Leadership1 publisher3 min readPublished
Khosla calls portfolio company Factory 'second tier' in a fight over a board observer's move to Cognition
Vinod Khosla publicly sided with Cognition against Factory AI, which his firm helped fund in a $200 million round last month. For founders who share investors with a rival, the episode argues for writing observer access and investor conflicts into the contract.
The Board Room · Leadership desk
What happened
- Factory CEO Matan Grinberg said the company was terminating board observer and advisor Chris Degnan for "unethical conduct involving Cognition."
- Degnan said he had resigned before any termination and disputed that he shared Factory information with Cognition.
- Shortly afterward Degnan announced he was joining Cognition as its chief revenue officer.
- Cognition CEO Scott Wu denied that the company had asked employees to gather information about competitors "under-the-table."
- Cognition is valued at $48 billion after raising more than $2 billion in September, while Factory reached a $5 billion valuation last month.
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Why it matters
- contradiction Khosla and his own managing director Keith Rabois took opposite sides in public, so Factory cannot tell from the firm's statements where its investor stands.
- exposure An observer seat puts board-level information with someone a rival can hire, and the company's protection afterward depends on terms set before the seat was granted.
- decision Founders raising from a firm that also backs a direct rival have a concrete reason to negotiate recusal and information limits before closing, at some cost to how fast the round closes.
- precedent A shared investor has now publicly ranked two of its own portfolio companies, so founders backed by firms that hold their rivals cannot assume public neutrality.
The dispute holds two conflicts, and each needs different paperwork. One belongs to the investor: Khosla Ventures owns stakes in both Factory and Cognition [1]. The other belongs to the seat Degnan held at Factory as board observer and advisor [4]. Business Insider's account does not include the terms of that seat or any conflict provisions in Khosla Ventures' investments, and the firm did not respond to the publication's request for comment [14].
Keith Rabois, a managing director at Khosla Ventures, put the observer problem as a question of timing. "To even sit for an interview while having access to board-level information and without resigning is absolutely insane," he wrote on X [8]. Degnan disputes that he shared Factory information with Cognition [5]. Wu denies that Cognition asked staff to gather competitor information "under-the-table" [7]. We do not know yet whether any Factory information reached Cognition. An observer agreement can settle narrower points, such as when an observer must disclose talks with a competitor and what he must return when he leaves. In this case those points are being argued in public, on X [15].
A skeptic would say the practice is routine. Investing in competitors is increasingly standard in Silicon Valley, according to Business Insider [16], and a Wired analysis of PitchBook data in June found roughly 90 investors holding stakes in both OpenAI and Anthropic [13]. I think the scale is the argument for writing terms down. Shared ownership has relied on the investor staying out of public fights between its companies, and that held only until one investor stepped in [2]. Nathan Lands, an angel investor in Factory, said Khosla had "clearly crossed a line" and added that founders should not let venture investors tell them conflicts of interest do not matter [10].
Khosla's ranking has some footing in valuation. On paper Cognition is worth about 9.6 times as much as Factory [1]. The objection is to the timing. Palmer Luckey, the cofounder of Anduril, wrote on X: "If they are struggling second-tier losers, why did you just invest in them a few weeks ago at a multi-billion dollar valuation?" [9]
For a founder closing a round this quarter with a firm that also backs a direct rival, the trade-off is speed against protection. Recusal from disputes between portfolio companies, limits on what partners share across them, and notice and confidentiality terms for observers all take negotiation. A firm with other deals to choose from may not wait for it. Leaving those terms out means relying on goodwill, and in Factory's case Khosla's support turned within weeks of a $200 million round his firm helped fund [3][2]. The cost of that choice comes due in a later quarter, when an observer seated today takes a job with the competitor, as Degnan did [6].
What to watch
- Whether Factory or Degnan makes public the observer agreement or any confidentiality terms that governed his access to board material.
- Whether Factory pursues its claim of "unethical conduct involving Cognition" in court, where evidence on what information moved would have to be produced.
- Whether Khosla Ventures states a firm position that reconciles Khosla's and Rabois's comments, or changes its relationship with Factory.