I have a friend who started working two months ago in a small startup company that raised a nice seed investment. He works there as a senior programmer.

Two weeks ago, he was present at a meeting with the company executives (CEO, CTO, CFO), where they discussed the fact that they find it difficult to raise money from investors because investors feel that there is not enough unique technology developed at the company. During the conversation, after a number of ideas for technological developments were proposed, the CTO said that they are actually not going to develop them, but only to present them to investors and raise money for them.

Is this considered a criminal offense? Is it common in start-ups? Is morally my friend should alert investors? What would you do if you were in his place?

  • 1
    This is unethical at best, potentially illegal under business of advertising regulations, and quite likely fraudulent. Your friend should get out now. Take evidence if possible. – user53718 Sep 23 '17 at 1:39
  • This is as unethical as it is common. Mainly due to a few investor that shed off money on the basis of a nice looking PPT, without "ok, now my team of seasoned engineers will take a look at this"... Still, TINSTAAFL... seed investment is some sort of debt, no free money... – Caterpillaraoz Sep 25 '17 at 8:26

Even when ignoring the moral and legal side, it seems like it's better to move from there. Founders that are planning to lie to investors will eventually lie to each other, to employees, to customers, to the regulator etc.


US Businesses:

Executives in small companies can say whatever they want to investors with caveats. Smart companies know what to say and what not to say, however, and utilize legal teams and industry professionals to doctor releases.

Now, the investors know the technology pipeline, what the company is developing, it's why they invested in the company. The executive committee are making what are called forward-looking statements. I'm just going to glance this off Wikipedia because it's accurate:

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. Businesses usually include a form of a disclaimer that states that any instance of a forward-looking statement found in their material is only true at the time it was written, and they further claim that they are under no obligation to update such written statements if conditions change or that unexpected occurrences happen to affect the statement afterwards. Such forward-looking statements, however, must be identifiable by the use of certain prescribed words. This act allows companies to make speculative statements based on current market trends or research directions without fear of major repercussion, while ensuring that potential investors are informed of the speculative nature of the statements.

TL;DR companies can make speculative statements and not follow through on them at all, and in presentation materials and call transcripts you can always find the disclaimer for forward-looking statements that makes this okay.

The executive committee should not under any circumstance make non-speculative promises that could lead to a breach of fiduciary duty or insider trading suit, however. That's beyond scope here, but essentially one or more parties sue the company and potentially executives if they were involved. Employees are typically not involved unless otherwise noted, and shouldn't get involved unless otherwise required.

Also, employees absolutely should not disclose non-public information to investors. This opens up multiple parties to insider trading.

"We are developing Java" was made public, for example, during an investor call.

"We aren't going to develop Java" was not made public, is known only internally, and should not be disclosed.

  • @sumelic It treads directly into legal territory depending on how the executive committee is handling things. PSLRA is about securities litigation, but the forward-looking statements safe harbor provision is meant to insulate companies from strike suits, whereas other law exists to delineate speculation from reality for investors. In any case, I would not get involved without legal counsel, which will be vastly different from what I've typed up here. – CKM Sep 23 '17 at 19:27

Business is not about ethics, it's about money. That is the primary concern of the owners.

Selling pie in the sky is a timeless and long honoured tradition for salespeople. You don't know what is happening.

Many startups go this route, they sell anything the investor wants, once they have the money they invest in actually developing it at least enough to have something to show for the next round of funding. I have seen whole careers work like this. Some actually commit themselves wholeheartedly and develop something cool.

Look at it from the owners viewpoint, they can develop a bunch of stuff and hope someone buys it, or they can just develop what people actually want and they have a guaranteed outlet for.

Is morally my friend should alert investors?

No, there is very little positive in this for him (lots of potential negatives) and morally he is not obligated to pass on hearsay. If he feels strongly about it he should leave.

  • Even if he does not believe he will develop the ideas he presents to investors? – Infinity Sep 23 '17 at 2:33
  • What does his beliefs have to do with anything? Does he believe he will be paid on payday? If he feels strongly about it he should quietly leave. – Kilisi Sep 23 '17 at 2:40
  • For some people working for people who are violate the law considered to be immoral. But even if it doesn't affect your moral or collide with your values, working for people that are not reliable is probably not the smartest choice that you can make. For example, how can you be sure they will keep their promises to pay you what you deserve, or give you your equity? – Tal Delbari Sep 25 '17 at 11:56
  • @TalDelbari it's called a contract, you're not trusting them to do anything, you can sue them if they breach. – Kilisi Sep 25 '17 at 12:25
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    Your first sentence is so inaccurate. – Pete B. Sep 25 '17 at 19:24

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