Ask HN: Should I inform investors that my startup employer is a scam? | Hacker News Reader

Ask HN: Should I inform investors that my startup employer is a scam?

88 pointscordialthank102 comments

So I was hired in this startup a year ago. Its aim is to make a SaaS. It's been painfully obvious that nothing gets done about this, the only projects we work on are bizarre random demos or small open source projects on github for "marketing".

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?

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I'm gonna agree with qikInNdOutReply here: you work for a laundromat. If this has happened multiple times, it's entirely possible that all of the VCs involved are aware of it, and are in fact getting their money's worth. :-)

Here's my advice to you, and I'm not going to say IANAL because you don't need to be a lawyer to know this: you are working for shady people. If it is, as seems likely, a laundering front, the very last thing you want to do is "go to the investors", unless you really enjoy the feeling and weight of a custom pair of concrete shoes.

I would find another gig ASAP, and then and only then would I sit down and have a serious think about how much I cared about seeing these people get punished for what they're doing. Because the only people you should probably be going to are the SEC, and that would probably turn into a criminal case, and then you'd be getting the very strict attention of whomever set this up. And those people are probably not tech bros.

Up to you, man, but I would seriously suggest you consider this possibility.

The whole point of a laundry is to get money out that has an apparently legitimate source. That isn't happening here.

That’s one kind of laundry. Another is “how can I funnel millions to my friends and still get a tax deduction”.

I think the correct term is 'syphon'. In my country we had this famous startup raising tens of millions with a product that existed only on paper. Suddenly tons of people employed with salaries triple of what's reasonably expected, tons of marketing fluff and very little substance. It looked almost identical to what OP described. Fast forward a couple of years, they still seem to be doing something but I bet owners did extract a few cool millions out of it.

Exactly. This seems like it might be some type of tax shelter scheme.

The investors are adults who are expected to be able to look out for themselves. VCs, doubly so.

There are probably way more crooked VCs than crooked startups, by volume of money skimmed. Giving investment money to a crooked VC is even dumber than to a crooked startup. I.e., they deserve to be milked. They may cease to invest, after some time.

Its a money laundering machine.. the oligarch invest dirty money into it, they buy equipment from other oligarch conglomerate companies, washing the money in the process.

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.

Yep. I've seen this model many times in my industry(cannabis). You can coast for a long time in this position. Consider asking to go remote, sit on payroll, and getting another job as well. No harm no foul.

Can you explain? "Money laundering" businesses are cash businesses. If the money is already in the legitimate banking system it doesn't need to be laundered, even if it's from an "oligarch". How does this help?

As someone below commented, it seems more likely that the VCs are stealing from their investors.

Laundry isn't always cash. Sometimes you've stolen funds from a government or through a banking scam. That money needs to travel through other businesses to be effectively cleaned.

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.

The world is more complex than that. Things like sanctions and countries (not) fully implementing the sanctions create a world in which the transport of sanctioned ‘money’ (or money owned by sanctioned people) from place X to Y is only possible via constructions as the one hinted on here. Dirty money is not always cash. Even bank held funds can be dirty enough to require cleaning.

Yep it may be entirely illegal for a foreign entity to buy fifty million dollars worth of brand new excavators, but entirely legal for them to invest fifty million in crappy startups that burn money buying weird things like excavators.

Good point, thank you for helping me understand.

...They're cash businesses when you're cleaning cash - drugs, prostitution, etc

Do you think people are bringing briefcases of cash on the scale of that many millions to a nail salon?

There are other ways of cleaning bulk cash. Buying real estate in developing countries, for instance. I just thought that once the money is in the legit banking system, as it would have to be for a startup to accept it as funding, it's clean enough. I hadn't considered sanctions though.

I think the "VCs stealing from their investors" hypothesis is quite plausible, but there's plenty of reasons why someone might need to receive payments as 'investment' or 'revenue' rather than unexplained payments from suspicious people, especially if the money is being transferred internationally. Could also be a way of exploiting 'investor' and 'startup' tax breaks and collecting R&D grants whilst doing as little real research as possible (and eventually, having consumed all the cash, writing it all off as losses against tax bills)

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...

