Three grounds for cause, two failed arguments, one bill the company can’t dodge
Mixedbread AI fired its co-founder and CTO back in June 2025 - but the company is still paying for it.
A Delaware Court of Chancery decision dated October 19, 2026 confirmed that the AI company must advance legal expenses to its former CTO while he fights a separate employment lawsuit in California. The company tried two arguments to avoid the obligation. Both failed.
The company had terminated the co-founder from his roles as director and CTO, purportedly for “cause.” Its Third Affirmative Defense in the California litigation alleged he disparaged the CEO in front of officers, directors, employees, and investors, created a toxic work environment, and failed to fulfill his CTO obligations.
After the termination, the former CTO sued in the US District Court for the Northern District of California, alleging breach of his employment agreement. Mixedbread AI filed three counterclaims and sixteen affirmative defenses, then dropped the counterclaims. The defenses stayed.
In April 2026, the former CTO went to Delaware Chancery seeking advancement under Section 6.3 of the company’s bylaws - a provision that requires the corporation to pay defense costs upfront, with repayment due only if a court ultimately rules the officer was not entitled to indemnification.
A Magistrate in Chancery sided with him in an August 2026 report. Mixedbread AI filed exceptions two days later.
The company’s first argument: responding to affirmative defenses is not “defending” under the bylaws, so no advancement is owed. The court pointed to decade-old Chancery precedent holding that advancement extends to fees incurred defending against affirmative defenses that implicate an officer’s corporate performance. The company urged the court to overturn that precedent. The court declined.
Its second argument: the expenses were not incurred “by reason of” the former CTO being a corporate agent. The court was unconvinced. He could disparage the CEO to officers, directors, and investors because his CTO role gave him access. He could shape the work environment because he was a senior officer. The alleged conduct was inseparable from the corporate position.
The court denied the exceptions, affirmed the Magistrate’s report in full, and noted that oral argument was unnecessary.
For HR and legal teams structuring executive separations, the decision spells it out: firing a senior officer for conduct tied to their corporate role does not end the company’s financial exposure - it may just shift the line items from salary to legal fees.
Whether those fees were “reasonably incurred” remains open for a later stage.
