Ask HN: Should I inform investors that my startup employer is a scam?
The company has not had a series A funding yet, and was almost bankrupting some months ago until a VC gave them "some" millions. Meanwhile, there's still no product, and the company pays for worldwide company trips for no purpose (no conferences or anything), pays for life coaches and frequent global flights for the CEO and who knows what else.
When I say "no product" I literally mean it. It only exists on a powerpoint slide without a single line of code implemented.
The worst part is this startup is 5-7 years old, and has gone through the bankrupt -> saved last minute by investor cycle more than one time.
Average employee stay is 6-14 months. During my employment three managers left the company, and four engineers. There's no documentation about anything because people come and go after they see there's no future in this company.
Should I anonymously inform investors that my startup employer is a scam, and if yes, how should I approach it?
111 comments
[ 5.1 ms ] story [ 234 ms ] threadBest option is to just leave. OP can still talk to the employees that he is friendly with - maybe that will help them take the situation seriously
If there is litterally not a single line of code in 10 years and nobody does anything all day but drink kombucha and play foosball then they already know...
Equity is a gamble and should be treated as such. Most jobs don't contribute any value in the grand scheme of things beyond shareholder value, so that's not a loss either. If anything it's a learning opportunity to not trust startup founders so blindly.
But if you want to warn your coworkers out of comradery, do so in a way that isn't simply telling them "I think our boss is defrauding investors".
> So I was hired in this startup a year ago.
I'm not poorly informed, otherwise I wouldn't be making this post. After everyone left I am in the most senior engineer position (lead) and there was no one left on top except for me and the CEO.
At the moment, it sounds like you doing BS work and chasing your own tail.
It might be more interesting to change your attitude and jump on the delusional train (which a lot of startups are tbh), take the CEO more seriously and start building exactly what they want (or at least start prototyping). I don't think anyone will criticize you for taking the initiative and having a general positive attitude and start getting shit done.
It sounds like more fun than what you're currently doing, while you think of your options.
Listen to others here, just leave. You will not break into that fuct up situation, you cannot improve it, no one will listen to you, and if you blow the whistle you'll be done.
This entire post hinges on OP's correct interpretation that their employer is engaging in fraud against investors. This isn't as straightforward as defrauding customers because it's easier to judge fraud in sales because you probably don't know the exact terms agreed to as part of that investment. It's entirely possible the VCs are in on it or will try to kill the messenger rather than admit they didn't see the fraud.
OP wants to inform investors that they're being defrauded because he sees it as the ethical thing to do - not everything has an ulterior motive. Sounds like he's wondering if there's any possible serious unforeseen repercussions that could befall him if he goes through with it (or doesn't). Losing the job (whether through quitting or getting fired for whistleblowing) is probably a foregone conclusion.
If you're pretty for down the totem pole you're probably safe, but awareness of fraud without exposing it can very often leave you legally liable. If you're in any kind of leadership position you could be one of the people that end up taking the fall.
No, you are not. Employees do not have an obligation to act purely based on morals without considering the balance of potentially very one-sided legal and financial risks to themselves.
These are professional investors with the means and the obligation to do their own due diligence. They don't need individuals making potentially life changing sacrifices in order to save them some money.
Fraud is only fraud if a judge says so. Until then, it's an accusation. The accused will defend themselves and potentially hit back at the accuser.
I would take legal advice, both on whether I have a legal obligation to report what I have seen and on how/if it can be done without taking on outsize risk myself.
Edit: Consider the moral situation from the other end for a moment. I'm a small investor myself, far too small to even be allowed to invest in venture capital funds.
Would I want some employee somewhere to take potentially life changing risks in order to protect me from losing a percentage or two of my money? Certainly not. How could I expect anyone to take on far more risk than I'm taking myself?
What I would say to the employee is, stop contributing to the deception! If there's anything more you can do safely, I would be grateful.
Unless you live in China or another poor governance country, whistleblowing is actually encouraged. It signals integrity and honesty. If the thing is indeed a fraud, it will eventually collapse. When that happens, you will have a pretty embarrassing spot in your CV. When you look back in 10-20 years, on what side do you want to be?
Another minor point:
>I'm a small investor myself, far too small to even be allowed to invest in venture capital funds. Would I want some employee somewhere to take potentially life changing risks in order to protect me from losing a percentage or two of my money? Certainly not..
Pension funds invest in VC so even if you make minimum wage, you still most likely have money invested in VCs. The longer you wait, the more of people's money (pensions, endowments, etc) will be lost in this fraud.
