

Ask YC: Ethical Question, possible fraud - nobodynew

Background Info:<p>I am a coder at an angel backed startup.. we have a couple paying customers and a handful of full time employees including a few founders. I started a few months ago after i saw an ad for the job, I did not know the founders previously, the company has been around for about 2 years. We sell software to fairly large corporations.<p>Ethical Dilemma:<p>The past couple weeks, I have overheard the founder of the company exagerrate/lie about key facts of our company to potential customers. ie. claiming that we have   20 customers worldwide. claiming the we have multiple offices. and 2-3 times the employees that we actually have. claiming that certain parts of the software are in use by other customers when these parts have never been used in production.. not positive about this but possibly misrepresenting investment incoming money as sales in financial due diligence documents or at least not going out of his way to make it clear that thats where incoming money is coming from.<p>I understand why he is doing this, because the kind of companies we deal with do not want to take the risk of working with an unproven brand new product.. but it seems wrong. Clearly unethical, but is it illegal too? Could people go to jail for this kind of thing? ( This is in the USA )<p>What would you do if faced with this situation?
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cmos
Sounds like a salesguy!

But seriously, it's a no win situation for you. People will say a lot of
things to close a deal, and even more to make payroll.

So either your founder is: 1\. Desperate and willing to say anything, which
means you might want to be cautious about the general health of the company
2\. Just a sneaky and over the top exaggerating salesguy (ok, a liar) because
that's the only way he know's how to sell. A shame, but you'd be surprised
what salespeople will do to close a sale. 3\. Has a 'corvette' complex. His
lies are not about what amazing things his product will do and how it will
transform the customers business, which is more common for a salesperson to
'embellish'. Instead, it's about how big and successful his company is.

If the company isn't healthy, and he's desperate, I'd figure out a way to
either help or bail.

If the founder is just a liar, I'd go elsewhere. The thing about liars is they
lie about everything, sometimes for no reason about absolutely trivial things.
Life is to short to be around them. And the saddest part is that his customer
might be looking for a nice, small company who really wants their business and
will jump through hoops to get it as they would be a highly valued customer,
not just one of many.

If it's the 'corvette' complex then run. He's starting a company to prove
something to the bully in the playground.

And the bully is probably mowing lawns for a living.

------
prakash
Ever heard of WinFS?

A good personal moral compass in such situations is whatever helps you sleep
soundly at night. Life is rarely black or white, more shades of grey (can't
remember where I read that).

Curious to know, what would you have said in the same situation, would you
have said _we have 2 customers, one office, couple of customers, you would be
third if we are lucky and hey guess what you are going to beta test our
product._

Also, think about the second order effects of this deal not going through. Can
you company make payroll without it? Is this deal the break your company has
been looking for?

I did technical sales for 3 years, first real job right after school, the 2
things that really helped me sell were:

1\. Tell the truth and

2\. Put your customers interest before your company's

Good luck!

~~~
dcurtis
Number 2 is kind of abstract. There are a lot of ways to interpret "putting
your customer's interest before your company's." You could make the software
cheaper, for example, but you probably won't.

I've thought a lot about how far to bend to customers demands the past few
weeks as I've been working on a fairly large project geared toward companies
that are used to influencing product design and direction. In enterprise
sales, when the Vice President of Marketing at a company ready to pay a few
million dollars says, "Can I check my data from your website while I'm on my
jet?" what are you supposed to say? Sure, we could rig some complex system to
download the data for him, but that's a terrible use of our time.

On the other end of the spectrum is Apple's dealings with consumers. Apple
very rarely does things people ask for-- I wish I had a card reader on my
MacBook Pro, for example, but I don't. They're geniuses at distilling the most
useful things that most people will use and then developing them to absurd
levels of perfection beyond what the rest of the industry is used to.

I'd much rather build a product with a few amazingly awesome features that
help a wide number of people than one with tons of OK features (including the
ability for one person to view reports on their private airplane!).

Both of these ends of the spectrum can be argued for putting the customer's
interest first.

(sorry for the digression)

~~~
SwellJoe
"There are a lot of ways to interpret "putting your customer's interest before
your company's." You could make the software cheaper, for example, but you
probably won't."

I have to agree on the interpretation problem here. But, I think an important
thing to learn in business is that sometimes lowering your price is bad for
your customers. You may have more of them because of a price drop...but you'll
almost certainly serve them less effectively. It took me way too many years to
learn this simple fact (and Joel Spolsky hadn't yet written his very good
article on the subject when I was learning it).

------
huhtenberg
> What would you do if faced with this situation?

