I Got Scammed By A Silicon Valley Startup
By: Penny Kim
Tags: California, True Story, Entrepreneurship, Startup, Scam

Telling my story isn’t going to be easy. Oftentimes I feel embarrassed, enraged, and regretful when I have to relive it, but in the end it is a story and life lesson which should be shared so that others may know major red flags to look out for when choosing to work for a startup or new business. What you are about to read is true and happened within the last four months. The names have been changed to protect the innocent and guilty.

Hook, Line & Sinker

It all started in May 2016 when I was searching Angel.co for opportunities in the Bay Area while living in Dallas. I applied for a Marketing Director position with Startup X and soon received an invitation to interview with the CTO. I took the initial phone screen in Los Angeles where I happened to be, and he asked me to fly out the next day to meet in Santa Clara. The responsibility of the less-than-24-hours flight wasn’t addressed, so I asked who would be covering it. When the CTO asked me to book it and told me it would be reimbursed later, I was hesitant and skeptical but followed through with blind faith. There’s no way a startup I found on Angel.co is going to screw me over, I thought. The next day, I was in Startup X’s office meeting the co-founders and small dev team of 8.

Michael, the CEO, introduced himself as the owner of a successful international mining business group, a millionaire investor, and a former JPMorgan analyst. Charlie, the CTO, founded his first startup right out of college, sold one in the past few years, and worked with IBM. Both men pitched their experience to me more than their product (I later learn this is a recurring theme in investor meetings), nevertheless I thought they had a viable idea and one that I was interested in building. They told me that I would have $4M for the marketing budget and carte blanche to build my team. They seemed like veteran entrepreneurs, the kind I could trust, but one thing that would later haunt me was something Charlie said. When I asked him if hired employees were given a probationary period (it was standard for several of my past employers), he said “No, because I hire fast and fire fast.” I didn’t know which part of that sentence gave me more pause.

Red flag #1: When someone says they “hire fast and fire fast” believe them and walk away.

After our interview they took me to lunch with the rest of the team and asked for a high level marketing plan for round two. The following week I received a check in the mail for my reimbursed flight expenses, I delivered a keynote with my marketing team plans, and I received a job offer. We had to negotiate and rewrite my employment contract a couple of times (it was written by someone with absolutely no HR experience), but we finally agreed on a $10,000 sign on bonus (relocation assistance), a $135,000 salary, equity, and a 3 month severance package if I were to leave for good reason and without cause (which was defined as role / compensation changes, office relocation over 50 miles, cease of operations, or change in the company’s market focus). It was a pretty solid deal and I had always wanted to move to California. After a final review, I signed the contract and took a pre-planned trip to Japan for two weeks.

Red flag #2: If it is too good to be true, it probably is.

While in Japan, the CEO called me (knowing I was on vacation) and asked me to put together an user acquisition strategy over the next couple of days. Wanting to put a good foot forward, I brushed off the confusion, chalked it up to culture, and spent time on what he requested with the limited knowledge and resources I had at hand. I didn’t bring my computer to Japan so I wrote what I could in notes and typed up the deliverable as soon as I got home. As a side dish, I included new names and logo ideas for the company since the startup had an anti SEO name and wanted to be a recruiting / job platform. My first priority was branding. Later on I would learn that my preliminary work was worthless because we never had a $4M marketing budget which was what I based my projections on.

Red flag #3: Give some people an inch and they’ll take a mile. They’ll constantly test boundaries and see what they can ask of you or get away with.

Things moved fast after that. I sold everything, packed what I couldn’t part with, and asked my boyfriend at the time to watch my cat for a month or two until I settled in. I said goodbye to my apartment of the last 6 years and goodbye to my city of the last 12 years. After 3 days on the road I arrived in Santa Clara with a car full of boxes and an excitement to start something new, both professionally and personally.

