Ask HN: Misuse of corporate funds in a small business

[NonIdentifiable]

HN, I have been a part of your community for a while now but I would rather not make it known who I am for this post. I am looking for some advice.

I started a corporation with a couple of friends, and we made some money here and there. Not much, however it is enough to keep us afloat and out of the red. In the mean time we are having fun learning the ins-and-outs of owning a business.

However, recently we noticed that one of the founding members/board directors/officers of the corporation has been spending corporate money on little things like vending machine purchases, and gas. When asked about it he mentioned he was accidentally using the wrong card, we (the other founders) thought it would stop and the monies would be repaid to the corporation. Not only did it not stop it continued for a whole other month, and the monies to repay to the corporation has not been deposited.

The thing is that each of us has an equal share in the corporation, and we each hold our officers positions I am not sure how to approach the situation and/or reprimand this individual and make sure the money gets returned since officially he is listed as having access to the corporate account. How would it work if we did decide that he was dead-weight and wanted him out (no investors involved, we each gave ourselves 20% of the shares in the corporation)? Would we have to buy him out? Technically this is embezzlement, could we as a corporation take him to court? If this happened in your corporation how would you handle it? What would be your next steps in resolving the situation amicably?

I understand that the first response is going to be "find a lawyer", however when I mentioned that we are just making enough to stay afloat I really do mean that. The amount that has been embezzled is no small amount compared to our income, and will hurt us and keep us from doing R&D work for products we would like to develop and release to the consumer market.

[philiphodgen]

It's over. You no longer have a friend or a co-founder. You may or may not have this business anymore.

What you have now is the situational equivalent of the Kubler-Ross stages of death. Your brain needs to cope with this. Your brain isn't coping yet.

What you do next will affect your future. Not because of this thief. Because your action will demonstrate to yourself that you can be jerked around and you will let people steal from you. OR NOT.

I had an employee embezzle from me. Not exactly the same but similar. I was ashamed and embarrassed. I'm a tax lawyer FFS. I should be smarter than that.

I had her arrested. It was time to stand up for myself. I suspect it is time for you to stand up for yourself.

Your company may be dead as a result of this. You don't have total control over that result. Your next business will do well if you insist that you be treated honorably and not be stolen from. As soon as you're willing to let _this_ company die for reasons beyond your control, you'll take action. Because you already, in your heart, know what to do.

There may or may not be ways to evict him and keep the company going. Don't hold onto this company at all costs. But do stand up for yourself here. If you don't the wheel will come around again and someone else will steal from you. And again until you insist that it stop. Then it will.

[rdl]

I would call the credit card company and report the card as lost/stolen, immediately.

Then, set up a policy requiring 2 people to sign for all purchases, and pay for things by company check only. Establish a formal expense reimbursement process. You can probably get an accountant or bookkeeper to help you set this up.

If this person was initially a friend and productive, and suddenly started behaving differently, there are three possibilities.

1) He was always a bad person, and you just didn't notice.

2) He has given up on the company for some reason related to the company, and is being passive-aggressive, plus inherently somewhat dishonest.

3) He is having personal financial/emotional/etc. problems.

Not sure how you would determine which of the above it is, or how best to respond.

I've had embezzlement happen at a company I owned, and it ended up killing the company (the scale of embezzlement was high, and it wasn't a normal tech company). Ultimately, the problem is a lack of process/controls, adequate enforcement and supervision, and hiring immoral people. As a result, I am much more cautious with all of those things now.

I think you're more doomed due to lack of founder vesting than anything else.

[dtran]

If you founded the company with friends, then you should know this person pretty well and just be able to sit down and talk about it right?

It sounds like its not quite to the point where it needs to escalate to the steps you're talking about in terms of buying him out, and this could be solved with a quick 15-minute company meeting about use of the company card/funds. Maybe there's something deeper there like he's having financial trouble that needs to be addressed. Or maybe he's just really bad with money, in which case maybe you should suggest someone else hold onto the company card.

I think as a whole, our culture is too quick to jump to getting lawyers involved, when you should at least try giving just talking to him a second shot. Even if you get lawyers involved and take care of taking him out of the company cleanly from a legal point of view, it's definitely going to be a HUGE distraction and morale killer to have a founder leave.

[NonIdentifiable]

Yes, he is a friend, and yes we did sit down with him and talk to him. As mentioned in my post, after that it still went on for another month, and the monies still has not been returned.

If he was having money troubles I would have hoped he would talk to one of us however that has not been the case. It is very disconcerting to us that he has pretty much gone quiet, it has been hard to get ahold of him. I don't know, but it just feels like things have changed since we first started the corporation 2 years ago.

