Founder Disputes: When Someone Suspects Misconduct by Their Founder

Navigating issues and disputes with founders can be difficult at any stage of business, especially when someone suspects a founder of their company of wrongdoing. What is founder misconduct, and how does one navigate such a sensitive, yet serious issue? Read on.

What is Actionable Founder Misconduct?

Founder misconduct can be actionable if it involves any wrongful or criminal deceit by a founder against an organization’s employees, investors, customers, the government, or others for his or her own gain. This can include fraud by deceit, but it can also refer to other wrongful acts of self-dealing by founders in which individual profit is sought at the expense of the organization.

Founder fraud may include:

• Embezzlement, which is the use of company funds or assets in an unauthorized manner.
• Theft or conversion, which is obtaining possession of company funds or assets without properly authorized access.
• Breach of a fiduciary duty, specifically, taking deliberate steps to sabotage the value of a company for purposes of a later opportunity to shift who controls (or owns) the company in a manner favorable to the founder.
• Theft of trade secrets, including the sale or use of company trade secrets for personal financial gain. In California, the protection of trade secrets is governed by the California Uniform Trade Secrets Act, available at Civil Code § § 3426-3426.11.
• Collusion with a competitor for personal profit, such as bid rigging, bribery, and kickbacks.

Taking Steps to Protect Your Company from a Fraudulent Founder

If you suspect fraud or other misconduct by the founder of a company, your first step should be to look at your company’s policy for fraud reporting and investigation. When you are working for a startup or a smaller business, there may not be a policy. You may also find that the founder is so intimately involved in the day-to-day that word would get back to them about your suspicions if you reported your concerns to your superior or co-workers.

In this circumstance, you may choose to keep your suspicions, and any concrete information you already have gathered, confidential at work. Instead, document what you know in a memo or journal. Include the date or dates of each incident, a detailed description of what happened, who was involved (if there were other people besides the founder), where it took place, and an estimate of the amount lost.

If you rightfully have access to any evidence of the improper conduct, consider making photocopies of paperwork such as checks or fake invoices or copies of computer files if you can do so without drawing attention. Do not attempt to collect evidence that you do not rightfully have access to, as this may jeopardize your job and hinder any future investigations that may take place because of your report.

You should also consider speaking with an attorney from Delahunty & Edelman LLP. A knowledgeable corporate fraud attorney may be able to help you determine if you have enough evidence, explain the risks and benefits of reporting the conduct, direct you to the appropriate agency to report it, and assist in protecting your rights if your employer attempts to retaliate against you.

Patrick Delahunty

Patrick Delahunty is a former federal prosecutor with deep experience in resolving disputes. He advises individuals and companies in complex criminal, regulatory, and commercial litigation.