“The Credit Karma of LinkedIn”

My first day of work was July 5th. I walked into the office to find 17 employees. Between June and July, the startup hired an additional 9 members, including a young social media manager who had been running marketing efforts free range prior to my arrival. I had notated in my interview keynote that this person was a team member that I would fill as Marketing Director, so it was interesting they decided to hire the person without communicating with me. Even more interesting was the fact that she labeled herself as the “Chief Marketing Officer” of the startup on her social media channels before she even met me. Already there were signs pointing to challenges ahead.

Red flag #4: If you’re a manager and your direct report is hired before you without your engagement, they may not be a good fit and compete for your job.

We had 8 young Chinese employees on H-1B visas with us as developers, limited in experience but eager to please and learn. They end up being the ones to suffer the most. We also had three new business development team members. One of them befriended me quickly (I’ll call him Bruce) and eventually told me that he and the other two were poached from another startup across the hallway by our CEO who wanted a group of friends. Essentially, they were hired bros with ambiguous titles. I quickly leaned on Bruce as a friend (less cautiously than usual) because he seemed like a genuine person who was interested in helping me adjust to the new area.

Red flag #5: When your leader hires people for reasons other than their professional experience or qualifications, you may have a bad leader.

I would spend the rest of my first week at work understanding the product, the goals, and market landscape. The co-founders wanted to be the next “Credit Karma of LinkedIn” and considered their competition to include Indeed, CareerBuilder, Angel.co, Zip Recruiter, and of course LinkedIn. They had three revenue subscription models: they would charge job seekers, recruiters, and companies to use their product. It would take me a few days to figure out that we didn’t have a strong, differentiating feature from the competition and that no one would pay for something they can do for free elsewhere. When the co-founders couldn’t agree on our top three selling points, I called a whiteboard session meeting. My mind was blown that no one at the company had ever done one of these before.

First week on the job

After the whiteboard session I had more clarity on where to build the marketing strategy and brand. I would continue to push new names, but in the end Charlie’s choice would win and we’d blow two weeks on this task. The goal was to launch a beta product in 3 months by October 2016.

Red flag #6: Your product isn’t ready if you can’t tell a compelling story.

The following week I asked to join Michael and Charlie in their next investor meetings. I wasn’t sure why we were already having these meetings if we had the money and what was being discussed, but I wanted to know. Our first stop with Venture Capital & Private Equity in Palo Alto proved to be eye opening. When the investor asked my co-founders to tell him about the product, they talked about themselves, their connections, and their qualifications for 30 minutes instead. When we finally touched the 31 slide pitch deck, the investor stopped us on our team page. He asked, “You have 20 employees? How much have you spent, and what’s the revenue”? That was the first lesson I would learn from those VC investor meetings: your burn rate matters. Another great question he asked was how we saw ourselves disrupting the market and if we had traction yet. Michael and Charlie couldn’t provide a strong argument. Thinking back, the seasoned investor probably could see right through them, even before the rest of us.

Red flag #7: If your founders focus on name dropping and self aggrandizement, they’re probably compensating for something lacking.

The second investor we met that day would ask the same questions as the one before and spend even less time with us. I consolidated notes I took from both meetings and sent them to the business development team. As soon as we got back to the office I started from scratch and condensed the pitch deck to 10 slides. Jessica, the social media manager, apparently cried when she found out I went to these meetings she wasn’t invited to. So for the next one, I let her go in my place to get her feet wet. Deep down I knew that the investors who knew what they were doing wouldn’t take us seriously at this stage, nevertheless it would be valuable experience for her to learn how to navigate these meetings. You would think a gesture like that would be seen as collaborative and team building. On the contrary, she took it as an opportunistic step for her own agenda. For the remainder of our working relationship, Jessica would ignore my best practices recommendations, post Spongebob memes on our Facebook page, and promote her “gonzo style” writings that were often filled with typos and grammatical errors. I would frequently guide her to more relevant content and other methods of social media strategy, and she would respond adamantly with whatever she wanted to do. Hands-off “I trust you to do your job” boss Penny had to be micromanaging “won’t take your bullshit” boss Penny.

