Keith Rabois, one of Silicon Valley's most influential startup investors, has stepped down from the No. 2 role at Square amid a sexual harassment scandal.

Rabois, a member of the so-called PayPal Mafia who has invested in an A list of Web 2.0 companies, claims in his Tumblr blog that he's being blackmailed by a former lover who also worked at Square, the online payments startup launched by Twitter co-founder Jack Dorsey.

While admitting it was a mistake to remain involved with the man after recommending him for a job at the company, Rabois insisted the relationship was consensual. He also wrote that he didn't supervise his former lover.

Still, the threatened lawsuit may have been too much for a company with its eyes set on a possible stock offering this year. A more sinister theory holds that it may have given Dorsey cover to dump his lieutenant.

In a statement, a Square spokesman said that while an internal investigation found no evidence of wrongdoing, Rabois had "exercised poor judgment" that undermined his ability to lead the San Francisco-based company. Rabois joined Square as chief operating officer in 2010 and helped oversee its growth from about 30 employees to more than 400.

Dorsey launched the company to help small merchants -- and anyone else -- accept credit card payments by plugging a square plastic reader into a smartphone. Newer products can turn iPads into virtual cash registers and let people pay for items using their cell phones, without having to swipe a card.


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Square's rapid growth accelerated last fall when Starbucks said it would let the startup manage all its credit card payments and let customers at thousands of its coffee shops pay by phone. Starbucks also participated in a $200 million-plus funding round that reportedly valued Square at $3.25 billion.

"This is the perfect example of a hyper-growth Silicon Valley company," said Sam Hamadeh, CEO of a New York firm called PrivCo that analyzes the value of private companies.

Hamadeh echoed some social media pundits who on Friday suspected Rabois' stunning departure was due to a falling out with Square's iconic CEO. In a tableau of intrigue that might echo "The Social Network," Hamadeh said he's been told by someone inside the company that the lawsuit was an excuse to jettison Rabois.

"You don't change your number two guy just because somebody claims sexual harassment," Hamadeh said. "Jack's going to prep the company to be sold this year. They need a much more veteran, experienced COO, and Keith was not willing to accept a demotion."

Another Square source, however, told this newspaper that rumors of a feud between Dorsey and Rabois were unfounded.

Rabois previously had been head of business development at PayPal, LinkedIn and Slide. He also sits on the board of Yelp and has invested in such high-profile startups as Airbnb, Path and Yammer.

"PayPal, LinkedIn, Slide and Square are some of the most innovative companies in the last decade, and Keith has been an integral part of all of them," said Auren Hoffman, a serial entrepreneur and influential angel investor. "I personally would work with Keith any day."

But recent days, Rabois wrote on his blog, "have been the toughest, saddest, most frightening, and emotionally draining of my life."

Rabois set he met the unnamed man who's bringing the allegations in May 2010 through mutual friends. Eventually, they began a relationship, and several months later, Rabois suggested his boyfriend interview at Square.

Veteran sex-harassment attorneys said there's no law against an executive hiring a romantic partner, although many companies prohibit such situations to avoid liability.

Last week, Rabois and Square received a letter from an unidentified attorney in New York, threatening a lawsuit that would allege the relationship was not consensual. Without offering specifics, Rabois wrote in his blog that the letter promised "to accuse me of some pretty horrible things."

He wrote that Square did not know about the relationship before the lawsuit threat, and it was unclear when the romance had ended. A company spokesman would not say whether the man still works at Square.

Rabois, on his blog, wrote that the letter demanded "a payment of millions of dollars" and said he decided to resign to save the company the distraction of a lawsuit, although attorneys on Friday said Rabois' resignation doesn't necessarily spare Square from being hauled into court if the suit goes forward.

Though Rabois said the claim "feels like a shakedown," attorneys who specialize in sex harassment law said sending a so-called "demand letter" is standard procedure before filing a suit.

"Often times, it's advantageous to both sides for these matters to be resolved confidentially," said Therese Lawless, a workplace rights attorney in San Francisco.

Stephen J. Hirschfeld, co-founder of San Francisco law firm Hirschfeld Kraemer, said that while that strategy usually works, sometimes a prospective plaintiff demands far more money than a company thinks is warranted.

While a settlement may still happen in this case, he said, Rabois' decision to make the situation public may reduce some of the plaintiff's leverage.

Rabois, for his part, said in his blog post that he's already working on his next startup and hopes to unveil it next month.

Contact Peter Delevett at 408-271-3638. Follow him at Twitter.com/mercwiretap.