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Financial Misstatements

blog.samaltman.com

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141–150 of 194 posts

Re: Financial Misstatements

#141

Post by rokhayakebe »

tkiley wrote: post #85

I agree with Sam's message, but I sympathize with founders who make mistakes here. Founders are told to hustle, to aggressively push themselves and their visions in order to build momentum for their businesses. Founders are encouraged to bend - if not break - the rules in order to get things done. First-time founders are thrown into the world of finance with a good deal of ignorance about the meanings and conventions…

mistakes

Color me stupid, but I am sure the vast majority of founders know exactly what they are doing when they give GVM in place of revenue.

For example no one would buy a home for $200M, sell it for $201M and say I made $201M last year.

Re: Financial Misstatements

#142

Post by adebtlawyer »

unreal37 wrote: post #49
taylorwc wrote: post #45

Earlier quoted context omitted.

Your point stands, and this is a nit, but... Fraud, by legal definition, must be intentional. It is a deliberate attempt to mislead.

Is there a concept in law as "you should have known"? Like, its one thing to not know that the thing you are saying isn't true (i.e. "my co-founder went to Yale" when he actually believes that he did). But another to not know the definitions of words you are using when you should know that? Can you say "I have a million dollars in the bank" when you honestly believe "a million" = 1000?

I have reason to think oral statements about your financial condition aren't actionable as fraud by your creditors in bankruptcy. I know nothing of liability to investors, securities law, etc.

Re: Financial Misstatements

#143

Post by skilbjo »

evo_9 wrote: post #121

Mr. Altman is talking about the basic misunderstanding of these terms and it's surprising to me that he didn't take a bit of time to define the terms himself. Maybe I'm naive and those terms are a lot harder to define than I'm imagining, but even then some references linking to other sites could have been provided. I really enjoy reading Sam's posts and I'm usually bookmarking and/or forwarding his articles to a ton…

I agree. I'm a CPA and some of these terms (GMV) I've never heard before (must be because I'm in a different industry - payments, and we use TPV - total payment volume), and others (burn) are ambiguous to my accounting brain.

Is that cash flow used to fund operations? Is that the accrual based operating expenses? Is that the difference in cash between this month and last month?

Re: Financial Misstatements

#144

Post by DrNuke »

It's a learning process. A lot of times the Bay Area (like some other places in the world, for different endeavours) is the first real-life encounter with excellence and some times with geniality. Experiencing failure will make felons better, if they survive rejections, mature and learn from mistakes.

Re: Financial Misstatements

#145

Post by tempestn »

rokhayakebe wrote: post #141
tkiley wrote: post #85

I agree with Sam's message, but I sympathize with founders who make mistakes here. Founders are told to hustle, to aggressively push themselves and their visions in order to build momentum for their businesses. Founders are encouraged to bend - if not break - the rules in order to get things done. First-time founders are thrown into the world of finance with a good deal of ignorance about the meanings and conventions…

mistakes Color me stupid, but I am sure the vast majority of founders know exactly what they are doing when they give GVM in place of revenue. For example no one would buy a home for $200M, sell it for $201M and say I made $201M last year.

Not necessarily; many would consider $201M the revenue and $1M the "profit" or "earnings" in that case.

Re: Financial Misstatements

#146

Post by saryant »

pen2l wrote: post #119
dboreham wrote: post #117

Earlier quoted context omitted.

Um. I've emptied the trash cans at my company, but we still had an accountant (external). And lawyers.

Why didn't you hire people to empty the trash? Would save your time, and another soul out there who is struggling to find a job get something. Personally, I love the fella who empties our trash. He's become a close friend of ours, with his heavily accented "Hello friend!" message he greets us all with and everything!

It's damn hard to get in legal trouble for being your own janitor. The same is not true of accounting or law.

Re: Financial Misstatements

#147

Post by jleader »

randall wrote: post #122
kevin wrote: post #8

Here's the biggest offenders I see when talking to founders: revenue vs GMV (if you give GMV, give me your cut/margin) contract vs LOI burn vs expenses users vs customers (customers pay) signups vs users vs active users (you should give active with time interval and measurement of active. eg. logged in last 30 days) profitable vs cash flow positive Others people should know: diff between retention rate vs churn rate…

What's voluntary vs involuntary churn? (googling but if anyone wants to save me the time) :) A: Voluntary churn occurs due to a decision by the customer to switch to another company or service provider, involuntary churn occurs due to circumstances such as a customer's relocation to a long-term care facility, death, or the relocation to a distant location. from: https://en.wikipedia.org/wiki/Customer_attrition

I've also heard of "happy churn", where the customer no longer needs your services (e.g. when a dating site's customers get married).

Re: Financial Misstatements

#148

Post by jforman »

unreal37 wrote: post #49
taylorwc wrote: post #45

Earlier quoted context omitted.

Your point stands, and this is a nit, but... Fraud, by legal definition, must be intentional. It is a deliberate attempt to mislead.

Is there a concept in law as "you should have known"? Like, its one thing to not know that the thing you are saying isn't true (i.e. "my co-founder went to Yale" when he actually believes that he did). But another to not know the definitions of words you are using when you should know that? Can you say "I have a million dollars in the bank" when you honestly believe "a million" = 1000?

In American law, there are civil offenses (torts) and criminal offenses (crimes). Criminal cases are prosecuted exclusively by the government.

In both categories of law, there is a subset of offenses that fall under "strict liability" — for which you can be punished regardless of your state of mind when committing the offense.

Fraud, like most criminal offenses, requires establishment of mens rea (knowing wrongdoing), so Sam is incorrect in saying that financial misstates are "felonies" on their face. But once you've become an investor you can bring a claim of breach of fiduciary duty (a tort) — rather than establishing that the CEO intentionally misled you, in this case you only need to show that they breached a "duty of care" — essentially, "you should have known".

Re: Financial Misstatements

#149

Post by atom-morgan »

evo_9 wrote: post #121

Mr. Altman is talking about the basic misunderstanding of these terms and it's surprising to me that he didn't take a bit of time to define the terms himself. Maybe I'm naive and those terms are a lot harder to define than I'm imagining, but even then some references linking to other sites could have been provided. I really enjoy reading Sam's posts and I'm usually bookmarking and/or forwarding his articles to a ton…

Isn't it also surprising that investors aren't taking the time to define and clarify these terms as well? I feel this shouldn't fall entirely on a founder's shoulders unless they're intentionally lying.

Re: Financial Misstatements

#150

Post by lmm »

unreal37 wrote: post #49
taylorwc wrote: post #45

Earlier quoted context omitted.

Your point stands, and this is a nit, but... Fraud, by legal definition, must be intentional. It is a deliberate attempt to mislead.

Is there a concept in law as "you should have known"? Like, its one thing to not know that the thing you are saying isn't true (i.e. "my co-founder went to Yale" when he actually believes that he did). But another to not know the definitions of words you are using when you should know that? Can you say "I have a million dollars in the bank" when you honestly believe "a million" = 1000?

We have the concepts of negligence and recklessness, which often constitute offences of varying severity. I don't know anything about the specifics of fraud.
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