Late Paychecks Begin

I don’t know when or how the money became an issue. Something tells me that Michael and Charlie knew we were running out before I even arrived in July and they played it off for as long as they could while betting on future investors. Michael covered lunch for the team everyday and sometimes dinner too on the late nights and weekends we worked. We had a cramped but decent office space — we were packed sardines at conference tables, but we made it work and told ourselves we would only endure for a little longer. A new office space lease was signed and we’d be moving in by the first week of August. The co-founders had a subscription to SurfAir, a private airline service that mainly Charlie used to go back home in So-Cal each weekend. ADP was handling payroll up until the first week of my employment before Michael fired them (or did they really fire us?) Everything seemed normal for a startup my first two weeks on the job until payday.

My first paycheck was late. Jessica, Tom (our new project manager who started in June), and I were the only ones that received cashier’s checks on July 20th. My sign on bonus was not included. I asked about it and was told it was coming in the next check. The other employees received nothing and I’m not sure why. I can’t recall a time in my life where I was paid my wages in a cashier’s check so I requested a pay stub. Charlie told me that they wouldn’t be able to help with payroll until we moved over to Gusto, a new accounting system. He and Michael would get back to me on this. I didn’t like this answer. Considering this was my first payroll experience, I abruptly halted my apartment search and paid for a temporary Airbnb covering the first half of August. The boxes of what was left of my life remained in the back seat of my car. Something was up and I started feeling uncomfortable.

Around this time, Bruce and I were sharing personal concerns and he confided in me that he had let Michael borrow $50,000 from his personal savings. Did you read that? A startup employee gave his life savings to our CEO. He wasn’t the only one. Another biz dev team bro who was crashing on the CEO’s couch, Bobby, apparently lent Michael five figures too. In disbelief, I asked why he needed money when he has $2M already committed in the company. Bruce said that Michael had his offshore money tied up with the IRS because of unpaid taxes and essentially his assets were frozen until he went to court. These people are not related by blood or lifelong ties so why would they trust Michael enough to do this after only knowing him a few months? Again, I chalked it up to bro culture and secretly hoped they would get their money back.

Red flag #8: It’s a very bad sign if your founder or co-founder is borrowing money from team members.

Red flag #9: If your founder or co-founder has history with the law, you may want to consider working somewhere else.

The Flood of Lies

Over the course of the next few weeks, tension grew. The H-1B visa employees were getting nervous — they haven’t been paid since June 15th. Apparently this wasn’t the first time paychecks were late. Several employees had to pay late rent fees for June 1 due to another missed payroll. Michael blamed ADP for this one, saying it was the reason for their contractual fallout. Could have this been another scapegoat in disguise? Probably. Between July 21 and Aug 8 we would be told, every day, that our paychecks were coming. The first few days we were told that physical checks were on UPS trucks. They never came. Days after that we were told that the UPS checks were cancelled because they must be lost and Michael would be personally wiring each of us the money. He asked us to write down our bank accounts and routing numbers. Every day, he would “be at the bank” moving assets around, wiring funds and promising delivery dates that never came. It was our bank’s fault if the money wasn’t there so it was our responsibility to dispute the delinquency. In the meantime, we were still expected to work long hours and be on call for Michael. One time he called me at 11pm on a weeknight to talk about his ideas and how much he didn’t agree with Charlie’s ideas. As each day passed with broken promises and as I would discover more truths, I became more anxious, angry, and distrustful.

Charlie, being a co-founder, didn’t help much — he would just say Michael was doing his best. I find it hard to believe that Charlie was that naive — as a cofounder and partner, wouldn’t you know what’s going on with your company at all times? Were they playing good cop, bad cop? We had no choice but to wait and see what would happen when July 31st came around. Nothing happened. We now had 15 employees who haven’t been paid for a month, three who haven’t been paid for the last two weeks, and three who have yet to receive their sign-on bonuses. At this point, I started asking Michael and Charlie for transparency and open communication through casual attempts first then documented attempts when it was going nowhere.