptcy shortly after FTX. Paradigm had participated in BlockFi's $350 million Series D in 2021.

Prosecutors asked Huang whether certain alleged actions by FTX would have affected Paradigm's decision to invest, if they had come to light during due diligence. Those included allowing Alameda Research to spend customer funds and omitting certain expenses from FTX's balance sheets to create the appearance of higher profits.

Huang was a partner at Sequoia before co-founding Paradigm with Fred Ehrsam, who co-founded Coinbase. Paradigm held a stake in the crypto exchange worth more than $800 million at the time of Coinbase's IPO in 2021.

This article originally appeared on PitchBook News