Maybe? But then why go through the "bankrupt -> saved in last minute" cycle several times and generate unwanted attention? I'm not an expert of course, but I think if you want to launder money, you should do it as quietly and inconspicuously as possible...

It's probably not officially bankrupt, it's "almost bankrupt".

Looks more realistic like that I think: startups are supposed to struggle so doing dips of almost bankrupt seems smart really.

> Ask HN: I have a job making money without being forced to do anything difficult. Please help me figure out how I can fuck up my situation.

On that note, any VC's needing a CEO to start a new company when this guy goes to the feds, HMU.

Plot twist;

He was gonna buy puts on the company stock and make out like a bandit on his way out the door.

>>> When I say "no product" I literally mean it. It only exists on a powerpoint slide without a single line of code implemented.

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.

None of this is legal advice (IANAL).

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.

Great point

You just gave me flashbacks to this dude I contracted for. Dude had me working on utterly random stuff for like less than a week at a time. "Hey, make a visualization tool in Unity!" "uhhh ok but I don't know C#, and the backend is only 10% done, I suggest we focus--" "just do it! we have to move fast!"

I eventually started to get roped into investor meetings and he was just straight up lying to investors; nothing wrong with a little optimism or whatnot, but suggesting that you present-tense have some non-existent capability that'd take years to develop is ballsy. Paychecks started getting late and then not coming at all and I had to threaten to sue him.

Just give 0 notice on payday and gtfo.

How much did he end up skimping you on?

If you see fraud and you don't shout fraud, you are a fraud. Document your findings and do what is appropriate. After all, those VCs are managing people's money. They need to know.

>If you see fraud and you don't shout fraud, you are a fraud.

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.

I appreciate your points, I think this is an interesting debate. What I mean is that the right thing to do is to call things out if you know they are wrong, even if that involves risk. Assuming that you are absolutely certain that it is indeed a fraud and that the investors are not aware, that is the right and honourable thing to do. Not only that, but looking away is wrong. Think about the hundreds of Theranos employees who were too busy considering risk/benefit and decided to look the other way vs the whistleblower guy. Of those two, who do you think will have their career impacted? who do you think have their reputation tarnished?

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.

> Unless you live in China or another poor governance country, whistleblowing is actually encouraged.

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

> Assuming that you are absolutely certain that it is indeed a fraud

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.

If pursuing this strategy, step 0 should be consulting an excellent attorney.

Regardless of whether or not you pursue this strategy it may be worth consulting an attorney. You know what's more legally precarious than blowing the whistle? Having kept quiet before someone else blows the whistle.

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.

i don't think this is a case of mandated reporting.

Find a new job ASAP. The company will fail eventually. If the investors aren't doing their due diligence, that's on them. Investors expect companies to fail more than succeed and they budget accordingly.

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.

Just make your exit, find another job, it's not worth your risk to pull back the curtain, the VC is responsible to be aware of the progress the startup is making and what their burn rate is, where their spending is going.

Stick around till you have an even better gig lined up.

Ah a company that sells dreams and promises to its investors while the founders/employees use the money for hookers and coke. A (repeating and common) story as old as the startup world itself :)

https://www.imdb.com/title/tt0427783/

Name the company, I'd love to get an additional job there collecting money for free.

Go ahead and try it, I assure you that will be the end of your job there.

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.

Well this isn't about my job. I didn't mention once the problem was me losing my job or anything.

Good. Then please elanorate if you wsnt; what is it ypu want to achieve with informing someone about the situation?

To... prevent someone from getting scammed? Why does OP need more justification than that, as if that's not a lofty enough goal?

That's pretty self-evident surely? What he wants to achieve is the investors having the information that they're being scammed - would you be asking "what are you trying to achieve" if someone was asking about telling someone that someone had just picked their pocket?

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.

Maybe avoid criminal liability once the scam is uncovered? Even if you're just a regular employee, if you know about stuff like this and don't report it, you can be considered an accomplice...

In that case an anonymous report will not work to their favor: they should talk to a lawyer, get out ASAP and then consider their next steps carefully.

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.

achieve the and then everyone applauded ending.

Presumably the investors are aware and this is some sort of tax / laundering scam?