In short, your options are:

    
    
      * confront the founder
      * get vocal outside of the company (customers, investors, etc)
      * quit 
      * keep your concerns to yourself and continue working
    

I would _strongly_ advise against first two options. They will automatically
tag you as a troublemaker, and depending on the size of your professional
circle this may cause you substantial problems further down the road. They are
also not likely to change things either.

Keep in mind that the decision to twist the facts was conscious. This is in
all likelihood his mode of operation, so talking about ethical concerns will
probably not yield any response. It's not like he'd say - "Damn, you are
right. What was i thinking ?".

~~~
ScottWhigham
Excellent analysis. I would add a 5th option (and not that I'm recommending
it; just that it should be there as well):

    
    
       * "Drink the kool-aid" (i.e. buy into what the company believes/touts)
    

I think another saying is, "Fake it till you make it." It sounds like this is
an aphorism the founder buys into. He isn't the first founder to use this
strategy and, without saying it's right or wrong, I would just suggest you
look around and take stock of just how bad your founder actually is versus the
next founder/company you will go to work for if you do number's 1, 2, or 3.

------
lakeeffect
You could definitely lose face, but i don't believe it is a jailable offense
to exaggerate the logistics of your operation.

If he is exaggerating to get investors then he is most likely violating the
law. This is really bad policy, since due diligence will wipe those illusions
clear.

If exaggerating features of a product, again bad policy, if you are selling
something you don't have you are going to end up with an unhappy customer. In
this case exaggerating number of employees would be exaggerating features if
he is selling support as a feature, bad policy to make promises that are not
true.

Overall as long as they arent asking you to do anything you feel is not just,
i wouldnt worry about it to much. These lessons usually end up making teachers
out of themselves.

------
h34t
I would quietly & politely leave, possibly after a candid, thoughtful
conversation with the founder in question. Or, I would be quiet and put up
with it.

Five years ago, at 20 years old, I was offered an amazing opportunity --
running leadership conferences across Canada, and leading teams of youth
around the world to promote business/development. I'd been running projects
with the organization for a couple of years and absolutely loved it.

Then, I discovered that the founder was committing fraud with taxpayer money
-- criminal mismanagement. Had anyone gone to the media, it would have been a
juicy scandal involving taxpayer money (but that would only have hurt the
youth involved). He was hurting himself, his family, and at times even putting
people in danger.

After consulting mentors I trusted (an ethics law professor, retired business
person and retired diplomat)and a five hour conversation with the President, I
turned down his bribes and caused a minor but localized fuss in a genuine
attempt to improve the situation. It was unsuccessful.

Even though I was right, and even though my mentors and friends verified this
and helped me form my actions, I would have been _much_ better off by keeping
my mouth shut, politely declining their job offer, and simply shifting my
focus to creating my own future.

This would have avoided the stress of going through hell in a fruitless
attempt to make things better, that most people would never understand and
would leave me disconnected to a group of people I loved being apart of (aside
for just the couple of people who were causing all this nonsense) -- I was
disconnected from them because I couldn't explain why I was taking action
without endangering the good that the org. was also doing for a lot of young
people. ie. I didn't want to harm the org. by actually having the media get
wind of it.

So next time I will button my lip, acknowledge the world exactly as it is, and
stay focused on what I want my own life to be instead of getting hung up on
others..

~~~
andreyf
From the way you explain it, you seem like a nice guy, giving nice guy advice.
It's a bit ironic, however, that you were supposed to be running leadership
conferences - shouldn't a "good leader" rally people against perceived
injustice? Surely, it would be hard to argue that criminal mismanagement is
just. Could there have been some way you could have "created your own future"
without letting criminal actions stand?

~~~
h34t
I don't think "good leadership" is about fighting a battle you can't win.
Energy is best spent on battles that you have a good shot at, in areas you're
good at. Not setting yourself up to fail.

In this case, I didn't know I couldn't win, so I fought a losing battle and no
good came of it.

On-the-ground I created an ambitious assessment program called "Assess the
Past, Inspire the Future" which for the first time, connected participants
from the past & present of the future and had them submit evaluations of their
experiences... and "from-above", I was ultimately asked to give a report to
the cabinet minister in charge of this thing. You can't go higher up than him
without reaching the prime minister, and I could hardly have asked for better
results and response for my survey. I believe I had the personal support every
single active participant above the age of 20 (the younger ones were mainly
oblivious), though none of them knew as much as I did about how deep the
problems actually went. And my mentors would have supported me to run the damn
thing if we'd have been able to get some change in the air.

Unfortunately, hearing the truth didn't help the organization -- they reacted
by selecting young, naive people to participate in their programs, shying away
from people who were old or mature enough to realize what was going on.
Neither did it have the intended impact on those with the power to change
things -- no politician, including the cabinet minister, would touch this with
a 10 foot pole, because it would be way too risky. Much easier to let it
continue as-is, and deny knowledge if anything nasty ever bubbled to the
surface in the future.

In the end, the people who had the real power to make things right failed to
act, so the only choices I had were to leak the story to the press, which
likely would have destroyed the program in an instant, or walk away quietly.
And since I believed (and still do) that our country is better off _with_ the
program than _without_ , even when taking into account its imperfections, I
took my cue and left the scene.

The whole ordeal took _way_ more out of me than I expected. I don't even like
the way I sound when describing it here, because it comes across as so
negative and pessimistic! There are way better things I should be spending my
time thinking about and acting on -- now, just as then.

To accept other people, that I can't change them, that I am always going to
wake up and find new forms of nastiness. Then, to move on and think about
better things. That's what I believe in these days.

My mistakes were misjudging my chances of making a difference, and misjudging
the value of my own time. Life is short -- pick your battles accordingly.
Those people are going to be the same tomorrow as they were yesterday. I can
either try to fight that reality or I can find something productive to do.

