The Sad Story Behind Yahoo's Latest Startup Acquisition: Ptch

Business Insider has since learned from multiple sources that Yahoo paid $6.5 million for Ptch.

We've also learned that this wasn't really an acqu-hire - only three Ptch employees joined Yahoo, sources confirmed. Most importantly, it was a raw deal for most of Ptch's early employees who at one time had an equity stake but got nothing in the end.

Yahoo declined comment when contacted by Business Insider. But we've spoken to three sources close to the company. Here's what we know:

DWA Investments, the company that created the Ptch app, was a wholly owned spin-out of DreamWorks Animation founded in late 2011. DreamWorks invested $10 million in DWI Investments, one source told us. At the time DWA Investments was considered a breakout moment for DreamWorks, a company best known for doing animated movies, its first attempt at launching consumer tech startups.

Ptch is a mobile video app that let users remix their videos with effects and music. It was released about a year ago. When it launched it was hailed as an "Instagram for videos" by the tech press.

Ptch was widely regarded as the brainchild of Dreamworks CTO Ed Leonard. He started the project at DreamWorks and left to become the startup's CEO after he talked DreamWorks's CEO, Jeffrey Katzenberg, into funding DWA Investments.

At the time the app launched, DWA Investments had 15 employees and all of them had a stake in the company. About a third of the staff came from DreamWorks. "The guys that transferred over, we all took pay cuts, but in exchange we got a material chunk of equity," Leonard told the Beta Beat blog at the time.

Under Leonard's leadership, DWA Investments quickly burned through about $6.5 million creating Ptch, hiring like crazy. At the peak of development, Ptch had 32 employees.

Leonard's cofounders were not happy with how he was running the company and chewing through cash.

"Ed Leonard was forced out of Ptch due to serious issues with DWA and the other founders," our source said. Leonard left Ptch and returned to DreamWorks in February, according to his LinkedIn profile. (We've reached out to Leonard and asked for his response, and will update if we hear back.)

After Leonard left, several of his hires also left and the company stopped burning cash so rapidly.

That's when another mobile startup, Qwiki, showed up and merger talks began.

It was a weird sort of merger. The two companies would combine and the remaining $3.5 million in DWA's coffers would be invested in the new joint company. The Ptch investors and employees wouldn't have gotten any money out of the deal, our source said.

But the merger stalled, a source said, and a few days later, in June, Qwiki announced it had been bought by Yahoo for a reported $50 million. Ptch employees grumbled that Qwiki bagged the merger so that it wouldn't have to share the $50 million with DreamWorks or Ptch employees.

Another source told us that it was Yahoo CEO Marissa Mayer that tanked the merger because she didn't want to buy both companies.

"The merger didn't fall apart. Marissa decided she wanted to buy each separately. That's exactly what happened. She bought them in parallel and the Qwiki deal was larger so sequentially Qwiki closed first and then Ptch," one source close to the company told us.

Meanwhile, things were devolving at Ptch and most employees were finding jobs elsewhere. But negotiations between Ptch and Yahoo were ramping up.

"At the time of sale, Ptch had one employee, [cofounder] Hans [Ku], and two part-time employees, who all went to Yahoo," our source said. We've confirmed with a source close to Yahoo that three Ptch employees joined Yahoo.

DreamWorks' Katzenberg originally wanted Yahoo to pay $10 million but then agreed to $6.5 million because Yahoo wasn't buying DWA Investments, just the Ptch technology.

Because of the way this deal was structured, employees with an equity stake didn't get any part of the $6.5 million.

"No founder or employee received anything out of the Yahoo deal, only potential job offers," a source told us.

It all went to DreamWorks, both of our sources confirmed.

Moral of the story: In Silicon Valley's startup culture, a $6.5 million exit for a two-year old company is not a dream come true.