Ethical dilemma: I work at a consultancy. How to handle a client's request to moonlight directly for them, for equity? Weirder context inside

Question

I'm suddenly facing a bit of an ethical dilemma. To give background:

The company I currently work for, let's call it AppCorp, currently has a client, let's call him Bill, who has built and launched a small social networking product. We inherited this project when he switched consultancies, and we are now maintaining it.

Our maintenance team works by having clients buy chunks of hours at a time ("maintenance retainers"). Bill has been renewing his maintenance retainers for the last few cycles, and he's an absolutely fantastic client. Likely the best that has ever come through this place – he is humble, patient, kind, and knows what he wants his product to be but doesn't dictate how to get there.

Today, Bill sent me a private text message that I'll summarize below:

• The app has raised $750k, so it's relatively good in terms of capital
• Operational costs are getting too high, so I won't be renewing my maintenance retainer.
• I'm offering you 5% of the company to be a CTO in your free time, with you only doing maintenance and not adding features or doing anything too complex.
• I plan on telling AppCorp all of this later in the week, but I wanted you to have an early heads-up.

This causes a list of problems in my head:

1. There is no written agreement that I won't tell my boss about the fact that he won't be renewing his retainer (i.e., I responded to his text and said "don't worry, I'll keep it on the DL until you tell him"). I know for a fact that my boss is assuming this retainer will get renewed.
2. He's asking me for free labor in exchange for equity, in my free time. This seems a little unusual. It doesn't technically violate my employment agreement, but it feels very under-the-table and I'm not sure if my bosses would find it acceptable to continue employing me.

So, should I tell my boss, even though Bill will tell him in a few days anyway? I'm afraid that he won't understand my predicament. I don't want to screw either of them, but if I tell my boss, then I'm screwing Bill. If I don't tell my boss, I'm (in a very small way) screwing AppCorp.

Answer 1

So, should I tell my boss, even though Bill will tell him in a few days anyway?

No.

...if I tell my boss, then I'm screwing Bill.

Yes, you would be.

If I don't tell my boss, I'm (in a very small way) screwing AppCorp.

No, you wouldn't be. Because of the timing involved and the fact that there aren't any crazy, illegal or unprofessional activities taking place or being planned, you have no ethical or professional obligation to disclose this news. Bill has made a business decision (not renewing his contract) and after that he'll have a follow-up business opportunity that he would like to propose to you. Because of the relationships involved, the right thing to do is for him to propose that offer to your employer first. It's his job to tell your employer and he gets to control how he breaks the news. Because of that you even have a small ethical obligation not to disclose the news because you should give Bill the opportunity to handle the communication with your employer.

Bill gave you advance notice as a courtesy so you wouldn't find out from your current employer but he's not expecting anything else from you right now, beyond considering whether you'd be open to such an arrangement. He's also not doing anything unprofessional or unethical here. If he was suggesting hiring you and asking you to keep quiet to your employer, that would be highly unethical. But even then, you still wouldn't be ethically obligated to disclose the offer to your employer. In that case you would just politely decline the offer and, if you were interested, you could tell him that you require approval from your employer so everything should all be done above board.

Now, given the dynamics here, it is incredibly unlikely that your employer would approve, so I frankly wouldn't worry about this further. Your employer will most likely and understandably see this as a clear conflict of interest. If they don't, then it's up to you to consider the details of the offer, but that's an entirely different topic. I will say that arrangements like this require highly professional conduct and clearly defined boundaries from all parties involved: Bill, you and your employer. It can be done well but it can easily go wrong. It's also dangerous to get a static percentage equity for an unspecified and unpredictable amount of work.

Answer 2

Titles are cheap in small companies. As "CTO", will you be leading the technical direction of the company, or just providing code maintenance?

Questions to ask:

1. Is the amount of technical support expected of you worth whatever the current value of 5% of the company?
2. How do you define or limit the expectations as to what is "maintenance"?
3. How would you convert your 5% to cash? Would that ever happen?
4. What will you do if this company folds? Your 5% becomes worthless.
5. Would your current boss at AppCorp be happy with your moonlighting, or would he see this gig as direct competition?

It seems likely that Bill is working to lower his operating costs which suggests the company may not be growing as rapidly as one might hope.

My recommendation:

Thank Bill for the heads up, decline his offer, but don't tell your boss about it. Your boss will find out soon enough and that way you won't raise any uncomfortable questions about how you learned about this.

I'm not sure if my bosses would find it acceptable to continue employing me

I wouldn't.

Answer 3

To dismiss the second point, it's not unusual at all to exchange time for equity--many startups do it. He doesn't have the money for the retainer, and this is a way to make progress. It's not likely to add up to much, other than a line-item on your resume--5% of a company that can't afford you? It looks good to put "CTO", but "span of control" determines how much that's really worth. This will be "I managed myself part-time". Plan accordingly.

Your contract with your company will likely dictate the terms of you working with former clients. There may be a black-out period. I would get an explicit sign-off from your consultancy if you go down the road. Then there are no misunderstandings later, if you miss a deadline elsewhere or start making serious money on the side.

Your boss will find out about the renewal at the appropriate time. You're not normally obligated to get or give that information, so you don't need to share--and shouldn't, since you've signed off against it. But you can already see the conflict coming into play here, so tread carefully.

Answer 4

5% isn't enough. You'd have no reliable revenue stream, no power to make decisions or change direction and just token ownership.

Moonlighting for actual money would be the only decent option.

The rest is moot, don't tell your boss, just refuse those terms and see what eventuates.

Answer 5

I'm offering you 5% of the company to be a CTO in your free time, with you only doing maintenance and not adding features or doing anything too complex.

That's outlandish. You will be expected to build new features for many hours a week and you will be expected to do many complex things. Except now you have sunk costs, you have equity you wish were going somewhere, etc. This is just a bait-and-switch at best.

Can you imagine a successful CTO who works with a "stopping by and checking in on how things have been going" relationship with the team? Of course not...