Tracing Nasty Gal's Trajectory From Hot Startup to Lawsuit Magnet

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"At the beginning, it was awesome because it was this family of friends," says Sarah, a former buyer who spoke under the condition of anonymity and asked that her real name not be used. "We got along really well and we were building something really cool and fun and interesting. Everything that people knows that Nasty Gal stands for."

In 2012, Nasty Gal landed almost $50 million in two rounds of funding from Index Ventures that piled in within months of each other. This was the first time Amoruso had taken on outside investment; for the previous six years, she had run Nasty Gal without any outside financing or marketing. It was a stunning feat to many people, including Danny Rimer, one of the lead investors at Index.

In a Forbes post detailing why Nasty Gal and Index were the perfect match, Rimer spelled out why he was so taken with the brand. "What jumped out at me, visiting Nasty Gal, was how everyone I met with knew what the priorities for the next twelve months were; how hard-working the staff was; and how convincing Sophia had been to bring them on board from retailers with bigger brands," Rimer wrote. "Afterwards, there wasn’t much of a debate between Tony, Martin, and me." Index had a history of investing with companies like Net-A-Porter, Asos, and Etsy (which, for what it’s worth, is having a disastrous time in its first year as a public company).

Rimer did acknowledge, however, that in the year or so that he’d been working with Amoruso it was apparent that Nasty Gal needed management help in order to grow. "Since Sophia bootstrapped much of the business, many aspects of the next stage of scaling are new to her," he wrote. Tony Zappala, another investor at Index Ventures, agreed to move to Los Angeles in order to help Amoruso build out the next phase of Nasty Gal. (Zappala left Index soon after, in February 2013.)

At this point, Nasty Gal was growing at a dizzying rate, so much so that Urban Outfitters reportedly approached the brand about a possible buyout. The deal never went through, but it's easy to see why Urban Outfitters was interested in the brand. For a sense of scale: Nasty Gal pulled in $10 million in sales in 2010, $28 million in 2011, and then catapulted to $100 million in sales in 2012.

The millions from Index gave the brand the fuel to hire and scale in every area of the business. By the end of 2013, Nasty Gal confirmed that it employed 280 employees, up from just 40 employees at the beginning of 2012, and the brand poured money into a gigantic new Downtown LA office to house everyone. "It started to get really top heavy and so much more bureaucratic," Sarah tells Racked. "There was this sense of hiring, hiring, hiring, hiring, on top of all the people who were there from the beginning who were the oil that was keeping this machine going."

On the executive level, the hires didn’t stick around. Kate Williams was poached from Urban Outfitters to head up Nasty Gal’s editorial direction; one year later, she left. Lina Kutsovskaya was brought in from Sephora to take over as the brand’s creative director, but she also left after a year. Christian Parkes came from MySpace to fill in as Nasty Gal's VP of Brand Marketing; he was gone after 11 months.

Another former employee, who left of her own volition but asked that her name not be used, Ashley, chalks the company's instability up to growing pains. As Nasty Gal grew, she saw "three or four" new hires from established brands like BCBG and The Gap cycle through a position that fell between her direct boss and herself. "I think that it was really hard for people who have been with the company for a long time to have people come in and say well, this is how we're going to do things," Ashley explains, "I think a lot of times it just didn't fit creatively."

The executive shakeups did nothing to boost company morale. Starting in 2013, internal frustrations started to leak out onto Glassdoor, an anonymous job review site. "There is a strategy of hiring upper management to oversee a core group of worker-bee mid-level employees who have been building the brand at an explosive rate over the past few years," an anonymous employee wrote in one review. "Compensation is on the low side by industry standards, unless you are hired at the top."

The divide in salary between top-level hirings and everyone else only added to strained relations between employees. "We were like, ‘Why are we not getting promoted? Why are we not growing?’" Sarah says. "We should be growing and instead we kept getting stomped down and all these other top heavy people came in. The more we got injected more money from all the investments, then they started getting paid more."

