Are founders allowed to lie? Is it vital that they do?

A simple model for those who want to raise capital, without risking their morality

Aug 11, 2023

Welcome entrepreneurs, I’m so glad you’re here.

I posted a question on LinkedIn the other day that caused some interesting discussion. In it I asked whether founders are, as a part of their job description, allowed to lie.

The easy answer is “no,” of course. But as anyone who’s raised money knows, it’s not that simple. You need to convince someone of the truth of something that doesn’t yet exist. And you need to do it without saying anything false.

It’s a tough line to walk.

So I did some digging. And between my own experiences and those of others, I think have come up with a model that works to raise money, while also keeping you on the right side of that moral line.

“Nobody will invest,” our board member told me, looking over our latest financial projections. “The revenue in year five needs to be at least $100m.”

We were prepping for our Series A raise. The current revenue projection for year five was $69m, which was the result of a great deal of effort by our team to model out the best execution plan for our business. Of course we couldn’t be certain we could pull it off, but our team felt really confident about the numbers, and $69m top line at the 8x multiples of the day would have still been a great exit. I told him so.

“I don’t need you to have a plan you feel confident you’ll hit,” he said. “I need a plan that’s plausible.”

“Plausible?”

“Yeah, one you can defend. All plans are wrong anyway. Your plan now is just as wrong as the one that will say $100m in year five. Any investor will cut your financial projections by 50% anyway, so if you aim for a conservative plan you won’t even get credit for what you think you can hit.”

My ethical alarm bells went off. I couldn’t just come up with a plan to hit a random number I knew wasn’t realistic, could I? It didn’t exactly feel like lying, but a “plausible” plan, knowing that it was unlikely, felt like more of a gray area than I was comfortable with.

I asked the rest of my board members as well as a few seasoned entrepreneur friends. The general consensus was that he was right, so we went back to the drawing board and came up with a new plan in which, if a few things went our way, we could potentially hit the bigger numbers. It was riskier, for sure, but as our board member predicted, we closed the round.

We celebrated. And immediately afterward I was filled with dread at the commitment I’d just made. What if we missed?

But within a quarter, the investor was proven right: both plans had been wrong.

It raises the question for me:

Is it ok to lie as a founder? Is it actually vital?

Here’s an interesting take on the topic, according to which it’s incumbent upon VC backed founders, as a part of participating in the ecosystem, to “pre-tell the truth” about something. Or said another way, to tell the truth about something that doesn’t yet exist.

Sounds fishy, perhaps. Especially if you’re not in the industry.

But consider the process of pitching well. You are selling a story of what could be, what’s possible for the world if your company is successful. But at the pitch stage, your company has, by definition, not yet reached that success, so one could argue that speaking with conviction about things that your company “will do” is sketchy. It would be more accurate to say that your company “might” do those things, and you “hope” it will. Maybe you “plan to.”

But let’s face it, if that’s how you pitch, good luck raising capital. Your conviction is essential to getting anyone else to come around. You must, as they say, “paint castles in the sky” to get anyone to pay for you to build an actual castle.

There’s a strong precedent for this. At fourteen years old, Alexander Hamilton, the founder of our financial system, wrote this to his friend Ned:

“I’m no philosopher, you see, and may be jus[t]ly said to build castles in the air. My folly makes me ashamed and beg you’ll conceal it, yet Neddy we have seen such schemes successful when the projector is constant.”

No wonder the pinnacle of capitalism, Venture Capital, follows a similar philosophy.

Alexander was (painfully brilliant, obviously, if he talked like that at fourteen years old, and) right in two ways. First, the way to get your project funded is to speak with conviction about the future success of that project; any equivocation, any hint that the projector is not constant, and your vision won’t carry the juice to convince others. And second, this process comes, to many of us, with not a small amount of guilt and shame.

Because we don’t, and can’t, know the future. So pretending we do feels, well, wrong.

