Founders: Lawyers aren’t your Moral Compass

One of our investee companies made a significant change to their cap table without any proper intimation or disclosure to the existing investors. Not only did they make the change, but also went ahead to complete the transaction, keeping the remaining investor pool in the dark. What the founder failed to consider is that these things cannot remain in the dark for long. So, when the news came to light, I was upset at the way the entire transaction had taken place. A couple of days later, I had a face to face meeting with the founder to understand why such a crucial mistake had been made.

During the meeting, the founder admitted that he had made a mistake by not informing the investor pool about the changes. However, instead of owning up to his mistake, he retorted, “my lawyer told me it was okay.” After hearing this, I asked him if he genuinely thought his decision was morally or ethically correct and his reaction said it all. He couldn’t even look me in the eye or deny his lack of responsibility.

As human beings, knowing the difference between right and wrong is our basic instinct. Therefore, we should not rely on the shoulders of service providers (read: lawyers) to defend our actions (or as in this case, inaction). The critical trust between a founder and an investor is not based on the paper that is signed. The paper only defines what the individuals have agreed to do in the worst-case scenario of a complete breakdown in communication.

Thus, I believe that it is my responsibility to go above and beyond the minimum standards that I have committed to in the investment documents. Hiding behind the cloak of a legal professional’s advice is a smoking gun and founders that do so simply weaken the trust their investors have in them.

For the record, the advice given by the lawyer was incorrect so legally speaking we can sue the company for violating the investment agreement. Not only that, but the founder has also lost all credibility among the investors & what price can you really put on that?

All of this could have been avoided if only the founder had openly communicated what he/she was doing. If you, as a founder are reading this post, remember that communicating with the investors about both, the good and the bad things going on with your company, help to build trust.

In fact, I would go a step further in suggesting that you communicate the bad news quicker if not as quickly as the good. Not only will this help reduce the damage that it can cause but it is also just the right way to do business. Nothing harms your business’ growth like the loss of an investors’ trust.

53/2018