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Advise HN: My co-founder is stealing money from the company

6 points by temp0101 ↗ HN
Hi HNers,

I co-founded a company with someone I knew from work. We were not best friends, but we know each other from a professional perspective.

I am a tech person, mostly behind the scenes. My co-founder is a salesperson, responsible for closing the deals.

The company is doing great, I couldn't dream of a better fate financially. Deals are flowing, we are both making money, and life felt beautiful unless I recently got to know that my co-founder is stealing money from the company, hence from me. When he's closing the deals, he charges clients much more than he tells me and puts that money into his pockets.

For example, he negotiates $150 for a deal, brings in $120 to the company (we cover the opex and split the profit as a dividend) and that $30 goes directly to his pockets.

He's been doing this for over a year, costing me six figures by my estimates.

I could potentially sue him and get my money back. But the issue is that if I start a battle with my co-founder the music will soon finish, he will stop bringing in money in the company. I will probably loose all the upcoming profit (MUCH greater than what he steals from me) and other people, that I brought in the company (some of them are close friends) will be affected (if no runaway money, I will be forced to send them to homes).

What would be your advise, other than legal battle?

8 comments

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akerl_
What’s your proposed option, other than pursuing them legally? If they’re crucial to the business, this is going to destroy the business, either today or later. If they’re not crucial to the business, this has a decent chance of destroying the business, either today or later. Having an embezzler as a co-founder seems like it only has bad outcomes, might as well pick the option that might recoup some of your money, and doesn’t involve continuing to co-found a company with somebody who’s cool with stealing money from you and the company.
galaxyLogic
> he charges clients much more than he tells me

Wouldn't there be a receipt of how much the clients are paying to the company's account? Or do they pay part of the sum total to the company and part to the co-founder directly? Do they pay him cash?

Maybe just gather enough proof of the fraud then show it to him and say he must stop doing that. Surely he would appreciate his fair share of profits as opposed to going to prison.

Point is you must have ironclad proof of the fraud.

thirdplace_
They probably justify it morally by thinking they deserve more because they bring in the big sales and "do all the hard work". You could offer up some stock ownership for free to heal the relationship. Some people couldn't live like this and would rather burn it to the ground. So, depends on your position, goals and preferences etc.
prirun
I would never reward a thief with additional stock, especially as it may diminish your ownership share.

I would hire an accountant to advise you on how to setup checks and balances to ensure that his theft does not continue. You cannot trust everyone in a company to do the right thing. That's why procedures with checks and balances are necessary, especially for money. If he won't agree to this or won't follow the check-and-balance procedures, you should figure out a way to buy him out and force him to sell his shares to you, with the threat that you will pursue legal action if he doesn't agree. I think you would have the upper hand in this situation, because it would be the company against him personally, so you could use company funds for legal fees while he would have to use personal funds.

Not a lawyer, so consult one before you take action.

alxcb
Can you explain how you are running the business, charging customers without invoices? Anything amount other than billed on the invoice is tax evasion, right?
TooSmugToFail
I am no lawyer, but this sounds like embezzlement to me: he’s an executive who is stealing from the company, and thus from the shareholders.

Have you taken any 3rd party investments to date? If yes, there may be a Bad Leaver clause, which could be a basis for a more expedient delivery of legal consequences.

I would expect a founder lose all his shares under a Bad Leaver clause if found stealing from the company.

That said, I have no clue how you could prove this. I would strongly advise taking legal advice before making any move. If you have a strong case, I would first confront the guy and give him a chance to make things right.

At any rate, I would not stay in business with a guy that steals from me.

duped
This post is wild - from what it sounds like you're not in "legal battle" territory. You're in "make sure I don't go to jail with my cofounder too" territory. You need lawyers for your business and a personal lawyer to be giving you advice.

The Netflix execs who took kickbacks like this got 30 months in federal prison.

anm89
Tell him you know what's up, that you are giving him two weeks to reimburse the company in full and not a penny less, and that if he does that, this will be forgiven this one time.

Make it clear that anything except 100% compliance and it's straight to the lawyers / police. No bargaining.

The company is likely screwed anyway if one of the founders can't be trusted at all.