Not to mention the fact that investors out there like this one will push you to go way beyond any reasonable definition of honesty. Or that there are many, many stories of founders trying so hard to pre-tell the truth that they cross a line in the process. Because there is so much on the line in VC backed startups, and one person’s decision to invest or not can be so material, there is a great deal of pressure on founders to just say what they have to say to get the deal done.

So where’s the line?

It’s definitely not black and white. In my conversations with founders, everyone has their own answer to this question, just like everyone has their own moral compass. That said, in my experience having raised now 1, 2, 3, 4, 5, 6, seven rounds of capital in my career (shit…), to balance the reality of both A) the need to paint a big vision to raise capital, and B) the need to be honest, you must do two things:

Keep the past the past
Paint a big vision with bold words, while showing your work

Keep the Past the Past

The first guideline is simple: The past (and present) must be told factually in all cases, 100% of the time.

If your product doesn’t yet work (past tense), you can’t say that it does. If you have $1.75m in ARR, then you can’t say you have $2m in ARR. You MIGHT be able to stretch $1.75m ARR to “nearly $2m,” but I would feel even a little off about that. I’d have to have $1.9m to feel good about “nearly $2m.” Fudging a fact is no bueno. No matter what’s at stake (and sometimes it feels like everything is at stake).

Paint a big vision with bold language (and show your work)

The second guideline is simple, too. You must boldly paint a big vision. But you must also show your work.

Let’s take the bold vision part first. Simply said, you can’t equivocate and raise money effectively. You must be decisive in your language.

“We think that we might be able to reach $100m in revenue in five years”

performs worse than

“We expect to reach $100m in revenue in five years.”

Spoiler alert: everyone in the room knows that you don’t know if you will reach $100m in revenue, but saying that you “expect to” rather than that you “might” communicates a level of conviction in your future performance necessary to convince someone else to develop their own conviction.

So you’re wise to use bold language when discussing the future. But bold language on its own can get you into trouble (see all the links above of many people who tried to pre-tell the truth, but then it didn’t materialize and now they’re in jail). So how do you avoid putting yourself in hot water?

The key to navigating this fine line well is to show your work.

If you expect to reach $100m in five years, that belief must be based on a series of key assumptions. All of which are guesses based on various degrees of education. I see many founders skim over or even skip mentioning these assumptions in an attempt to hew to the bold-narrative part. If you’re talking to unsophisticated investors, or folks who don’t understand your business, you might be able to slip something by them. For a while. At least until diligence. But when they do find out it sends a clear message that not only weren’t you forthright, but you also don’t believe in your assumptions enough to put them front and center. Your fear becomes their lack of confidence, and your deal falls apart.

Or worse, they never do find out, make an investment based on their belief in you, and when the investment doesn’t work have no recourse but to turn on you. The person who either incompetently missed, or dishonestly hid, something critical.

Far better to show your work. Lead with those scary, make or break assumptions, and paint a picture of the enormous upside if they come true. Something more like:

“Our CAC/LTV is 7/1. Assuming that holds as we scale we plan to pour money into marketing and we expect to hit $100m in revenue in five years.”

This does two things: first, it helps the investor see the key assumptions that are materially driving the model – the CAC/LTV might not hold in this case – which enables them to draw their own conclusions about the likelihood of those assumptions being correct. They’re not relying on your word, they’re doing their own math. So if the assumption turns out wrong, they made the bet eyes wide open.

And second, for sophisticated investors, it actually makes your argument stronger. It shows them that you see the risks associated with your plan. That you know your plan isn’t foolproof, and will be wrong in some (many) ways, and that even when considering all those risks, you are still confident enough to invest your time, energy, and money into it.

So are founders allowed to lie?

I think the answer is a firm “no.”

But don’t let that stop you from painting a humongous castle in the sky.

Just be sure that you keep the past the past, and you show your work.

The investors you want to work with long term would expect nothing less.

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