~~~
andreyf
Thanks for the thorough explanation. That does put quite a different light on
it, indeed. My apologies for jumping to conclusions in my first response.

Personally, I probably wouldn't have had the balls to raise as much dust as
you did, but ideally, why didn't you warn the leaders of the organization that
unless the issues were resolved internally, you'd be providing evidence of
misconduct to the media at such-and-such a date, giving them time to prepare
whatever PR kung-fu organizations do during scandals?

To me it just seems really immoral to walk away when taxpayer money is
involved...

~~~
h34t
I see your point, but it could be seen as equally immoral (if not more so) for
me to cause the destruction that would have resulted. Especially since it
would have hurt other people more than it hurt the perpetrators.

Threatening them with a media leak was one option. But it didn't seem to be a
very good one, not to me or any of my mentors. The only way for an actual net-
positive result here was for the management to be swiftly but quietly replaced
by those with the power to do so. We went as far as we could to push for that.

------
jfarmer
It sounds like you know what the right thing to do is. So, why aren't you
acting on it?

~~~
zenspider
seconded... you certainly don't need the feedback of strangers to justify your
decision... just act on your gut.

------
Harkins
I've been in roughly this situation, where the founder of a small company made
grandiose claims and would say anything to get the sale, get another round of
investment, get his way.

Reevaluate any promises he's made to you or any agreements you think you have
with him. If you have a manager between you and him, same goes. A manager who
is much closer than you to his dishonesty and is OK with it is going to act
the same way to you, or claim to be on your side but, gosh, was overruled by
the boss.

Now that you know you can never trust your bosses, it's time to find a new
job.

~~~
icey
This advice is correct on every level. Get out now. (I've been in this
situation as well, with painful results.)

------
gm
There is a fine line between fraud and salesmanship... This is actually one of
the things that lawyers learn at law school...

What I would do is not listen to that. They have their job (selling the
software) and you have yours. If they commit a fraud, you will not go to jail
for it.

Do you hear the car dealership mechanic tell the customers the cars was NOT
really driven by an old lady to church every Saturday?

Now, where you KNOW there is a fraud, you have a legal obligation to disclose
it. But fraud is very different than what you are describing.

I'd keep my mouth shut about it. It might not be what you would do, but it
does not sound illegal.

~~~
LukeG
Ignoring it is wrong. You have a responsibility to do something, even it it's
just talking to your boss.

~~~
andreyf
_You have a responsibility to do something..._

I don't think so... a responsibility to whom?

------
gunderson
I can't advise you to leave b/c that's just the way sales happens -- you
aren't going to escape this sort of thing even if you go to work for a non
profit. Non profits often exaggerate the amount of good they do and how
important their cause is -- and how efficient they are or are not.

The bottom line is that it's tough to bootstrap a company and sometimes the
salespeople will "throw the ball ahead of the runner" a bit.

The morality has to do more with whether or not the founder believes that what
he's saying will be true soon enough that telling the customer that info isn't
misrepresenting the company.

If you went to work for a big company you'd sit in a cube and not hear any
sales conversations, but they'd probably be much more distorted -- at least in
a startup everyone can help make the dreams (of the founder and the customers)
a reality... there is much more of a team mentality.

When you hear the founder say such things you should be thinking "wow, he
really believes that we can do that" and feel motivated by it. It's part of
the entrepreneurial psychology. He has you on the team b/c he believes you can
make whatever he says true.

If you don't like spirited optimism, I hear the IRS is hiring :)

~~~
jamiequint
I ran a consulting company that did some work for large "name brand"
corporations. I bid on projects for companies we should have never had access
to and I didn't have to lie to do it. Its a positioning game, you position
your weakness as strength. For an excellent contemporary example of this see
Barack Obama's campaign. Whether you like Obama or not, he has managed to
position his relative inexperience as a strength. Similar tricks are possible
within a company, NO LYING REQUIRED.

