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Ask HN: My startup has concealed from me that it raised funding. What to do?

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Ask HN: My startup has concealed from me that it raised funding. What to do?

#1

Post by mendacium »

I'm a founding engineer at a startup and just found out that the founders have concealed an investment from me leaving me with a potential tax bill on $10,000s of income that I had not received.

I did my best to keep my story within 2000 words but I couldn't shorten it anymore without leaving off important details so I posted the full text here: http://pastebin.com/xLLNUF0H

I feel so disgusted and cheated right now. I had worked for this company for almost 3 years doing everything possible to maximize its chance of success: from working overtime to meet deadlines to answering support emails on weekends, and now I find out that they've kept this investment (and the tax implications that go along with it) hidden from me for over a year. I'm left thinking that they concealed it so they wouldn't have to give me a raise, but I am more concerned about the tax implications of these shares. I had to leave work early yesterday when I found out about this and I don't think I'll be able to come in to work today. What should I do? Should I confront the founders about this? Is there any use in contacting a lawyer?

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#3

Post by johnloeber »

Yes, you have been cheated quite seriously. Consult a lawyer immediately, especially since the (Canadian) tax filing deadline is soon. Do not press the issue with the founders until you've received thorough legal counsel.

Another problem, however, is that even if you do confront them and get to claim what's rightfully yours, you're probably going to be asked to leave the company. It's worth noting this as you plan ahead.

Anyway, I'm very sorry to hear this. That's disastrous.

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#4

Post by techjuice »

When in doubt, it is best to ask an Attorney. It was a good idea to ask the company lawyer but you cannot always take their word as their job is to tell you what they want you to hear in the best interest of the company. The information might have been withheld from you as you were not a C-Level executive or similar or higher in the company.

When joining a company if you are a founder always insure the titles are correct as they do make a difference even if you are a founder. If you are not a C-Level executive, apart of the board or an investor the groups under them will always be the last to find out what is going on. If your in the C-Club you are always in the mailing group list for all the important meetings and are expected/invited to all of them. To be honest though, it appears you were left out because you were not family and they probably just considered you as just an engineer that they gave some stock too and not really privileged to the company inner workings or financial activities.

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#7

Post by tarr11 »

Usually there's no need to exercise until you either leave the company or there is some sort of acquisition. As you found out, it can be problematic. Did you have a specific reason to do that?

You should definitely talk to a lawyer and an accountant. I could see an argument where your gains would be based on the company's 409A valuation, which can be significantly lower than what the last investors put in.

Based on what you wrote, I am not seeing a bad intention from the founders. seems like talking to them might be helpful.

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#10

Post by charlesdm »

First: this situation sucks. :(

Second: Yes, consult a tax attorney. Your own attorney, not theirs. Don't talk to the founders. You need to know where you're at first. Legal500 could be a decent starting point: http://www.legal500.com/c/canada/tax.

It could very well be that they disregarded some security rule (i.e. notification of a capital increase or something like that) and can now be sued for your situation (in the event it's too late to fix things).

One thing to consider if you get a capital gains tax loss is that you usually can offset it against other gains. Do you know if you can carry that loss forward in Canada, or do you need to use it in the same year?

Given an S&P fund tends to return around 7% (averaged) per annum, you can actually use it over several years if you can carry forward the loss indefinitely.

Third: Time to look for a new job.

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