Square's Keith Rabois Resigns Amid Sexual-Harassment Claims

The problem is that all the refined nuances of this law turn on facts and circumstances, most of which depend on the word of the parties involved.

Lessons and risks to founders:

1. Absurd as it may seem (because it is natural that attachments may be formed by those working together), from the standpoint of protecting your stake in your venture, it should be a categorical rule for a founder never to have any form of sexual or romantic interaction with a co-worker in your venture and this applies especially if you are an officer or director of the company. Why? Because it is a certainty that you can be "set up" by the other party at any time after the company begins to prosper. Accusations can be made from any direction, real or fabricated. All they need is some fragment of verifiable support and you can be guaranteed that you will be on the hot seat for all allegations made, whether true or not.

2. Among the risks, say, if you are an officer, a VC-controlled board will almost certainly demand that you "resign" or, if you do not, will fire you. This may be because the board members do not want to fool with defending potentially indefensible facts or it may be that they simply want to consolidate investor control of the company by using the event as a reason to get rid of an otherwise dominant founder.

3. Which leads to a further risk: when your employment gets terminated in this way (or you are forced to resign), you will very typically forfeit all of your unvested stock and options, usually meaning that your founder stake will get cut to less than half of what you could have gotten upon earning it out. Of course, your value to the company may be such that a board will prefer to defend you and allow you to continue to vest but the point is that, through this set of events, you are vulnerable to the whims of whatever investors happen to control the board. This is a huge vulnerability and (from an economic standpoint) a risk never worth taking in exchange for a few moments of fun.

4. You will also be sued personally if a lawsuit ensues and that lawsuit will typically be ugly, both financially and emotionally. Of course, the company would get sued as well and this is the justification for your being terminated in the first place - your actions as an officer would be seen as irresponsible at best and you would have caused some serious harm to the company as a result of subjecting the company to the risks of a multi-million dollar lawsuit. Worse than that, the company may or may not choose to indemnify you for your personal costs in defending the lawsuit or in paying any resulting judgment. Even with an indemnity agreement in place, there is a strong incentive here for the company to claim that your conduct falls outside its parameters. You may win on this point in the end but, even if you do, who wants to have a huge liability threat looming over him for the duration of such a lawsuit.

5. Even if you manage to keep a half-decent financial stake, you can lose further once you are bounced from the company in this. For example, if the company later has a down round, resulting in a huge dilutive hit for all original shareholders, it may continue to incentivize its then current employees (including your co-founders) with a "refresh" on option grants so that they keep some form of parity with the new equity structure, but you will be left holding only a severely diluted equity piece in the end. Your apparently secure "vested" stake will be worth very little.

The above is based on real-world experiences that I have gone through with startups and the risks are very real. When this sort of thing happens, you will get no sympathy from those on whom you counted. In effect, you become tainted and those around you will either attack you or will keep distance in order to play safe. What is worse, common sense does not prevail in these situations. The company lawyers will work to ensure that all emphasis is placed on the worst legal risks imaginable, even if there is another side of the story. This may not be as true in Forture 1000 companies where the positions are more entrenched, but it is true in startups and is therefore murder for founders who get caught up in such a mess.

So, beware - when doing that international travel for conferences, when doing those late-night sessions with co-workers, etc., etc. - don't leave yourself in situations where you can be second-guessed. Remember too that the other party need not be some high-up person in the company and, indeed, usually is not. Keep it clean, then, for sure. But also keep the appearances clean.

If the above sounds too much like a lawyer's perspective, it's because it is. I realize that people place value on real-life affections that have nothing whatever to do with money and these may be enough to trump the legal risks. In my experience, though, in the startup context for founders, the mixture is too lethal in its consequences to make it worthwhile. That is a personal judgment for every founder to make. Do so with open eyes, however, for once you start down this road, you will be completely at the mercy of the person with whom you are flirting or whatever else you may be doing. Should it go bad, you will have little to fall back on.

Having said this, the sexual harassment laws are a minefield with serious unintended consequences, and there is a cadre of lawyers ready to start what amount to shakedowns at the drop of a hat.

I once heard someone say (very cynically, and I hope not truthfully) that he preferred to hire "young white males of means" because he believed they would have no cause of action to sue. Apparently even such shamefully prejudiced behavior is no longer protection against this sort of outcome.