It sounds like you're trying to convince yourself that lying as a means to the
end is OK. Its a pretty weak argument, or rather excuse to not work hard and
do things honestly.

The suggestion that what this founder is doing is "spirited optimism" is
sickening.

~~~
gunderson
I'm not saying that lying is good, but in any small company there is (or
should be) a collective belief in the success of the company and its product.
If we wanted to be rational we could just look at the numbers and realize that
over 80% of startups fail and mention that when on the phone with prospective
clients!

My point is that it's not a good idea to get overly worked up about someone in
sales stretching the truth a bit. Sales is the part of the organization that
responds to customer needs, and so if they promise a feature to a client, you
as the developer are more likely to end up building that feature than if it
was never promised and the sale was lost.

It's an imperfect system, but at its core it's not any different from Ford
running a commercial that suggests that its operations actually benefit the
environment. People believe what they want to believe in order to give
themselves an excuse to buy what they want. If the founder in question is
outright lying, then he's just not very good at helping customers rationalize
the purchase.... :)

------
anon_commenter
Lawyers will generally write into contracts with customers that the written
agreement forms the entire agreement, and that the customer will not be
relying on anything other than the text of the agreement in making their
purchasing decision.

This isn't water-tight, but the reality is that verbally telling people you
have more employees or offices than you actually have, within reason, are
really not going to get anyone into trouble.

Nearly all startups pretend they're more established than they are.

Nearly all startups pretend they have more customers in the process of signing
up than they do.

I hate to see everyone acting like these kind of exaggerations are the same as
dishonesty or fraud.

People that make these kind of exaggerations can definitely be trustworthy.

There is a very big difference between exagerrating the position of a startup
to break out of a catch-22 and being a liar and untrustworthy.

I'm sure a lot of people feel the same as I do - it's just that they'll not
comment with their established usernames, and advisably so because that'd be a
stupid thing to say on record.

------
hooande
I'm not sure if it's right or wrong, but it certainly seems common.
Exaggerating is part of business, and it happens in a lot of them. It's
similar to lying on your resume...some people are hurt by it, some people are
helped by it.

There are a lot of factors involved (in this case, can you deliver the
software they want). If your company delivers what's been promised, then it
probably won't be a big deal.

Legally, you probably aren't on the hook. It's unlikely that your company will
agree to be audited so they probably aren't cooking their books. It's equally
unlikely that they will sign contracts that contain false statements. I would
rest easy if I were you - this sounds like part of the sales game. Your
founders probably won't let it turn into a legal situation.

------
DanielBMarkham
Software is a funny business. I've known guys to run full-page ads for
software that didn't even exist yet. The theory goes -- if the orders come in,
we'll build it.

Some people are naturally prone to exaggeration. Immaturity comes in to this
as well -- once you've been around the block a few times you realize that fake
posturing is easy for customers to spot.

If it's not investment related, it's not criminal. I'd have a word with the
guy, something along the lines of you can't lie your way into trusting
business relationships. After that, I'd make a call as to whether it was worth
staying or not. I wouldn't.

~~~
randallsquared
_My_ fake posturing would be easy for customers to spot, but you hear over and
over about multi-million-dollar companies which started as fake posturing, and
no one noticed until later, and people rarely care even then.

------
gaius
Reminds me of one startup I worked at, the boss even went as far as putting on
funny accents on the phone to make it sound like there were more people. He
would even pretend to be someone else and tell whoever was on the line that he
was in fact in a meeting/on the other line/with a customer.

And that sort of thing, while a little weird, doesn't really harm anyone. It
was when he started putting in ads in the trade press that we did things or
had things that we blatantly didn't (and couldn't) that things started to get
a bit dodgy. I left shortly afterwards.

