Unavoidable Ethical Dilemmas for Entrepreneurs

The following list of ethical dilemmas, organized by the 14 stages of the Startup Lifecycle, are the product of the Markkula Center's Startup Ethics Online Community, The Ethical Startup, and roundtable discussions of prominent entrepreneurs and venture capitalists in the Markkula Center's network. Have a dilemma to add to the list? Head over to the Ethical Startup Group page at ethicalstartup.com to suggest it!

1. THE IDEA
   
   
1. Who owns the idea?
   
   
1. Conceived while on the payroll, directly related to current employer’s business
2. Conceived while on payroll, unrelated to current employer’s business
3. An idea that’s been floating around the company, but no one has pursued it.
4. I suggested the idea to my current company. They decided not to pursue it.
5. It’s my friend’s idea. She is not going to pursue it.
   
   
2. What resources can I use?
   
   
1. Can I use my current employer’s office, computer, phone, or supplies to pursue my idea?
2. I need help with the product design and other technical issues. Can I ask my friend in my company’s product development department for help?
3. Can I ask a customer or supplier for advice or assistance with my new idea?
4. Can I review company documents, product specifications, or marketing plans to brainstorm for my idea?
   
   
3. When can I start?
   
   
1. Can I work on my idea and go to startup meetings on “company time?” What about on the weekends?
2. When does my work on my new idea make it necessary to resign?
   
   
2. CONSIDERING THE COST TO YOU AND YOUR FAMILY
   
   
1. What are the risks?
   
   
1. Is it fair to give up steady income for an indefinite amount of time to do a startup?
2. Is it fair to put all of our family savings, take out loans, or leverage our credit cards to fund my new idea?
3. Is it fair to ask friends and family to loan or invest in my idea?
   
   
3. PUTTING TOGETHER THE TEAM
   
   
1. Who has a right to be on the team?
   
   
1. Fred came up with the idea, but we don’t want him on the team.
2. Erin has key connections with investors and suppliers that we could really benefit from, but we otherwise wouldn’t want to work with her.
3. My best friend/relative who I owe a favor or two wants a spot on the team.
4. John, from the IT department of current employer, would be a great asset to my new venture. Can I offer him a spot on the team?
   
   
2. What are some issues with recruiting?
   
   
1. We really need a specific person, but he is holding out unless we also take his friend.
2. There are multiple “founders” who feel entitled to steer the ship. How do we choose a front man?
3. Another team member is pushing to bring in 5 people from his former company, representing a potential faction.
4. Amy has key skills in programming but has been implicated in some incidents of poor integrity and judgment at her previous job.
5. John played a major role in developing the idea, but he is frequently difficult to work with.
6. The idea was mine, but everyone on the team wants to be called a “founder.”
7. All the prospective team members are employees at my current company. Can I recruit them all?
   
   
4. DIVIDING OWNERSHIP SHARES
   
   
1. What factors determine appropriate ownership share?
   
   
1. An internal group came up with all of the idea, but the other group members want equal shares and status in the company.
2. Bill came up with the idea, but John is the only one willing to leave his current job and take on the project full-time.
3. John is the only one with experience in this sector and knowledge of the technology, but he wants significantly more ownership share than the other partners.
4. When can employees hired be considered just employees and not be entitled to special status and shares associated with being a “founder.”
5. I’m the founder but everyone else on the team wants equal shares.
6. Some members of the founding team are not as financially sophisticated as the rest. Should they be protected in some way?
   
   
5. SELLING THE IDEA TO INVESTORS
   
   
1. Where’s the line between exaggerating and presenting your idea well?
   
   
1. Is a business plan a “selling document” or a good faith account of product capabilities and market conditions?
2. No data is available on some parts of the business plan. Can I fill in the blanks with educated guesses?
3. Can I leave out episodes in my own career, or past history of the idea, when I talk to others?
4. Can I imply that someone is committed to the team or to investing when they have not yet formally joined?
   
   
6. LAUNCHING THE STARTUP
   
   
1. What role does my current employer have in my plans? How do I leave?
   
   
1. When do I have to tell my boss I’m working on an idea?
2. When do I have to tell my boss that I am leaving on a certain date?
3. I’m leaving. Does my current employer have to know about my plans to start a new venture? Do I have to describe its nature?
4. I’m leaving. Does my current employer have to know about my plans to start a new venture?
5. The new venture will compete directly with my current company. How does this change my obligations to my current company?
6. The exit survey asks if I am starting a new venture. Do I have to tell the truth?
   
   
2. What can I take with me?
   
   
1. Can I ask for my current customers’ business? Can I take my client list? I’m the one who built those relationships, not the company, right?
2. I’d like to use a supplier from my old company. Can I contact them? Can I take my supplier contact list with me when I leave?
3. I’m not taking any documents, but I do remember a great deal about my current company, it’s products, and customers. Can I use this information in my new venture?
4. I’ve used my company email for work and personal matters and may need access for my records. Can I download and take all my emails when I leave?
   
   
7. HIRING THE FIRST EMPLOYEES
   
   
1. How do I build an ethical organization on the fly?
   
   
1. We are too busy to worry about a values statement. Can we make due without one?
2. Some members on the team have differing opinions about the importance of integrity. Can we live with that?
3. I know we should have policies and compliances safeguards, but we are a lean startup. How much of this needs to be formally committed to?
   
   
2. We need more staff. What about hiring?
   
   
1. We are having a hard time recruiting top talent. Can we exaggerate our new venture’s financial position to get benefits to commit?
2. Money is tight. Can I: skimp on benefits? Hire new staff as independent contractors for tax breaks? What about interns and temp employees?
   
