[pixelmonkey]

I was once on the other end of this -- witnessing a startup that failed "the wrong way". The unethical way.

I decided to use a startup to raise some money for a non-profit. Their business model was to help fund events / organizations with their platforms, and take a fixed 2-3% commission on the funds raised. I raised $500 using the platform. But I never received the check for the $500.

I knew the founder personally. I e-mailed him and week after week he said, "the check is coming, there has been some sort of accounting error". 2 months passed, and no check. Then 3 months.

So, I e-mailed one of his investors, a mutual friend. He said, "Oh no, I think they are in a very bad place and may not have any money. I have stopped using the service." I e-mailed the founder again. He replied that my money was gone, but that he had committed himself to pay it back.

He was looking for work, though, so he wasn't sure when. Then, the platform's domain name quietly stopped responding to web requests, and the whole platform went offline.

I'm now in this weird position where I'm debating pursuing legal action. I'm still in touch with the founder. He keeps saying that he will pay soon, but doesn't.

The money actually came from over 20 people who had donated to the cause. They are unaware the money never made it to the non-profit. The check I was trying to receive was meant to just be a direct donation to this cause. The founder's mismanagement actually led to $20-$40 being "stolen" from about 20 people. In a way, I acted as a middleman, by encouraging people to donate via this platform. And now, I feel very responsible to get this money back. Do I pursue legal action? I've debated it.

So, here's another piece of advice about how startups should die: "if it's not your money, it's not your money". In other words, if your platform deals with money (e.g. accepts donations, facilitates payments) it is NOT OK to use money you owe your customers to fund operations. That is called theft, plain and simple!

[fludlight]

> That is called theft, plain and simple!

Not theft, but fraud. Unfortunately, it happens in many startups that don't have a qualified finance/business guy in a senior role.

[jacques_chester]

Off the top of my head there's also breach of trust and possibly trading while insolvent.

If you take money from A in order to give it to B on A's behalf, you are a trustee of the money -- it belongs to you in common law but not in equity and you cannot repurpose it for something else. If the money cannot be conveyed to B, you must return it to A.[1]

Lawyers and accountants typically keep funds held on trust in a completely different bank from their own business accounts, just to avoid even the possibility of error leading to a breach of trust. To avoid even the whiff that funds on trust might be comingled with regular income.

Trusteeship can arise without anyone signing anything and it comes with high legal standards. If you have a business model that involves doing something like this, you need to consult a lawyer in your jurisdiction about the local laws for trusts.

IANAL, TINLA.

[1] As an aside, I suspect this is part of the problem Readability had with their "we have money waiting for you to collect, Mr Webmaster!" growth strategy.

[connerbryan]

Eeesh. Nothing is more uncomfortable than a friend who owes you money.

[smtddr]

A rule my father taught me when I was young.

"Never loan money to a friend with the expectation that you'll get it back, be ready to just let it go."

[sanderjd]

Yes! Except I would phrase it differently: Never loan money to a friend or family member - either give money or don't. Oftentimes, the person you gave money to will later give you as much or more than you gave them, but that isn't a loan repayment, it's just them being kind to you in the same way you were kind to them.

To hnriot, who I can't respond to: No, it's not being a chump to willingly give money to those you are close to. The other side of the "be willing to give money to friends" coin is "be aware and careful of who you consider friends". You may be a chump if you give money to people actively taking advantage of your willingness to do so, but those people aren't friends. You should never give money to people who aren't your friends, and you probably shouldn't loan it to them either, unless you're in the lending business.

[smtddr]

@OffTopic You can't normally respond to comments that have been recently made unless you click on the word "link" next to the comment. I would reply to hnriot, but I already see he's being downvoted so hopefully one day he'll understand why.

Also, I agree with everything you said. ^_^

[davemel37]

If you lend $20 to a friend and never hear from him again...it was worth it!

[noonespecial]

There's a special name for money you loan to friends and family. Gift.

[jedc]

When I was in business school, I took a class on venture capital from one of the earliest VCs in the valley. (He invested in Intel, for example.)

One of the two founders of Genentech was a good friend of his, and so he had the opportunity to put the first money into what became Genentech. But he refused to do it because they were good friends, and instead helped him find other investors.

Somehow I don't necessarily see something like this happening often in today's funding environment.

[xerophtye]

eh? but OP didn't LOAN him money.He just used a fundraising platform developed and run by a friend of his. So since everyone donated the money to platform (like kickstarter) and the platform didn't transfer it to OP, the platform became indebted to him.

[hnriot]

that's not very good advice. that's called being a chump.