[dtran]

I didn't realize that he had gone incommunicado. Regardless, I would still try to reach him from any possible form of communication and talk to him.

If he is clearly avoiding you guys while continuing to misspend company money, then I would talk to a lawyer. Did you guys set up any kind of vesting schedule for each of your 20% of the company? It's a fact of startup life that founders will sometimes leave, and vesting schedules help ease the legal mess that ensues.

[NonIdentifiable]

No vesting schedules, so that makes it all the more hairy from a founder leaving stand-point. At the time we started working with him he was a responsible individual who knew what he was doing. It is only recently that these issues have popped up.

[dennisgorelik]

Considering that you do NOT have vesting agreement and have serious troubles in communication with one of key founders -- you should consider your company dead. Try to cut losses: dissolve the corporation, distribute the funds, save your time, and start another company with the remaining founders you trust.

[byrneseyeview]

If he's welshing on debts and not taking phone calls, that's really bad news. You wouldn't start a company with a cofounder who behaved like that, or if you did he wouldn't have access to company accounts.

[NonIdentifiable]

Well, the corporation was started 2 years ago. At the time it was a completely different situation. That is kind of the dilemma.

[exline]

How much has he spent so far. On one hand it seems fairly small, which should not be an issue to repay. But I can see being a bit angry no matter the amount if he continue to do it after talking with him.

If he is not communicating, then perhaps put a hold on or cancel the company credit card he carries? I'd only do this if he is avoiding you while continuing to use the card for person expenses. What do your other founders think about this? Are they willing to cut him more slack than you? Are you over reacting? Hard to tell with out more details, but I would push to resolve the issue quickly.

[NonIdentifiable]

It is fairly small (sub $1000), but large compared to our income over the past 6 months. We are trying to slowly grow, gain more capital to do more ambitious projects without involving VC's in an attempt to keep the corporation for us. I think the anger issue is definitely something that is getting to me, AND the other founders.

We are definitely trying to cancel the corporate card, however Wells Fargo is giving us the run-around.

The other founders are unhappy with the situation and are on new territory as well, so we are all unsure as to how to proceed. No, we are all pretty much together that something has to be done, we cut him slack when we noticed it and talked to him about it, now it has become an issue of how is the corporation to survive if frivolous spending becomes the norm?

Am I overreacting, possibly, but if that is the case we (as in the other founders) are all over-reacting.

Yes, we are trying to get the issue resolved as soon as possible, however I know HN is an extremely smart group of individuals and advice is always wanted from people that may have gone through something like this before.

[mcknz]

You're not overreacting -- this could turn into something more serious. Some people you find aren't really your friends until it's too late. Though I agree you probably don't want to get the police involved, and I'm not sure there would be anything they could do since it's probably a civil matter.

random ideas:

-- get a new card account, then use up available credit on the old card with a cash advance or some other reversable transaction. -- report the card as lost. -- send him a letter/email explaining (nicely) that he has until X date to repay the money or you will go to small claims court. There you wouldn't need a lawyer -- you'd only have to pay a filing fee, and a judgement in your favor could affect his credit rating, and give you a tool to force repayment.

[hga]

Agreed that you're not overreacting.

Seriously, this guy has shown himself to be fundamentally dishonest (both for starting this behavior after the rules of the game have been well established over a couple of years and then by neither stopping his theft or repaying as he promised). You're just not going to make things work with this guy and it's a lot broader than him taking money from the company that can't afford it, he's demonstrated that you can't trust him at all.

As philiphodgen says, either you remove him from the company (and don't delay) or you remove yourselves from it and let it die. You've given him the one chance he deserves, now is not the time for half-measures, including any compromise that includes him continuing to work with you in any way.

My father once worked at a very high level for a company where one of the founding partners started helping himself to anything he took a fancy to. The company was very profitable so it's not quite the same thing; getting rid of this partner was intensely painful and expensive (e.g. his demands for immediate cash when it came time for investment limited the options and caused everyone to take a needlessly big tax hit).

One lesson from the above is that if you do become successful the pain and difficulty is only going to be greater. If you were making 10/100/1000 times as much money how much might he be helping himself to? He feels entitled to the money....

[uptown]

Who handles the accounting? Are you each drawing periodic paychecks from the company? You could have whoever cuts the checks just deduct the amount owed from his payments.

Also, from a tax standpoint, your business will need to account for his expenditures. Depending how how he's spending the money, and how it's accounted for, it could create some problems down the road.

[anigbrowl]

You can involve the police if you choose. Negotiate on that basis.

[NonIdentifiable]

I really don't want to have to do this ...

[fezzl]

Got to call the cops on a thief; don't bother putting your livelihood at stake.

[grep]

I don't believe that he's stealing. He has legal access to the card, he's just being dishonest.