Unless you want to do more business specifically with said investors, I would not recommend this. Whistle blowers almost always suffer and in this situation you have no moral obligation to the public but rather to some private figures. If I were you, I'd enjoy having an easy job. That said, is your company hiring?

After the "scary market downturn" they started hiring only people from India, Nigeria, Pakistan, other South Asian countries in order to avoid paying six figures.

Why do they keep hiring people if there is no product to build?

Could be that they're siloed and there is product but OP is poorly informed. If they don't work there, then how could OP truly know?

Didn't stress on this point, but CEO is delusional and megalomaniac. They think their plan is going to work and they keep hiring people for stuff that supposedly will build up the SaaS. They are emotionally abusive to dissidents and people who disagree. It's a lost cause.

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.

Not discounting any of the other "Danger, Will Robinson!" comments, have you considered actually building the crazy thing they want?

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.

I wish I could get into details but that'd give away my identity. Unfortunately this isn't possible. I tried it for months but I was sabotaged continuously by management by doing things faster than I was told (yes they actually berated me for being "fast").

I'd recommend you get out of there in that situation. I've personally had something similar and it wasn't fun being caught in the wreckage when it turned out the CEO had lied about certain investments.

It doesn't sound like a scam to me. It seems there is intent to actually build something, just poor execution and bad management possibly?

I'd also be worried about a defamation suit if the OP misinterpreted the situation. I mean, if I were a CEO of a struggling "startup" and somebody went around claiming I was scamming investors only because I was doing a bad job at building products, I'd definitely be talking to my lawyers about defamation...

OP:

> So I was hired in this startup a year ago.

> Should I anonymously inform investors that my startup employer is a scam, and if yes, how should I approach it?

It's literally the investors' job to have figured this out

My gut reaction is no. It does sound like a dumpster fire so I would leave. You feel a moral obligation to inform investors which is good but be open to the possibillity that there's more going on than you are aware of so things might not be as black & white as they appear in practical and moral terms.

OP can probably start their email with "As far as I can see (and I may not be seeing everything)".

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.

I would just find another job, let them crash and burn on their own

Well this is another discussion. I can do just that separately. But it doesn't seem fair to the employees who stay and believe the company's vaporware of making value and have their equity worth millions in an indefinite future time?

> But it doesn't seem fair to the employees who stay and believe the company's vaporware of making value and have their equity worth millions in an indefinite future time

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...

why kombucha?

foosball is strenuous and dehydration is no joke

How do the employees not know, if the situation is so bad for so long? They know and they still choose to stay. So they are not the OP’s responsibility.

Best 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

Are those other employees getting paid? Then there's nothing to worry about.

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".

Just warn your coworkers tbh

Was basically in the same situation, did as you said, not my problem, i dont get any money from whistleblowing or caring about that

Who says the 'investors' are not in on the scam?

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 ...

Get out, then anonymously warn the appropriate financial authority/regulator. Optionally, and if it's safe for you and for them, you might want to anonymously warn the employees like yourself, but this might be impossible or unwise.

Consider that someone else may already be planning to warn the authorities. To avoid or minimise involvement in any legal issues yourself if the company goes down, you should be able to prove you were either naive (very difficult) or had misgivings -- in which case you may need to demonstrate intention to act.

You've already written this post, so if you can prove authorship that would be good. An encrypted string in your profile, perhaps.

As others have said, you really need to talk with a lawyer.

The reasons I suggest this course of action: be the change you want to see in the world. You'll feel better about yourself. God knows what this organisation is actually doing; you were a naive cog in the machine but you're no longer naive, and you don't need that responsibility on your mind.

Finally, regardless of your actions, you should think about how your CV/résumé reflects the time you've spent at this company. Don't hide the truth, but of course don't flat-out divulge everything.

So many questions! What do you do then? What do the managers do? The engineers?? How have they survived for over 5 years??

Everyone leaves fast except for some juniors who stay. I will leave as well. At the moment there are no managers, they are trying to hire new ones.

Personally, I would feel uncomfortable staying with such a company.

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.

> Should I anonymously inform investors that my startup employer is a scam, and if yes, how should I approach it?

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.

