Two Tales of TransMoral Leadership

Sometimes they have morals. Often times they don’t.

So this one entrepreneur commits fraud.

Wait.

I’m getting ahead of myself.

Over the past few years, I’ve noticed a troubling trend related to moral judgement in the startup world. In an effort to do whatever it takes to succeed — driven by the need to deliver for investors, or maintain respect from their team, or for their own personal self-worth — certain entrepreneurs tiptoe over the bright line of ethics and morals with incredible nonchalance.

They justify questionable behavior as part of startup grit.

They aren’t morally corrupt all of the time.

Just occasionally. Just the times they need to be.

They are the TransMorals: sometimes they have morals, often times they don’t.

I’m not talking about obvious headline-grabbing cases such as Elizabeth from Theranos or Travis from Uber — or even grander, more culturally-defining movements such as #metoo — but a more sub-perceptive, cancerous growth that undermines the fundamental underpinnings of entrepreneurship and the startup ecosystem itself.

These behaviors threaten to turn entrepreneurship from a cause of courage — of admirable will and tough risk-taking — into a questionable pursuit driven by those who have more in common with sleight-of-hand card hustlers than authentic magicians.

So this one entrepreneur commits fraud.

This wasn’t so long after he was raised and tenderly cared for by the wolf-pack of a well known accelerator program.

Exactly why he did it is obvious: he wanted his startup to succeed, so he cut corners and took risks.

It’s no excuse, really.

Frankly, it’s stupidity. Ignorance. Ego.

But all that aside, the reality is he did it because he couldn’t come to terms with the fact his startup might fail.

Exactly how he did it is as follows: He stopped paying employee payroll taxes. That’s right, he withheld taxes from employee paychecks and failed to deliver them into the hands of the state or federal government. That cash ended up funding the startup’s daily cash flow.

So, what about the finance guy — the check and balance — you ask? Well, at the very least, he was a terrible accountant and controller. But more likely, he was culpable and dirty, too.

Oh, wait, that’s not all. That’s not even the fraudulent part.

The company would accept up-front fees from clients who, due to the nature of the program, had the right to seek a refund — often a year or two later. The fraud: that money was never listed as a liability on the balance sheet. In what amounted to a mini pyramid scheme, millions and millions in raised capital was being utilized to support client refunds vs. ongoing operations. Investors may have been in the game, but the leader was bottom-dealing the whole time.

When the lid was blown off this little caper, the CEO hemmed and hawed and seemed confused about why this was a problem. The payroll taxes would eventually be paid, he argued. The undisclosed client liabilities was just poor financial modeling, he shrugged.

The Board of Directors took immediate action and fired both the CEO and the finance guy. Each had to give their equity back. They never really apologized, they just continued shrugging.

The CEO? He’s now a handsomely paid executive at an established major corporation.

The finance guy? He’s in law school.

No, really.

This other entrepreneur, he did it differently.

He runs a cryptocurrency company somewhere around the corner from my office. His company took part in the ICO wave of 2017, and gobbled up a whole pile of investor capital in the form of the cryptocurrency, ETH.

(Of course, they had no actual business to speak of. You know. A b-u-s-i-n-e-s-s. Where you sell a product at a higher price than it costs you to make.)

That ETH? It skyrocketed in late 2017, and the firm sold off a huge chunk at 3x the value. Timing is, apparently, everything.

More recently, the Securities and Exchange Commission (SEC) recognized their illicit fundraising efforts by publicly admonishing them for committing securities fraud. In addition, they charged them with registration violations, and required them to pay a hefty fine and refund every single investor in full.

So, let’s do some math!

Let’s say the firm paid all the fines in full. Given the timing of their sell-off, their gain would be in the tens of millions of dollars.

I’m sure you can imagine their bank account. Filled to the brim with garden-soil-brown, dirty money.

A few weeks ago during a dinner at a local restaurant, my conversation was repeatedly interrupted by a rowdy table nearby. Whoops and cheers were met with wild fits of laughter. Drinks were being passed around. Glasses clinking.

Waiters were bringing chop after chop of cut meat.

It didn’t take long to figure out who the diners were, given most were wearing hoodies emblazoned with the logo of the recently-disgraced, SEC-fined firm. The soil was practically falling out of their pockets.

Their CEO deceived investors and broke the law.

Was he removed. Nope. Should the team rebrand? Nope. Should they quietly melt into the woodwork? Nope.

Instead, they should party. They should let everyone know where they work. That they won.

These mongrels considered it a victory.

The problem, though, isn’t the entrepreneurs alone: it’s the entire community’s willingness to let grimy, transmoral behaviors slide.

In countless cases, investors, shareholders, advisors, team members and co-founders allow moral injustices to go unchecked. Cloaked with the excuse that startups are complex, difficult and without roadmaps. That risks come with the territory.

Often, in the event questionable activities do bubble to the surface, no single constituent takes it upon themselves to take action. Transgressing individuals can scoot out the back door for new careers elsewhere or —in the most despicable of cases — remain securely at the helm.

Yet, in the end, no matter how many cleanings or deodorants are applied — no matter how many attempted washing of sins — the stink of the transmoral leader never dissipates. It just becomes forever embroiled into the fabric of the company.

Maybe they can make a magician’s cape with it?