AR Startup Skully Facing Lawsuit Alleging Fraud

UPDATE: Since we first published this story, Skully has been hit with a second lawsuit. This time from Flextronics, the manufacturer making the high-tech motorcycle helmets. It says Skully owes them more than $1 million. Read more about that story here.

Skully, a San Francisco startup that aimed to create an augmented reality motorcycle helmet with 180-degree vision, is facing a lawsuit alleging poor employee practices and “fraudulent” use of funds on last-minute plane tickets and strip clubs.

What Skully Promised

Skully’s pitch was easy to understand. Its AR-1 helmet put a small heads-up display in the rider’s field of view, showing navigation and a live feed from a rear-facing camera, so a rider could see behind without turning their head. For motorcyclists, blind spots are a real safety problem, and the idea drew a lot of attention.

That attention turned into money. As the figures below show, Skully raised millions from crowdfunding backers and millions more from venture investors including Intel. But building a safety-certified helmet with cameras, a display and software inside it proved far harder than the prototype suggested, and deliveries kept slipping.

Former Skully executive assistant Isabelle Faithhauer, who undertook bookkeeping duties for Skully, said in the lawsuit that the two co-founders “intermingled personal funds with corporate funds and used the corporation as a tool to pay their personal expenses.”

These expenses included:

• Personal groceries and restaurant bills
• Lamborghini rental
• Trips to Bermuda and then to Hawaii on 24 hours’ notice
• $2,000 on a Déjà Vu strip club

The allegations stand out, even in a culture that celebrates zip lines over pools as a channel for coding creativity. If they’re true, Skully would be an egregious example of startup culture going awry after raising huge interest and funding; another being the rise and sudden decline of Zenefits.

The lawsuit also claims that Faithhauer was not paid due overtime, that one of the founders called her autistic son a “dog,” and that she was fired after taking one week’s approved vacation.

Skully received $2.45 million in crowdfunding from IndieGogo and $11.5 million in Series A funding from Intel and Walden Riverwood Ventures.

Skully now plans to file for Chapter 7 bankruptcy, according to CNN Money. Co-founder Marcus Weller said: “We plan to vigorously defend ourselves against these claims. We strongly believe we will be vindicated in the end.”

A full copy of the lawsuit is available on Scribd.com.

What Chapter 7 Means

Chapter 7 is the form of U.S. bankruptcy used when a company is shutting down rather than reorganizing. A trustee sells off what’s left, such as equipment, inventory and intellectual property, and the money goes to creditors in a set order. Crowdfunding backers who paid for a product that never arrived are usually near the back of that line, which is why most of them never see their money again.

The Lawsuit Was Dropped

The fraud allegations at the centre of this story were never tested in court. In March 2018, the Mercury News reported that the lawsuit had been dropped. Faithauer, as the paper spelled her name, said she had worked at Skully from May 2014 to December 2015, and now credited Marcus and Mitchell Weller with developing “a great concept for the business,” calling it “a good place to work.”

She said she’d been “upset” after the company let her go. “There were many facts, documents, and information that could lead a reasonable jury to conclude that my claims were totally without merit,” she said. “My attorney concurred in this assessment, which is one of the reasons I dismissed my claims against the Wellers.” Marcus Weller said he and his brother had denied the claims, and called the lawsuit a “painful process.”

That outcome is worth keeping in mind when reading the list of alleged expenses above. They were claims in a complaint, and the person who made them later withdrew them.

Skully’s Second Life

The helmet itself got another chance. In September 2017, TechCrunch reported that cousins Ivan and Rafael Contreras had bought the assets of the bankrupt Skully, Inc. and moved the business to Atlanta as a new company, Skully Technologies. In a letter to the old company’s email list, the new owners said they had “no formal obligation” to the original customers, but recognized that “hundreds of SKULLY helmet enthusiasts around the world” had never received a helmet. “We are determined to make this right,” the letter said.

The relaunched helmet, renamed the Fenix AR, was priced at US$1,899. webBikeWorld reported in September 2018 that the first one had been handed over to a customer, with Ivan Contreras joining by video from Madrid.

Lessons for Hardware Startups

Skully’s collapse is a reminder that hardware is unforgiving. A crowdfunding campaign can prove there’s demand, but it doesn’t prove a team can manufacture a complex, safety-critical product on time and on budget. Every delay burns cash, and the Flextronics suit shows how quickly unpaid suppliers can become another problem.

For backers, the lesson is that pre-ordering through crowdfunding is closer to investing in a project than to buying a product. For founders, it’s that clear financial controls matter from day one. Allegations can be withdrawn, as they were here, but well-kept books are what make them quick to answer in the first place.