OK. IANAL, but here's my opinion anyway, having read the suit and exhibits as filed:

FG had $500k in debt by end of June. To whom? We don't know. Chandra would have liked to sell FG to CP [crunchpad] and then pay off that debt in a subsequent round of capital-raising. Arrington and fellow investors did not want to buy a company with half a million in outstanding debt.

Another option was for TC to buy FG at a valuation of $3m and pay off the debt at the same time by converting it to equity, which was also undesirable since it would have diluted shareholding by 16%. We may infer that with 35% of CP shares going to FG and a further 16% converted from debt to equity, the upshot would have been that Arrington's investors would have only had a 49% stake, with the other 51% being held by FG's investors and creditors, obviously giving them control of the company.

So TC's offer was for FG to pay off its debt completely, in rturn for which its investors would get 35% of CP shares. Chandra indicated this was acceptable, but was unhappy about it as it would have meant giving up all of his personal equity in FG and $75,000 in cash (in order to satisfy FG creditors) and his only holding would be an option to acquire 11% of CP in a future round.

Chandra asked for a better deal but indicated that this option was acceptable to him if it was the only way. It is unclear from the emails (which are confusingly presented in reverse chronological order) what position, if any Arrington & co. took in response to this offer. Since TC did not go ahead and buy FG, we may infer that the matter was placed on hiatus. I guess but do not assume that this was pending on FG's satisfaction of its creditors and getting back to a clean balance sheet.

By November, the awesomely-named Bruce Lee and his 2 co-investors considered FG to be worth $10m in its own right and valued TC's contribution at 10% of that for the Crunchpad name and Arrington's marketing effort, with Lee noting that Chandra had commended an offer of 25% of the shares in CP as payment for FG. It's unclear whether Arrington lowered the equity offer in exchange for taking on the debt, or whether the ~28% discount to the earlier offer represented Chandra's personal equity in FG; I suspect the former, suggesting that that CP planned to put down $2.5m in cash and absorb any outstanding debt in exchange for 75% of the equity, which would be fairly consistent with the negotiations in June.

Whew. So the upshot here is that Dr Lee is basically saying that he disbelieves Arrington/Crunchpad has brought $5m worth of product development and marketing clout to the table, but instead values their contribution at $1m (out of $10m cash that he and fellow investors are willing to put on the table). Additionally, he seems to feel like he is being hustled, considering the lack of a formal offer letter for the merger.

Seems to me that Dr Lee has decided to see the color of Arrington's money by raising the cash stakes considerably; suddenly Fusion Garage [in the sense of its largest shareholder] is offering to gobble up Crunchpad and pay Arrington off with a job rather than the other way round. Arrington's blogged thoughts refer to FG's poor financial position, but gloss over the fact that its investors have $10m on hand (which appears to be about 4x what Arrington had lined up).

The plaintiffs seem to argue that Fusion Garage is only alive because of the good will invested by Arrington/Crunchpad and would have died otherwise; I presume the defendant's argument will be that this was never the case, that FG had entered into the project in a spirit of partnership rather than supplication, and that any monies advanced by Crunchpad to FG's creditors were a matter of mutual convenience. The case seems to turn on the degree of innovation provided to the project by Arrington/CP: and looking at some of their claims, they seem pretty thin (eg suggesting web pages are bettered rendered against white background, or the use of large icons to select favorite sites, both of which the defendant will claim to be obvious prior art).

Prediction: it won't go to trial, Fusion Garage will settle with Arrington for $1.5-2.5m and both sides will declare victory. Arrington will keep the name and claim moral high ground and return something to his investors, FG will end up free of encumbrances and with a commitment of future silence from TechCrunch about the company and its products.