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Comment by duaneb | Hacker News Reader

IANAL, and Sam mentioned a felony charge. Are there any legal protections for investors (or.... whoever this is protecting) for e.g. misrepresenting "signups vs users vs active users"? Surely that falls under subjective fraud rather than a straight up objective lie, especially for sites e.g. reddit where the line between "active user" and "lurker" is extremely murky.

EDIT: Clearly I have no understanding of fraud.

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Usually and investor makes a Due Diligence in the company. Depending on the stage of the company, investor profile, this due diligence can be a formal one, where you hire external auditors to make the process or in a more early-stage phase you can do VC firm (or angel) makes the due diligence themselves.

Either way, at least in Brazilian Law (I work with VC in Brazil, but I imagine there is something similiar in USA), we have a "Hidden Liabilities" clause in our termsheet. It says that anything prior to the investors investiment is liable to the founders only.

If an investor does not include such a clause and doesn't do proper due diligence but everything was handed over...

It works the other way around with all the ways people get screwed over by the other side.

RE: "Subjective fraud". Regardless of whether the fraud is intentional or accidental, misstating something to investors (i.e. "our revenue was $1 million last month" when you're talking about GMV) will still subject you to a lawsuit and/or arrest.

Your point stands, and this is a nit, but... Fraud, by legal definition, must be intentional. It is a deliberate attempt to mislead.

Is there a concept in law as "you should have known"? Like, its one thing to not know that the thing you are saying isn't true (i.e. "my co-founder went to Yale" when he actually believes that he did).

But another to not know the definitions of words you are using when you should know that? Can you say "I have a million dollars in the bank" when you honestly believe "a million" = 1000?

Yes it's probably the line between just being liable for damages vs. going to jail.

Ignorance of the law is no defense to criminal charges. But law might also specifically entail intent. For instance, this is the difference between first and second degree murder.

IANAL and I have no knowledge of the business/financial/contract end of things. I do know I've signed quite a few "due diligence" and "reasonable effort" clauses. I don't know how legally defensible they are in situations like user reporting when it's not specified.

The concept of mens rea[0] touches on this. One of its applications is that ignorance is not an excuse for being culpable. All of this is not to say that lack of intent makes someone blameless, only that it is not fraud without intent.

[0] https://en.wikipedia.org/wiki/Mens_rea

I have reason to think oral statements about your financial condition aren't actionable as fraud by your creditors in bankruptcy. I know nothing of liability to investors, securities law, etc.

In American law, there are civil offenses (torts) and criminal offenses (crimes). Criminal cases are prosecuted exclusively by the government.

In both categories of law, there is a subset of offenses that fall under "strict liability" — for which you can be punished regardless of your state of mind when committing the offense.

Fraud, like most criminal offenses, requires establishment of mens rea (knowing wrongdoing), so Sam is incorrect in saying that financial misstates are "felonies" on their face. But once you've become an investor you can bring a claim of breach of fiduciary duty (a tort) — rather than establishing that the CEO intentionally misled you, in this case you only need to show that they breached a "duty of care" — essentially, "you should have known".

We have the concepts of negligence and recklessness, which often constitute offences of varying severity. I don't know anything about the specifics of fraud.

I know nothing about startup investor terms. But I wouldn't be surprised if they often included some clause "accounting shall conform to Generally Accepted Accounting Principles [GAAP]", at which the signing company is responsible for knowing and using the GAAP terminology for various items.

How those responsibilities translate over to criminal / civil law would be a question for a lawyer. I think Sam's use of "felony" might be meant to get people's attention. Even finding yourself in an argument with your investors over civil liabilities probably means you have huge reputational issues that could kill you among the investor community.

I think this is vastly over-exaggerating.

Unless you specifically state that you are using the GAAP term "revenue", revenue could mean anything, just like "made" could mean anything, like saying "we made $1M last month".

I highly doubt if you were making a presentation and you said "We had 1M in revenue last month", and it wasn't actually GAAP revenue, I find it hard to believe you would be subject to lawsuit or arrest. In fact, arrest is even more of an over-exaggeration.

Even Groupon had a hard time defining exactly what its "revenues" were pre-IPO, and yet no one got sued or went to jail.

Even Groupon?

If someone invests in you because of a revenue claim when no one else in the room would agree with your definition of revenue, you might end up getting sued. That's pretty reasonable. If it's in a casual conversation, they should have plenty of time to look over the books later, so it's not a big deal.

That said, why not use appropriate GAAP values? You should already know them, assuming you're keeping proper books, so it should be the easiest value to give.

You could get sued, but in the US you can get sued for anything. But you would win the lawsuit.

"Revenue" can mean anything. Look up the term online, for example http://dictionary.reference.com/browse/revenue, and you'll see 6 different definitions. One of them is: "an amount of money regularly coming in". How is this definition of revenue wrong, or how could it result you getting sued? The answer is you won't.

Sure it could cause misunderstanding, but that happens all the time. As long as you don't misrepresent it as "GAAP revenue", you're perfectly fine using it in any reasonable way. Unlike what Sam Altman says, it's not a felony. My wife is a CPA and she laughed out loud when she read that.

There are substantial remedies. Civil courts allow actions for restitution and punitive awards.

If the fraud rises to a sufficient level, you can attempt to have the state lock the person up and/or prevent the person from interacting with you.

Really? Seems like that line is easily defined with a sentence or two.

Sorry, I more meant it in terms of:

1. What to the investors think the terms mean.

2. What does the service provider think the terms mean.

3. Can the difference between 1 and 2 be construed as a violation of a contract.

4. If 3, is it possible to discern unintentional vs fraud.

I used reddit because it so easily demonstrates the different tiers of the 1% rule[1], except with reddit there are un signed in users, signed in users who don't do anything, only voters, voters and commenters, people who submit, and "power users". I don't know the details now (and reddit has changed a lot), but last I checked they seemed to descend in numbers by about ~10%. This would be a place where you could easily portray a very different ecosystem than reality, intentionally or not, simply by categorizing the users as "active" or not, and how you're characterizing the value you're getting from them.

[1] https://en.wikipedia.org/wiki/1%25_rule_(Internet_culture)

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