Factory CEO just accused his VC board adviser of spying for Cognition

The Boardroom Breach

In the world of early-stage startups, your board members and advisors are supposed to be your inner circle. They see the roadmap, the churn, and the secret sauce that makes your product more than just a wrapper. But a recent public fallout between Factory AI and their former venture advisor, Chris Degnan, shows just how thin those loyalties can be when the stakes are measured in billions.

Matan Grinberg, the founder of Factory, didn't hold back on social media. He openly accused Degnan, who sat in on Factory’s strategy meetings as a board observer, of taking that institutional knowledge directly to their fiercest rival, Cognition. The move wasn't just a quiet exit; Degnan reportedly transitioned into a Chief Revenue Officer role at the competing firm. This isn't just about a career change; it’s about the integrity of the information flow between founders and the people who fund them.

The Conflict of Interest Loop

Venture capital is a game of pattern matching, but lately, it’s looking more like a game of musical chairs. When a VC firm has an observer seat, they are effectively looking under the hood of your car while holding the keys to another one down the street. In the AI coding space, where everyone is racing to build the first truly autonomous software engineer, the distance between "helping a portfolio company" and "scouting for the winner" is dangerously small.

For builders, this is a wake-up call. We often treat VCs like partners, but this incident highlights that they are, first and foremost, asset managers. Their fiduciary duty is to their Limited Partners and their own fund’s performance, not necessarily to your specific cap table if a better horse enters the race. The optics here are particularly bad because the transition was so direct—moving from a position of trust at one company to a leadership role at the primary competitor.

Why the AI Coding Space is a Powder Keg

We are currently seeing a massive influx of capital into autonomous coding agents. Companies like Factory, Cognition, and Devin are all fighting for the same developer mindshare and the same enterprise contracts. When the technology is this new, the "moat" isn't just the code—it’s the sales strategy, the specific edge cases being solved, and the feedback loops from early pilots.

If a board observer sees which features are driving retention at Factory, they can theoretically hand that playbook to Cognition. In an industry moving at the speed of AI, a three-month head start on a product roadmap is the difference between an exit and an also-ran. The drama playing out on X isn't just tech gossip; it’s a public negotiation of what is considered ethical behavior in the age of hyperscale AI funding.

The Founder’s Perspective

As a founder, you are told to be transparent with your board. You’re told that the more they know, the more they can help. But this situation suggests that transparency can be weaponized. If your advisors are also scouting for your rivals, every slide deck you share is a potential liability. Grinberg’s public outcry is a symptom of a larger frustration: the feeling that the builders are being mined for data by the very people supposed to be protecting them.

It’s easy to dismiss this as just another Silicon Valley spat, but it points to a breakdown in the unspoken social contract of venture capital. If founders can't trust board observers to maintain confidentiality—or at least a reasonable cooling-off period before joining a rival—the entire governance model of startups starts to crumble.

What This Means for Builders

If you are currently building in a crowded space, you need to re-evaluate your information security. This doesn't mean you stop talking to your VCs, but it means you treat your board meetings with a level of strategic caution. You have to ask yourself: if this person left tomorrow and went to my competitor, what would they take with them that I can't get back?

• Information Silos: Keep your most sensitive strategic pivots and technical breakthroughs close to the chest until they are live.
• Restrictive Covenants: Founders need to be more aggressive about the terms they set for board observers and advisors. Standard NDAs aren't enough when the person can just walk across the street.
• Trust but Verify: Watch the movements of your advisors. If they start asking questions that feel more like market research for a rival than support for your growth, take note.

The Takeaway

The Factory vs. Cognition drama is a reminder that in a gold rush, the people selling the shovels are also looking for the biggest nugget. Chris Degnan’s move to Cognition might be legal, and it might even be a smart career move, but it leaves a trail of burned bridges and a warning for every founder currently seeking VC backing. In the AI arms race, your biggest threat might not be the startup in the office next door—it might be the person sitting in your boardroom.

Build with your eyes open. The capital is useful, but the cost of that capital is often your company's most valuable secrets. If you’re not careful, you’re just paying for your own replacement’s education.

Read the original at TechCrunch Venture →