Investor due diligence: how the wrong turn at the fork made all the difference

The Dutch startup ConnectBike had developed, together with the Taiwanese bike-titan Giant, a heavy-duty e-bike, in use by well-known logos like Just Eat Takeaway, Getir and both Domino’s and New York Pizza. By the end of 2023, they had forty employees and €4.5 million in revenue, but just six months later the whole group filed for bankruptcy, with the founders having to pay back €1.8 million to their investor Sustainable Future Holding (“SFH”). The reason: a structural defect in the bicycle forks, known within the company, was absent from the data room.

I. From spoonfed issues…

SFH had been an investor in ConnectBike since 2021, and had put a couple million in the company. They had agreed on receiving a monthly dashboard, covering KPIs on active bikes, clients, and revenue, in addition to quarterly financial reporting, and an advisory board seat. Shortly after the 2022 launch of the newly developed e-bike, ConnectBike were already complaining to Giant about multiple incidents where the bicycle fork had broken without apparent cause, but at the same structural failure point, across multiple clients. That email conversation did not appear in any conversation with SFH or in a dashboard sent to them under the existing reporting obligation. Management held to the story that the incidents were the result of normal wear and tear, focused on fixing instead of disclosing it, so as to keep the relationships with their customers, vendor, and investors amicable.

But the business was not growing as expected. ConnectBike’s all-in lease service and the consequently high repair and replacement costs, stemming from both the known issues as well as a high theft rate, burdened operational costs directly. The post-Covid decline of their customers’ business, including the full withdrawal out of the Netherlands by Getir, slowed down topline expansion in parallel. As a result, more cash was needed, and in July 2023 SFH signed an additional investment agreement to cover that gap. 

The agreement included boilerplate warranties, to be made by the founders, including that no acts or circumstances had occurred that could reasonably be expected to have a material negative effect, and that no information existed that could reasonably influence an investor's decision. In due diligence, questions about contract defaults and material undisclosed information were answered “NVT” (i.e. “N/A”). However, just eight days before signing the investment agreement, Just Eat Takeaway had reported four consecutive incidents of the same fork failure in Switzerland, putting their customer relationship under serious pressure, and raising a real possibility of ConnectBike’s biggest customer churning. 

II. …to boardroom pitchforks

The new money did not bring the necessary improvements, and governance-wise things were shaken up: one of the cofounders had stepped away from the statutory director seat, while the other one had borrowed money from SFH to pay off a personal debt he had incurred to ConnectBike. In February 2024, the shareholders stepped in by having SFH take over the (now single) director role to focus on cost reduction and profitability. Unsurprisingly, the structural fork issues waylaid the new leadership within weeks, with more complaints by Just Eat Takeaway, insurance claims, and a serious injury at Domino’s Pizza rearing their heads.

SFH took its responsibility as director seriously, and pressed Giant for a formal safety assessment. When Giant could not confirm positively, an “unsafe product“-notification was sent to the Dutch product safety authorities, as well as a warning letter to all clients to please suspend all use temporarily pending further information. Domino's Pizza and Just Eat Takeaway took to payment suspension and termination immediately, and some other customers reversed their direct debits putting the company in dire financial straits. In June, the company filed for bankruptcy.

SFH sued the founders for their full investment, but the court found that ConnectBike would have collapsed in July 2023 without the new funding, so the original funds would have been lost to a bankruptcy filing either way, resulting in SFH being awarded reparations for their July 2023 additional investment only, totaling €1.8 million. On top of that, one of the founders had had no assets in their personal holding at the point they provided the guarantee, a fact that is supported by the earlier bailout of his personal loan to the company by SFH, so he was held liable for the whole sum personally as well.

III. Learnings

The information scarcity between the management team and SFH, before things went south, is not uncommon: management is often selective in what to disclose in their recurring reporting in order not to bog down the assembly meetings and retain the appropriate amount of control over the company. This is first and foremost a function of trust between shareholders and the directors, as the assembly has the prerogative to hire and fire management when needed. For years, monthly dashboards and quarterly financials did their reporting job to the shareholders of ConnectBike. In keeping the fork issue out of the standard reporting channels, management had not acted contrary to what was agreed: neither party had a structural reason to surface what the other didn't bring up. Because of the limited shareholder information rights, proving the founders’ liability towards the investors would have been significantly more difficult if the company had gone down in July 2023 instead of later, as their relationship was back then still governed by parties upholding their hands-off approach to governance.

The due diligence process for the 2023 funding had been executed on a similar information basis: a management team reporting to investors with whom they had an existing principal-agent relationship at a distance. The “NVT” responses to the due diligence questions were consistent with these limited shareholder information rights, as those queries were not part of their usuals. However, the structural distinction between the standard investor reporting and the due diligence disclosure guarantee was missed by both sides: they had not updated their perception of the relationship to what was now true legally, and that resulted in SFH taking answers for granted where a customer or vendor reference call, being standard due diligence actions, would have saved them, and the founder omitting crucial information that would later be considered concealment and a breach of contract. Both were making a motivated choice based on fiduciary trust, which had a place in their shareholder-director relationship, but not in investor due diligence.

When SFH took on a statutory director role, their relationship was updated again. The carefully curated picture of the company that management had painted was jolted forward into reality, because now SFH was legally responsible for what had been and still was happening operationally as well. Their decision to warn clients and escalate to the authorities, ending in the company’s bankruptcy and the resulting claim against the founders, was understandable considering their position and the size of the suddenly cleared information gap, but was also the result of them bringing trust into a funding decision where it did not belong. The court sided with them against the founders, who had argued that SFH had caused the bankruptcy by acting too rashly. The difference between what the founders and SFH had considered more important was highlighted: disclosing a known safety risk to safeguard its clients, preventing liability down the line, or preventing the inevitable demise of the company resulting from that disclosure.

As such, the warranty structure of the due diligence process had protected the investor as it was structured to do. The judge, however, did not allow that safety net to extend into the prior existing shareholder relationship, because of the existing financial difficulties at the time of their latest investment. Even though I agree with that outcome, I consider the different relationship types SFH went through to be the actual decisive factor, not the financial situation at investment: an existing shareholder has a different right to information than someone about to put cash in, even if it is the same investor, which right was even put down in writing as a guarantee. If SFH could have demonstrated the issues already existed and were being kept from them during due diligence of their initial investment, that decision might have been different. 

This case highlights that founder and investor reference points of their relationship do not always fully reflect the changing reality, and mixing up the different hats worn between existing shareholder, new investor, and company director has real consequences, not only for their capability of receiving information, but also for what they were protecting against, and finally for the results of their decisions: if they had only known not to dig their grave with their own fork.

Source: https://uitspraken.rechtspraak.nl/details?id=ECLI:NL:RBAMS:2026:4722

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