Aug 13, 2015 · 5 minutes

Is it “wrong” for a founder whose company is teetering on insolvency to mislead employees and investors about that fact?

Is it “wrong” for a passive investor to paint a rosy picture of that same company’s finances in order to help it raise additional funds without first verifying the numbers?

These questions have formed the basis of a strange argument I’ve been having for the past couple of days with Jason Calacanis, an angel investor in Zirtual. The company suddenly and dramatically imploded earlier this week, leaving hundreds of employees unemployed, and without healthcare.

To Calacanis and a few others who have come to his defence, investors shouldn’t concern themselves about employees or other investors. Their first, and only, obligation is to “support” the founder-- regardless of whether that founder is doing right by the team, the customers, or the investors. And if a company fails just a few hours later -- well, so what? Companies fail all the time! Other would-be investors should realize that angels aren’t expected to really know the details!

To me, the debate can be boiled down to one word: Honesty. Specifically, whether the startup world thinks honesty is still a necessary trait in a relationship-driven world.

I know several angel investors on one side who feel their duty is to be blindly supportive no matter what. I know several others who feel like they can’t ever try to pass off a “dog” to a VC for a series A, because it’ll forever hurt their ability to help the companies they truly believe in. Likewise, I know founders who are radically transparent within their organizations, and those who feel they have to protect their employees from the harsh truth of imminent collapse. In most cases, I think all of these people think they are doing the right thing in difficult situations.

It’s clear from this Medium post written by an ex Zirtual Assistant-- and many more Tweets-- that many members of Zirtual’s staff would have preferred more honesty. From the post:

You have forever tainted everything that you built up in the actions over the last 2 days. I’m not saying you were bad for having financial struggles. I am saying the way you handled the last 2 days has been appalling.

Giving the media more information than your employees, blind siding employees and clients, lying to everyone (possibly even to yourself) about the status, the potentials, and the results. There is a difference between transparency and invisibility. You bold faced lied to your employees. You told us through so many “update” letters how great Zirtual was doing, how we had so many clients you had to go and hire more ZA’s, how we were going to get raises, and you were buying us new equipment. You came into our team meeting(s) and told us how we were going to go international. You told us you were being transparent so we could know exactly what was going on, but in the “11th hour” you unceremoniously sent an email to all of us saying the doors were closing, we had no jobs, there was nothing more that could be done, but you told the press and the clients that it was a temporary pause and collectively in effect walked away. 

Reading that earlier today reminded me of one particularly dark time in NSFWCORP’s history when, for reasons he outlined in this post, Paul didn’t know if he’d be able meet payroll.

He reached out to several friends in the industry for advice, and one in particular gave him the best possible guidance. He told him that while it was embarrassing and difficult, to go to his team and be brutally honest with them about how bad things were, honesty was always the best policy. Odds are, his team would be ok with temporary wage cuts and might even feel united in the cause of saving the company they believed in. If not, at least they were getting fair warning.

Ultimately, on that occasion, Paul was able to pay his team without making cuts -- but the advice was exactly right. As soon as you know your company is in serious trouble, you need to tell your team so they can help you fight to save it. It bonded the NSFWCORP team deeply, only making his employees more committed to the mission and to him as a leader. Respect that your team can handle it and will help you fight through it, this person told him.

The person who gave Paul that advice:  Jason Calacanis. The very same Jason Calacanis who is now defending Zirtual’s treatment of its workers, and telling screwed-over employees their fate is a “bummer.”

It’s worth noting that meanwhile, other investors are still supporting Donovan but also giving her advice to explain what really went wrong, publicly. In the comments of her medium post, investor Mike Walsh said:

Maren — call if you want to chat. Many people here are pissed that you didn’t give a heads up when you knew the burn. It’s my understanding, as an investor, that you weren’t given accurate info about burn and the numbers in general, and were caught off guard. I think you should address this here, as it’s:

  1. important to the message and a valuable teaching moment and will benefit the startup community
  2. will explain why you didn’t give people more warning — because you didn’t know it was coming (unless I misunderstood the email)

As you know, I’m a huge supporters of founders and am in your corner. I think providing this info will provide everyone deeper insight and a better understanding. 

Walsh is right. He is still supporting and defending the founder, but also trying to help her get out of this hole, but urging her to change her behavior.

Thinking about being honest with employees, how uncomfortable it can be, and whether we’ve lost it as an ecosystem, I remembered an early PandoMonthly interview with Ben Horowitz. As anyone who has read his book “The Hard Thing about Hard Things” knows, Horowitz went through a gauntlet of hopelessness running Opsware post dot com bust, but eventually built it to a $1.6 billion exit.

I asked what he learned about leadership during the hardest times. His answer is fitting today: The importance of being honest with your employees.

It’s a must-watch clip for founders:

 [vimeo https://vimeo.com/136167124]

People will forgive failure in this industry. Dishonesty is a lot harder.