The following is my answer to a Quora question: “What legal or ethical obligations does a shareholder of a privately held startup have if he suspects financial misdoings by the founder?”
If there is any clear evidence of financial mismanagement or fraud, anybody aware of it, even the shareholder, is obligated, by law, to report it to the authorities. Failure to do so is to be an accessory to the offence, and be liable for prosecution.
From an ethical perspective, we have to understand that in business, reputation is everything. You cannot be associated with anything untoward, and financial mismanagement will negatively affect your investment. In the example above, make that report.
From a strategic perspective, all is not necessarily lost. You can extract some sort of concession, and
exit, or you can take advantage of the situation and take over the company.
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