Go into the CEO's office, ask for a large raise and tell them the product is in a very bad shape and will require you to put your utmost effort to turn the ship around. If word were to get out, it would surely kill the company!

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.

While that comment is snarky, there is a decent chance the sales guy at the company has already done it.

Wait - how and what did you get hired for? Did you ask any questions about product and revenue?

It seems to me that you went in blindly and now you’re trying to cleanse your conscience. You think the investor didn’t do due diligence? I doubt it - sounds like a money cleaning operation to me!

You won’t get anything out of reporting - get the hell out now!

Got hired for a specialized technical role, which turned out they didn't even need. The job description I applied for and got hired for was not related to what I was doing in work. In essence, that was a lie.

A tip (probably best anonymous, but accompanied with some actual, real, confirmable data/documentation) to the IRS would go much further than one to either the investors or the SEC. That goes double if your managment is even slightly MAGA. The literal army of IRS agents coming very soon will be out looking for people to harass and eat the substance our of... (Note that the 87,000 IRS agent increase is several time the agency's total size and the additional $80 billion funded compares to Russia's total military budget of $66B USD!)

> The worst part is this startup is 5-7 years old

So not exactly a startup any more.

> has gone through the bankrupt -> saved last minute by investor cycle more than one time.

This isn't a scam. It's risky/bad investment.

Based on a similar experience, I would say it's best to leave.

Around a year ago I also left a 8-9 year "startup" with some of the same fundamentals issues but at least we had a basic demo even though it was very insecure. That wasn't the primary reason for me leaving but their attempt at A funding was taking a lot longer then expected and the contract was up.

Interesting enough the company I used to work for was mentioned on hn at one point, but this was many years ago. They changed industries which is understandable.

Apologies I have no advice to give to your question (others have provided plenty).

However, if you don't mind sharing additional details, I'm interested in knowing how you arrived at the position. Did the company seem legit from the outside when you first started? Did you seek out the job, or were they the ones to initially reach out to recruit you? Knowing what you know now, what are the things you would watch out for to avoid falling prey to a scam company like this?

It’s not worth it. I knew someone who was tasked with violating the laws of thermodynamics at a startup - and so he worked out the math that would disprove the second and enjoyed his time.

Do the same. They either know or don’t want to know.

What country do you live in? If this was me and the country was in the USA, I'd hire an attorney and have him (under privilege) anonymously report this to the investors, as well as the SEC, IRS, and FBI.

What's stopping you from working another job at the same time?

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.

OP has moral backbone and is trying to figure out ethical path. <snark>I know it can incomprehensible in some parts of startup world, but for some people, it is a thing</snark>

Copying from another comment in this thread (apologies for doing that)

"Well this isn't about my job. I didn't mention once the problem was me losing my job or anything."

If someone where to want to try and build their own startup, this seems like a perfect situation to be in. Does anyone know how to land one of these?

Doesn’t sound like a scam; sounds like a bad business.

Get out, focus on bettering yourself and don't let crooks and dishonest people drag you down. Don't let them negatively impact you.

I think you’re making this up. Not that it’s not a fun thing to muse about, but it’s too textbook-bad to be true.

Leaving deprives it of your skills and experience that alone will damage them. That's probably enough.

Are you guys hiring?

welcome to how 80% of startups roll

most people capable of raising money have connections… buddies and social capital

i never raised money for my company. meanwhile a well known VC funded a competitor because of connections or because they like the founder’s “energy”. after a few years the company went bankrupt. the guy went on to raise money again. we had far superior technology far beyond what they were able to develop. it would have been cheaper to acquire us.

TL;DR most peole who succesfully raise do so because of different reasons than having a product or revenue.

Yes

This is a moral choice you should make yourself.

There's nothing wrong with asking for advice.

But it hardly is of much use in morally ambiguous situations. When a partner of yours (I'd suggest even imagine it's your best friend to make the thing more vivid) is a real criminal inflicting real harm to real innocent people (rather than smoking weed in a wrong state) you have to choose whom to betray. There is no single right solution here. One has to decide for himself. It is just an act of will.

I don't mean he should not have asked, I just share the way I view such a problem.

I think it's very useful in such situations to hear other people's points of view, similar experiences, and so on.

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