Ask HN: Misuse of corporate funds in a small business

#1

Post by NonIdentifiable » Fri, Aug 06, 2010, 10:34 PM UTC

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.

Re: Ask HN: Misuse of corporate funds in a small business

#2

Post by dtran » Fri, Aug 06, 2010, 10:42 PM UTC

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.

Re: Ask HN: Misuse of corporate funds in a small business

#3

Post by NonIdentifiable » Fri, Aug 06, 2010, 10:50 PM UTC

dtran wrote: post #2

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 h…

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.

Re: Ask HN: Misuse of corporate funds in a small business

#4

Post by dtran » Fri, Aug 06, 2010, 10:55 PM UTC

NonIdentifiable wrote: post #3

dtran wrote: post #2

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 h…

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,…

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.

Re: Ask HN: Misuse of corporate funds in a small business

#5

Post by byrneseyeview » Fri, Aug 06, 2010, 10:56 PM UTC

NonIdentifiable wrote: post #3

dtran wrote: post #2

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 h…

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,…

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.

Re: Ask HN: Misuse of corporate funds in a small business

#6

Post by anigbrowl » Fri, Aug 06, 2010, 11:10 PM UTC

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

Re: Ask HN: Misuse of corporate funds in a small business

#7

Post by exline » Fri, Aug 06, 2010, 11:15 PM UTC

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.

Re: Ask HN: Misuse of corporate funds in a small business

#8

Post by NonIdentifiable » Sat, Aug 07, 2010, 12:08 AM UTC

dtran wrote: post #4

NonIdentifiable wrote: post #3

Earlier quoted context omitted.

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,…

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…

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.

Re: Ask HN: Misuse of corporate funds in a small business

#9

Post by NonIdentifiable » Sat, Aug 07, 2010, 12:09 AM UTC

byrneseyeview wrote: post #5

NonIdentifiable wrote: post #3

Earlier quoted context omitted.

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,…

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.

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

Re: Ask HN: Misuse of corporate funds in a small business

#10

Post by NonIdentifiable » Sat, Aug 07, 2010, 12:14 AM UTC

exline wrote: post #7

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 fo…

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.