   
3. What are my responsibilities toward my employees?
   
   
1. My staff is working 16-hour days. Do I owe it to them to provide lunch and dinner, or other services to compensate?
2. One of the founders spends all his time on the company and charges all of his “personal expenses” to the company account.
3. There is no oversight on compensation and some of the founders want to reward themselves with high salaries early on.
4. Money is tight. Can I ask employees to hold on to paychecks or under report hours worked?
   
   
8. GETTING ALONG WITH THE BOARD
   
   
1. Who has a right to be on the board
   
   
1. The venture capitalists want a majority of the board seats.
2. How many founders should be on? How do we decide which one(s)?
   
   
2. What are some potential conflicts in board decision-making?
   
   
1. The board is more comfortable stretching regulations to push profit than the entrepreneurs.
2. Some investors on the board promote decisions to favor other investments and interests they have.
3. Some investors on the board seek to limit disclosure to other investors.
   
   
3. Other potential issues?
   
   
1. How should authority be distributed between company management and the investment team?
2. Where’s the line between keeping your board informed and burdening the board with running the day-to-day business.
3. The investors on the board want to bypass the CEO/founder and speak with lower level employees for direct information.
   
   
9. DEVELOPING INVESTOR RELATIONSHIPS
   
   
1. What should my investors expect from me? Vice versa?
   
   
1. One of the investors wants the founders to hire a particular person or use a specific vendor.
2. How much transparency do I owe investors? Missed numbers, production problems, et cetera.
3. One of the investors wants to pump up the short-term value for a quick return, not manage for the long run.
   
   
10. BUILDING A CUSTOMER BASE
    
    
1. When is the product ready to ship or go on sale?
   
   
1. My product isn’t ready, but once orders come in I’ll have the money to finish. Can I say it’s ready to go?
2. It is unlikely we can deliver on customer support or the warranty unless the product is a huge success.
3. The customer wants a side agreement, including off the record promises and add-ons, to get the deal done.
4. The defect rate is outside the specifications but we need the revenue. Can we ship and later substitute a newer version and just deal with the complaints on a case-by-case basis?
5. We probably won’t make the ship date in the contract, but there’s a slight chance. When do I have to disclose?
   
   
2. What about sales and marketing?
   
   
1. Regarding exaggerating product capabilities, where’s the line? Is “fake it until you make it” a defense?
2. Can I give gifts to win contracts? Win does it become excessive?
   
   
3. What are some other concerns?
   
   
1. What can I do with our customer’s information, including contact information, spending habits, et cetera?
   
   
11. WORKING WITH BUSINESS PARTNERS
    
    
1. What matters in forming partnerships?
   
   
1. Which criteria should be used for choosing partners? Is it acceptable to choose based on preexisting friendships?
2. One of our potential business partners has different values when it comes to doing business. How much disparity can we live with?
3. On contracts, should we operate by letter or spirit of the contract?
4. How much disclosure do we owe to business partners regarding setbacks and new plans?
   
   
2. What about accounts payable?
   
   
1. Do we have to pay on time, or late like everyone else?
2. I know I can’t make the next payment but I don’t want the shipments to stop coming. When do I have to disclose?
   
   
12. MANAGING RAPID GROWTH
    
    
1. When do we have to grow up?
   
   
1. How “good” do my books need to be? Is inaccuracy due to neglect, not intentional deception, permissible?
2. When do I need a dedicated HR or compliance department?
   
   
2. What about the people-related growth issues?
   
   
1. What rights and deference do early employees get?
2. How do I maintain morale and team structure while constantly introducing new employees?
3. How much transparency should be given to employees, regarding the health of the business, future plans, or employee salaries?
4. What about when people contribute more or less than what they are being compensated for?
5. Some people are not keeping up with the company’s growth and are holding it back. Do I have to keep them around?
   
   
3. What about the founding team?
   
   
1. What right do founders have to continued employment?
2. When can the founder depart? When is it abandonment?
3. When, if ever, can the founding team take a payout or bonus to reward their success?
   
   
13. CALLING IT QUITS — FAILURE/BANKRUPTCY
    
    
1. The company’s falling apart and we need to make some tough decisions
   
   
1. When downsizing, what’s granted more weight, time with company or performance?
2. When can the founders or executives bail out from their role in the company or the equity stake?
   
   
2. Bankruptcy is inevitable. What now?
   
   
1. We are headed to bankruptcy. At what point am I obligated to disclose? Who deserves to know?
2. I owe money to my employees, creditors, and suppliers. Who gets paid first?
3. Do we need to make a good faith effort to repay, or only the legal minimum?
4. What personal obligation does the entrepreneur or top executives have to look after the employees’ future prospects and wellbeing after the company closes its doors?
   
   
14. CASHING IN — ACQUISITION/IPO
    
    
1. What issues arise in deciding whether or not to be acquired or pursuing an IPO?
   
   
1. Is it acceptable for the managing team to go after the quick return, or do they have to play to the long term?
2. Who has a say in the decision?
3. On conflicts of interest, are promises to specific employees of new positions or continued employment with the company doing the acquiring problematic?
   
   
2. What issues arise in preparing the company for acquisition or IPO?
   
   
1. We have some doubts about some of the assumptions in our financial statements, but they are still above board. Do we have to disclose these concerns?
2. Where’s the line between “dressing up” and exaggerating while on “the roadshow” or in negotiations?