Ask HN: My CEO has been "stealing" money from the company, what should we do?
We're a startup at the pre-seed stage, me and another co-founder just recently found out our CEO has been instructing our third-party accountant to issue themselves advance payroll for like 13 weeks, while we only have roughly 8 weeks of runway left.
They never told us or discussed with us about the payroll advance, would this be considered as fraud or stealing money from the company? Would this also breach the shareholder agreement? And if so, what are the actions that we can take?
We certainly want them out for good due to their dishonest actions and in-actions at work.
FYI, we are all equal shareholders, and we just passed our 1-year cliff, with a 4-year vesting schedule.
--- Edited to add more context here ---
We are currently in a pre-seed program in a relatively large VC firm, and we are about to pitch to our head investor in a few weeks for our seed round. Thus, we have a narrow time window to make an action, and we definitely don't want to blow up our chances with our investor.
28 comments
[ 3.4 ms ] story [ 65.3 ms ] threadIf you are really equal co-founders, then you should confront the CEO and accountant and fire them both. If you can't do that, then you never were equals.
From the information you provided, it is obvious that the CEO is a dishonest person and would be an even greater liability in the long term.
That's terrible advice.
What would you suggest OP do instead of asking HN?
e.g.
"Could you sue on behalf of the shareholders of your CEO's embezzlement and win? Maybe? Should you? I don't know, I'm not your attorney, and I haven't studied any of your claims."
That's about as worthless as it gets.
Although, we are trying to understand if this could be considered as fraud so we can remove them with a legally solid reason, and confiscate their shares.
Does this mean that for the last 13 weeks they've been one week ahead, or something else?
How much does the CEO's advances affect your 8 weeks of runway? In addressing this situation, I'd be mindful of the fact that the company won't exist if you run out of runway spending all your time on this issue. It's a frustrating situation, but legal bills can eat up runway pretty fast. The best possible outcome is to get some lawyer friends to help you figure out a slam-dunk case and get the CEO out without protest. But IMO (as a founder and former SV lawyer), this is pretty unlikely.
Their advances will probably last us another 2 weeks, and we only have 8 weeks of runway left because we are at the end of our pre-seed incubation program, and we are about to raise our seed round with our lead investor in a few weeks.
I can't agree more that this will eat up our time and resources very fast, but we also want them out before we pitch to our lead investor for the seed round. We have already spent a week investigating this issue ever since we noticed something wrong, so we have a very narrow time window for us to take actions, ideally by early next week.
Thank you very much for the suggestion, we have also thought about starting a new entity, but we are not so sure on how to transfer our assets (SAFE note, domain, IP, employees, customers, code bases, etc) to the new entity, and how this would affect the relationship with our existing funders.
What do you think the pros and cons would be?
It may blow things up, but I think it's your best chance at survival. Just my 2¢ as a guy on the internet with an opinion!
Be prepared to just call it quits, set everything to zero, and start over though.
Talk to a lawyer and be sure he/she agrees that your information is lawyer-client privileged. That might mean signing a retainer agreement with them.
Like is what they're doing right? Is it legal? Can you do anything about it? All interesting questions, but, none of the answers are going to meaningfully change your situation.
---
The first question to ask is, what would you like to see happen?
Considering the short runway and the apparent problems with the CEO, do you see value in the company and would you like to keep it alive? Are you ready to write it off, and you just want to manage the endgame to ensure that yourselves, other employees (if any), customers (if any), investors, or other parties are treated fairly? Is there some other outcome that you'd like to optimize for?
Separately: who are the members of your board? I've never dealt with a situation like you're describing, but at a high level I imagine you have basically three channels for action:
1. Call a board meeting, fire the CEO.
2. Legal action. I'm not sure whether this sort of action is something you could sue over, something you could ask the police to press criminal charges for, both, or something else. Consider, however, that filing a lawsuit is expensive, and it's not obvious to me that either of these actions would benefit you in any practical way (aside from revenge, if you're looking for that).
3. "Soft power" – threaten to do (1) or (2) above, or to quit, or do other things, in order to coerce the CEO into leaving / behaving better / whatever else you'd like to see.
One other note: while I'm off the edge of my experience and expertise here, I can imagine possible scenarios where you could wind up in legal trouble if you're not careful. (For instance, if you're on the board and fail to take appropriate action now that you're aware of the problem?) You might want to consult a lawyer for this reason alone.