Things continued to nosedive on the inside in early 2014, as Amoruso launched a much-publicized book tour for #GIRLBOSS and built up a new celebrity status. She was positioned as a Sheryl Sandberg for the millennial set, and, from the outside, it seemed like the metaphor fit fine. At SXSW that year, she declared that her management superpower was her hiring ability. "I've had the luxury of managing people who don't need to be managed," Amoruso said at the time. "It's an office full of girls and no one is bitchy... The one person who has permission to be bitchy is me and I'm not."

As the year wore on, Amoruso continued to build herself up in the public eye. She dressed Lena Dunham on her Not That Kind of Girl book tour in the fall, and lauched an MAC makeup collaboration. Meanwhile, back at the office, the operational structure continued to crumble.

"We felt that she disconnected from us a little bit and it started to feel more like a Sophia show," Sarah says. "We didn’t know if she was as interested as she was before. We just didn’t understand what was going on. When you start to feel that way about your leader, then the entire brand starts dwindling down in morale."

And then the layoffs started. Nasty Gal's new executives had each made their own hires, trying to build out the team, but without guidance the hirings left the company bloated and mired in an unworkable bureaucratic structure. Now, it needed to scale back down. Several reports put the number of employees laid off at about 10% of the company (or about 30 people), but Sarah estimated that it was actually a much deeper cut—going from a peak of almost 300 employees to barely 100 employees by the end of the extractions.

All of the layoffs occurred in the same year-long timespan, but the cuts started so small that it was barely recognizable. As the bigger waves started to hit, it got to the point where employees would show up to work and have no idea if they'd still have their job by the end of the day. "You always heard from the grapevine, like, 'Shit, I think there’s going to be a layoff this week,'" Sarah explains. "And then you’re sitting down like, 'Who’s it going to be? Is it going to be you? Is it going to be me? Is it going to be her?' You didn't know. And then next thing you knew, your number’s up."

Employees were called into a room where HR would dole out a severance package, blame the layoff on a company restructure, and ask them to leave immediately. It was such a rough process that some former employees are now questioning the legality of those layoffs. As Jezebel first reported, Aimee Concepcion and four other employees sued Nasty Gal for letting them go just as they were about to take maternity or paternity leave. Concepcion alleges that one of the rounds of company layoffs specifically targeted pregnant women about to take maternity leave and women currently on maternity leave. Buzzfeed News reports that the retailer is also facing another suit from Farah Saberi, who claims that she was laid off after her work was affected from being diagnosed with a kidney disease. While Ashley posits that the complaining parties just "weren't really enjoying their jobs," she admits that the layoffs, which came after her tenure, weren't handled "properly," adding, "obviously, there's a lawsuit happening."

Soon after the last round of layoffs, Amoruso stepped down from her role as CEO of Nasty Gal. In a YouTube video explaining the decision, Amoruso admitted that she had been thinking "for several years" whether she was the best person to run the company or not. From an internal perspective, the decision had been a long time coming.

She ceded her spot to Sharee Waterson, who had joined the company a little less than a year prior after ending on a not-so-great note at Lululemon, where she had been fired over the sheer pants debacle. "[Waterson] had a great run and she was there for five-and-a-half years and built an amazing business," Amoruso had explained when she made the hire. "I don't look at much more than that."

Under Waterson's guidance, Nasty Gal pulled in a third round of funding worth $16 million. The deal is a joint investment from Index and Ron Johnson, the former CEO of JCPenney who's since shed his corporate background for startup life. In a healthy company each round of funding is bigger and better than the last, so the $16 million Series C round (small change compared to the $40 million Series B round) is further indication that the company still has awhile to go to pull itself out of the trenches.

"Do a lot of people believe that she is someone that is going to turn the company around or that she has the experience to truly know what she’s doing as a CEO? I don’t know," Sarah says. "I really have my doubts on that. I just feel like every single person that has come in at that level—as Sophia’s right hand—has really fucked up."