Former Executive Sues for Stake in Beats Electronics, Object of Apple's Desire

A week after reports on its negotiations were first published, Apple's pending $3.2 billion deal for Beats Electronics has still not been completed. But Beats is already finding itself defending a lawsuit against a former executive over what could be a lucrative stake in the company.

David Hyman, the founder of Mog, a subscription music service that Beats bought in 2012 and turned into its own app, Beats Music, filed a $20 million suit against Beats this week, saying that he was cheated out of stock in the company because he was fired unfairly, before his shares could vest.

Mog was founded in 2005 as a network of music blogs. Four years later, it became a subscription service along the lines of Rhapsody or Spotify, selling streaming access to millions of songs for up to $10 a month. When Beats Electronics, then best known for its line of headphones, bought Mog's music service for about $14 million, in a deal announced in July 2012, it hired Hyman to continue as chief executive. (Mog's blog advertising network was sold separately for about $10 million to Townsquare Media Group.)

(Also see: Apple Reportedly Eyes Beats in What Would Be Its Biggest Acquisition Ever)

According to the suit, which was filed at Los Angeles Superior Court on Wednesday, and first reported by Courthouse News, Hyman was offered at least 2.5 percent of the "currently outstanding equity interests" in Beats' music service, which was then known under the provisional name Daisy. Those shares were scheduled to vest gradually after one year, but Hyman did not last that long. According to the suit, Hyman had the discretion to fire most employees under him at the new service but found himself dismissed in late 2012 after he tried to fire a marketing executive whom some of the higher-ups at Beats were "fond" of.

A Beats spokeswoman declined to comment. Neither Beats nor Apple has spoken publicly about their pending deal, although their negotiations have been confirmed by people briefed on the talks, who spoke anonymously because of the private nature of the discussions.

Although Apple appears willing to spend more than $3 billion for Beats, it is unclear how much of that price is attributable to the Beats Music subscription service, a separately owned affiliate of Beats Electronics, the headphone company.

While Beats Electronics is said to have more than $1 billion annual revenue, the music service, which opened in January, is still small; music executives estimate its current subscriber roll at around 200,000. Spotify, by comparison, is estimated to have around 10 million subscribers, and in its last investment round, late last year, it was reportedly valued at more than $4 billion.

© 2014 New York Times News Service