Zocdoc leadership move to dismiss co-founder's lawsuit, defend company's financial health

Zocdoc executives claim the company grew its revenue by 36% year over year in the first two months of 2020, and has returned to year-over-year growth despite COVID-19’s disruption. (Zocdoc)

A legal tussle between Zocdoc and its co-founder and former CEO Cyrus Massoumi is heating up as current leadership have shot back at his allegations of fraud.

Massoumi filed a lawsuit in September in New York Supreme Court against Zocdoc executives for allegedly staging a "fraudulent coup" to oust him five years ago. In the lawsuit, he painted a picture of a deceptive power struggle going on behind the scenes at the digital health company.

Three Zocdoc executives—CEO Oliver Kharraz, board member Nick Ganju and Chief Business Officer Netta Samroengraja—responded by filing a motion to dismiss Wednesday. They claimed Massoumi's complaint should be litigated in Delaware rather than New York and that his claims of fraud have no standing.

In November 2015, the board of directors for Zocdoc voted to terminate Massoumi from his position as Zocdoc’s CEO for "repeated unprofessional conduct and extremely poor business judgment," according to the executives' legal filing.

In a Nov. 2015 letter to Massoumi from Zocdoc executives, which was viewed by Fierce Healthcare, executives said they supported the Board's decision to appoint Kharraz as CEO. "Many of us and many of our top team members would have left the company in short order had you stayed on as CEO," the letter stated.

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At the time, Massoumi left without raising a legal objection, "given the overwhelming support for his removal, he had no choice," the legal filing stated.

In his lawsuit, Massoumi—who served as CEO from 2007 to 2015—alleges that in 2015, Kharraz, Ganju and Samroengraja orchestrated "an elaborate, multi-step scheme" to remove him from his roles at Zocdoc and steal control of the company from him.

The complaint alleges that his firing was improper and demands that the Court reinstate him as Zocdoc’s CEO and void “all actions taken by the Zocdoc board since at least December 18, 2015.” According to the complaint, Massoumi said he was not aware of the plans to remove him, otherwise he would have exercised his options to buy Zocdoc shares and thereby acquire majority control of the company.

According to the executives' motion to dismiss, Massoumi's firing was not improper because Zocdoc's bylaws do not require advance notice of agenda items for regularly scheduled board meetings. Massoumi also did not own enough stock options to block the vote, according to the legal filing.

Zocdoc outlines financial turnaround

Massoumi also alleges "Zocdoc is now a shadow of the company it once was, mired in a steep financial decline, failing to raise further capital, and taking on debt with crippling interest rates, according to his lawsuit.

Kharraz, Ganju and Samroengraja shot back at these claims in a blog post published Thursday detailing Zocdoc's financial turnaround in the past five years.

"It is also important that we set the record straight on the lawsuit’s misleading and inaccurate description of the company’s history and current performance," the executives wrote in the blog post.

In 2015, Zocdoc generated $71 million in annual revenue. However, it also burned through $43 million in cash that year. Revenue had flat-lined, growing by just 1% month over month by October 2015, according to Zocdoc executives.

RELATED: Zocdoc co-founder sues executives for staging 'fraudulent coup' to oust him 5 years ago

The company also had a higher turnover rate among its sales team, and its subscription model was no longer a winning business strategy.

"The business was losing money and dependent on fundraising, all while growth stagnated as the result of ineffective strategy and execution," the executives wrote.

In 2018 and 2019, Zocdoc transitioned its pricing model from a flat subscription fee to one that charges providers for each new patient booking that Zocdoc’s platform facilitates.That change drew backlash from some doctors. 

Zocdoc said it was a fundamental change to its business model and a "challenging transformation that very few late-stage companies attempt and even fewer successfully navigate."

Due to this change, the company became EBITDA profitable in September 2019 and had its first EBITDA profitable quarter in the fourth quarter of 2019, according to executives.

The company took a financial hit early during the COVID-19 pandemic, with in-person bookings declining anywhere from 50% to 90%. In response to the spike in demand for virtual care, Zocdoc has added telehealth appointments to its platform and launched a Zocdoc Video Service. 

RELATED: Zocdoc defends new pricing model as necessary for expansion, some New York doctors criticize changes

The company now has more than 10,000 participating healthcare providers across 100 specialties offering nearly one million available video visit appointments on its platform. Executives said that Zocdoc’s telehealth provider network is on par with or larger than that of Amwell or Teladoc.

Zocdoc returned to profitability in July 2020 and continues to operate profitably today, the executives said. 

The company grew its revenue by 36% year-over-year in the first two months of 2020, and has returned to year-over-year growth despite COVID-19’s disruption.

"Looking ahead to 2021, the company is on track to accelerate our pre-pandemic growth trajectory. Because of this success, we are no longer dependent on outside capital to grow," the executives wrote.