Whilst this may be true on paper the practice is rather different. Be aware that a company's lawyers will come after you with as much force of the law that they can muster in this situation
There's the rub, right there. There will always be a tiny doubt. Especially as a worker bee who doesn't have all the inside facts. People tend to talk themselves out of taking action due to this. The resolution is to document what you know, incontrovertibly, leave all speculation out of it and then hand the problem over to someone else. Which is why tiplines exist at the SEC, DHS, and other agencies where this sort of self-doubt is a serious impediment to reporting of malfeasance.
It sounds like there isn't much work to be done and even if you are found out I don't think they have enough motivation to care.
"Well this isn't about my job. I didn't mention once the problem was me losing my job or anything."
But as others here wrote, if the investor mentions the email to the CEO, it might trigger a witch hunt of who the whistleblower is. OP could say "I'm a former employee of [company]" and it would take the heat off people currently working there.
Even if you were to blow the whistle, do it after you have left for greener pastures. By then you wont care but perhaps you will ...
Imo, the good first step is to contact a layer with relevant expertise and consult what your steps should be. So that you don't accidentally break law or otherwise get yourself in trouble, so that your whistleblowing way is most solid possible and so that you don't accidentally out yourself.
The layer can also help you figure out what is actual fraud and what is not.
I don't mean he should not have asked, I just share the way I view such a problem.
It's literally the investors' job to have figured this out
It seems obvious to me that VC is part of the scam
>>> Should I anonymously inform investors that my startup employer is a scam, and if yes, how should I approach it?
I wouldn't but, if you decide to inform don't report to the VC, but the people/entities above this VC (could be another VC, funds, physical persons, etc).
Just be careful, it seems that you are looking through a very narrow window here.
If you live in a country where there are whistleblower protections you should talk with an attorney and see if you can report this to the relevant investigative authority under protection of that statute.
https://www.imdb.com/title/tt0427783/
Just build your dream project there, and then take it with you. Its basically a mafiosi incubator and the software is decoration and they do not recognize the value of it missing or ever having existed. Could be other things to. Empty houses in the middle of L.A or NY. Large Resource storages or car traders, dealing in circles.
Just make sure, there is no paper trail showing that you knew.
As someone below commented, it seems more likely that the VCs are stealing from their investors.
Do you think people are bringing briefcases of cash on the scale of that many millions to a nail salon?
For example, say you were in charge of a private equity fund with a close overlap of executives with a government bank. When investments go well you put them on the PE funds books. When they go poorly you put them on the bank's books. The bank gets a few government bailouts in the process. You now have billions in dirty funds in your PE fund that need to be laundered through investments. A few additional degrees of separation here can be very useful. I've seen this exact situation play out and met some of these guys while trying to do business in Africa.
And yes, there are also startups which produce only 'tech demos' of potential new business lines because they've accepted the product they were originally going to buy won't work, but their founders aren't ready give up yet, but not easy for them to convince investors to follow along for 5-7 years without revenue even if they're really good liars...
Stick around till you have an even better gig lined up.
After you get the raise, go into your cubicle, close email and phone, and start working on your own projects until the moving guys come to take your desk.
If the company has indeed defrauded its investors, that's between the company leadership and the investors. Unless you're involved directly enough to be potentially liable, this is above your pay grade.
If you think you may have been involved in defrauding the investors, talk to a lawyer. Otherwise, shut your mouth until you've found a new place and then carefully evaluate what you say to whom to minimize the risk of being thrown under the bus.
You'd be horrified if you knew how many companies sell products that don't exist beyond organically evolving powerpoint presentations. It only becomes fraud when the companies fail to deliver and can't meet their obligations and the customers aren't willing to agree to alternative resolutions.
It sounds like your employer is currently not very good at generating sales at all so the only defrauded party would be the investors and that would require knowing what your employer actually contractually agreed to deliver in return for the investment. Unless you're privvy to what's in those contracts, my advice would be to zip it and GTFO.
My advice would be to leave as soon as possible. If no technical work is happening then you are not building anything for your resume, and if the company goes under then its bad practices might be revealed. That would make the time you spent there seem like a toxic spot on your career.
On revealing them, I feel the VC is required to do their due diligence and the amount of legal headache and exposure you as an individual would have to deal with if ever discovered to be the revealing party is not worth it.
Exit, and tell friends to avoid being hired by this firm.