It was so close I could taste it. Two weeks ago we were ready to publicly launch the CrunchPad. The device was stable enough for a demo. It went hours without crashing. We could even let people play with the device themselves – the user interface was intuitive enough that people “got it” without any instructions. And the look of pure joy on the handful of outsiders who had used it made the nearly 1.5 year effort completely worth it.

Our plan was to debut the CrunchPad on stage at the Real-Time Crunchup event on November 20, a little over a week ago. We even hoped to have devices hacked together with Google Chrome OS and Windows 7 to show people that you could hack this thing to run just about anything you want. We’d put 1,000 of the devices on pre-sale and take orders immediately. Larger scale production would begin early in 2010.

And then the entire project self destructed over nothing more than greed, jealousy and miscommunication.

On November 17, our deadline date for greenlighting the debut three days later, the CEO of our partner on the project, Chandra Rathakrishnan, sent me an email with the subject “no good news.” Yuck, I thought. Another delay, probably with the screen that had been giving us so much trouble – capacitive touch at 12 inches isn’t trivial. And sure enough, the email started off with “no good news to update. updated hardware is still on its way , so that’s a timing issue. friday will be a challenge now.”

But the email went on. Bizarrely, we were being notified that we were no longer involved with the project. Our project. Chandra said that based on pressure from his shareholders he had decided to move forward and sell the device directly through Fusion Garage, without our involvement.

Err, what? This is the equivalent of Foxconn, who build the iPhone, notifying Apple a couple of days before launch that they’d be moving ahead and selling the iPhone directly without any involvement from Apple.

Chandra also forwarded an internal email from one of his shareholders. My favorite part of the email: “We still acknowledge that Arrington and TechCrunch bring some value to your business endeavor…If he agrees to our terms, we would have Arrington assume the role of visionary/evangelist/marketing head and Fusion Garage would acquire the rights to use the Crunchpad brand and name. Personally, I don’t think the name is all that important but you seem to be somewhat attached to the name.”

And with that, the entire project self destructed.

Neither we nor Fusion Garage own the intellectual property of the CrunchPad outright. Fusion Garage has a team of 13 or so employees, currently working here in Silicon Valley out of a home they rented and in our office. Their team has mixed with our CrunchPad team, which is led by Brian Kindle, the former Vice President Hardware Engineering and Manufacturing at Vudu and an early hardware engineer at TiVo. Development expenses have been shared, and our team has spent time in Singapore and Taiwan, and their team has spent time here. We chose to work with Fusion Garage on Prototype C and the launch prototype after we finished Prototype B internally.

We jointly own the CrunchPad product intellectual property, and we solely own the CrunchPad trademark.

So it’s legally impossible for them to simply build and sell the device without our agreement.

We’re still completely perplexed as to what happened. We think they were attempting to renegotiate the equity split on the company behind CrunchPad, which was to acquire Fusion Garage. Renegotiations are always fine. But holding a gun to our head two days before launching and insulting us isn’t the way to do that. We’ve spent the last week and a half trying unsuccessfully to communicate with them. Our calls and emails go unanswered, so we can’t even figure out exactly what’s happened.

Yesterday Chandra sent an email saying “Following our phone discussion, I had another round of discussions with my shareholders. The shareholders are not willing to move from their position as they believe their stand is justified. On the other hand, there isn’t an alternative offer on the table from Crunchpad.”

My response: “We have not come back to you with any counter offer to the email you forwarded because you and your shareholders have communicated to us that moving forward without us is something that you consider to be a legitimate and legal option. In other words, your “counter” offer is theft of intellectual property.”

Ultimately there are two sides to every story, and they’ll certainly have their side. We will almost certainly be filing multiple lawsuits against Fusion Garage, and possibly Chandra and his shareholders as individuals, shortly. The legal system will work it all out over time.

Mostly though I’m just sad. I never envisioned the CrunchPad as a huge business. I just wanted a tablet computer that I could use to consume the Internet while sitting on a couch. I’ve always pushed to open source all or parts of the project. So this isn’t really about money. It was about the thrill of building something with a team that had the same vision. Now that’s going to be impossible. And I’ve also lost a friend – Chandra spent months in our office this year and, until a week and a half ago, was the kind of young, determined entrepreneur that I admire. I thought we’d be friends for the rest of our lives.

And what’s really sad about all this is the incredible support we were getting from companies and people around the world to launch this device. A major multi-billion dollar retail partner has been patiently working with us for months, giving advice on manufacturing partners and offering to sell the CrunchPad at a zero margin to help us succeed in the early days. They were also willing to pay for the devices on order instead of 30 days after delivery, a crucial cash flow benefit that would allow us to ramp up volume without putting ourselves our of business. They were even willing to fly the devices from China on their own planes to eliminate our shipping costs. Intel, which would supply the Atom CPUs to power the device, has assisted us repeatedly with engineering and partner advice, and gave us pricing that was ridiculously generous given our projected first year sales volumes. Other partners were eager to promote and sell the device for little or no benefit on their end other than “supporting the project.” We even had sponsors lined up to help us sell the device near our $300ish cost.

And money wasn’t a problem, either. We had blue chip angel and venture capitalist investors in Silicon Valley waiting to invest in the company since late Spring. We were simply holding them off until we launched, to eliminate some of the risk.

It’s a sad day at TechCrunch HQ. Hitting the publish button on this post, which makes all of this so…final…is a very hard thing to do. I’m enraged, embarrassed, and just…sad. The CrunchPad is now in the DeadPool.