------
vaksel
well its understandable why the guy is doing this...gotta survive + almost
everyone is doing this. But if you feel uncomfortable about it, just go
looking for a new job.

~~~
andreyf
_gotta survive_

You mean the company? Surely there are companies which could survive without
lying to customers/investors? The ones that can't are meant to go out of
business, and that's OK. Companies aren't babies, it's OK for them to "die".
Going out of business is natural if the market/business model is wrong, which
happens often, by nobody's fault. It's simply due to the uncertainty of
things, which comes with the complexity of our world.

There is no ethical dilemma in Social Darwinism when applied to companies as
the "living beings". A CEO who holds his personal honesty as less important
than the survival of a company is very misguided.

 _almost everyone is doing this_

Really? I don't have the experience to contradict, but I really hope not...

------
kirubakaran
_> What would you do_

 _I_ would leave. No dilemma there. But I won't judge / advice. There is no
absolute morality.

------
andreyf
One way of splitting the people of the world is into people that would lie
about business, and people that wouldn't. You don't ever want to work for a
CEO that will, because he'll lie to you too. Avoiding working with people that
lie about business is a good heuristic to keeping to what you do best -
working.

If you think that you might have legal trouble for not telling people about
this, then talk to a lawyer. Otherwise, find another job and don't look back.
If you hear anyone doing business with this guy again and you care about them,
warn them about what you overheard and why you left - personally, I would
really appreciate such advice. Otherwise, don't mention it unless someone
asks.

------
patrickg-zill
I think that you should be looking for another job; however since you are
blameless in your current job, you should stay there until you are either
ready or the checks start bouncing - I say this because if he truly is a
scammer and not just someone who exaggerates to customers, that will happen
sooner or later.

If the checks bounce, leave immediately (that day) and contact the labor board
- they will get your money for you; and under no circumstances go back as an
employee - if they want to pay you upfront as a consultant, and this of course
is at your choice.

In any case you sound unhappy at your current job and should get another one
at a company you can feel good about working for.

~~~
MaysonL
My first programming job was at a small contract programming house. When my
paychecks started bouncing (the company was about a million overdrawn at
Citibank) I kept working when the president of the company paid me through his
wife's checking account. There were two main reasons: 1) I didn't have another
job 2) The project was about 90% done, and I didn't want to leave the customer
stuck (AND I was subconsciously hoping to be hired on there).

------
icky
Remember to have some money saved up, and line up a new job first.

At that point, you won't have to face the dilemma of doing the right thing vs.
making rent.

------
eyudkowsky
Run. This doesn't sound like a situation that's going to get better over time.

------
Kilimanjaro
Stay away. Ask for a raise. Start job hunting.

In that particular order.

------
131072
Make your decision based on the ACM Code Of Ethics And Professional Conduct.

<http://www.acm.org/about/code-of-ethics>

------
ismail
If the company signs the deal based on these claims the founder made, its
called misrepresentation and misrepresentation = fraud. So should something
screw up, and they want to get out of the contract they can use that as a
basis,or even if they dont feel like paying. If they have proof, they will
most likely WIN.

Firstly, i have to ask though was this put in writing or just while talking?

Secondly, there is a difference between almost closing a deal(Customer has
show interest and you reassure him with the numbers) and the customer hasnt
made a choice and you use the lies to convince him. In the second instance
it's fraud.

If it were me, i would leave.

~~~
ismail
let me just clear one thing up Misrepresentation for financial gain = Fraud as
an example: I Tell the bank i earn $10,000 when i only earn half that to get a
higher loan

or in the case of a company: Reporting higher numbers to investors, reporting
high userbases/install bases to convince other customers

Yes its fraud, thats what enron did.

It's a bad sign. And to all the people saying it's ok SHAME ON YOU,

------
tptacek
Does your employment agreement include an NDA? If you "blow the whistle",
you're going to get sued. If it's a real ethical problem for you, quit.

------
thinkcomp
Leave.

------
flavio87
get out.

------
mcescher
Bill Gates did this stuff dealing with IBM et al.

If you CAN do X, and the only thing stopping you from getting the deal is the
other side's perception of you, then influencing their perception (i.e. lying)
can save the deal, save your company, and solve their problem -- all at the
same time.

It can OFTEN be in BOTH your AND your client's best interest to lie.

And ask for forgiveness later after they are happy with you, IF it ever comes
up...

~~~
andreyf
> Bill Gates did this stuff dealing with IBM et al.

Please cite. From what I understand, he sold them software that he would
deliver at a later date, before it had been written. It was closer to contract
work than deliberate deception. That's not the same thing as lying about
factual, verifiable, information.

Personally, I would never associate in business with anyone prone to such
factual hyperbole...

~~~
reazalun
Dude, it is a well-known fact. At the time the dealing was made, Bill Gates
didn't have the software. Then he immediately bought the rights of QDOS, which
he then recast as MS-DOS and sold it to IBM.

