Ask YC: Ethical Question, possible fraud | Hacker News Reader

Ask YC: Ethical Question, possible fraud

30 pointsnobodynew51 comments

Background Info:

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.

Ethical Dilemma:

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.

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 )

What would you do if faced with this situation?

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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.

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!

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)

"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).

The opposite of "telling lies" is not "emphasizing your weaknesses" (besides they might not even be weaknesses).

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.

No, but how about... "No, we are not a major corporation with millions of customers. This has many effects on how we'll do business with you. For one, it allows us to provide you with the kind of attention and customer service unmatched by our competitors. As one of our first customers, you have a strong influence on how our product lines evolve, what features we implement, and what bugs we fix first. We can also offer you {special service program}, something we will only offer our first {100} customers, to help us evolve our software to address all of your needs. Being a fresh competitor in {this market} also holds our product to a significantly higher standard - the purchases you make from us can't be justified as the 'market default', and so we have to compete on features and quality, such as {specific features and examples of better quality}."

But I'm just a programmer, not a good business person; I'm sure a good business person can make it sound much better.

Life is rarely black or white, more shades of grey (can't remember where I read that).

Corollary: Careful with the shades of brown.

> 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 ?".

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.

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.

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..

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?

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.

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...

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.

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

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

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.

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

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.

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

You have a responsibility to do something...

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

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 :)

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.

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.... :)

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.

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.

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.

If he's putting false claims into written advertising or solicitations he's crossing state and federal "truth-in-advertising" laws.

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.

I've known guys to run full-page ads for software that didn't even exist yet.

That seems significantly more justifiable than flat-out lying about the company and its customers.

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.

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.

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...

>What would you do

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

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.

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.

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).

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.

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

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

In that particular order.

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

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

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.

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,

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.

Leave.

get out.

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...

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

Hmmm... this sounds like a slippery slope to me.

> 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...

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.

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