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Is this ethical? Or even legal?

February 20th, 2010 · 1 Comment

The Secret of Profitability (SOP) is a high profile start-up in the Silicon Valley.

It’s "high profile" because

  • it has two of the most famous venture capitalists on earth sitting on its board.
  • it had received $100 million in venture funding.
  • its senior management consists of super stars from major internet companies such as Google and Amazon, top-tier strategic consulting forms such as McKinsey & Company, prestigious universities such as Stanford and Berkeley, etc.
  • It has been selected by major publications as "top 100 start-up super stars", "The next Google", "The 21 Century Top Digital Company", etc.

SOP’s goal is to make one product: it offers a "secret sauce" — its scientist have figured out a way to apply artificial intelligence technology to make any start-up become profitable instantly. It holds the secret of profitability.

But, SOP has one problem: it is not profitable itself. In fact, it doesn’t even have a product yet.

SOP had four rounds of funding. Its senior management team had changed three times. About one year ago, the company hired its 4th CEO. He had done a good job to turn around the company. Product development is on track. Initial beta test of the product had very positive results. SOP seems to be finally turning a corner.

SOP still has some cash left in the bank. But, the CEO wants to launch a very aggressive marketing and sales push. He wants to beef up his cash position so that he can take SOP to the finish line as soon as possible. His goal is to make a lot of money quickly.

To make the aggressive marketing and sales push, the CEO has decided to raise 5th round of funding. He’s already gotten verbal commitments from several venture capital firms.

But, he ran into a problem. A couple of years ago, when the company raised its 4th round of funding, to protect employee’s stock options, the management put in a "poison pill" — in the future, if the company wants to get more funding that will further dilute the employee options, the financing must be approved by employees that represent 70%+ of the total number of employee stocks.

The CEO’s challenge is to get the required votes from employees to approve the 5th round of financing.

The shrewd CEO worked with CFO and legal counsel to come up with a game plan. Instead of calling a company-wide meeting that include all employees, he identified a group of employees who are close to him. Most of them are managers or above. And they represented a little bit over 70% of the total employee stocks.

The CEO gathered these people in a small room. He told them that in order to approve the financing proposal, everyone in the room had to vote "yes". If the financing proposal didn’t get pass, then the proposal will be presented to the entire company to approve, which would significantly delay the financing process.

Pretty much everyone in the room voted "yes" — they knew that they had no choice. The company might go under if they didn’t vote "yes". But, they all felt pretty bad — they wonder why they had such a secret meeting. Isn’t every employee shareholder equal? Why were we invited to this meeting while some colleagues were not invited?

In my opinion, the CEO is not very ethical. All employees should be invited and given a chance to vote.

I’m not a legal professional, but I wonder if this is even legal — this is like the United States has a presidential election, but only certain people are allowed to vote initially.

This post is a fictional account, but it’s based on true stories. I’d like to hear your take on this story: is the CEO’s action ethical? Or even legal?

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Excellent resources:

Tags: Frustration@Work · Start-up Success

1 response so far ↓

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