Can Founders Lie?

Paul Graham (legendary founder of YC and essay writer) and David Sacks (PayPal mafia member and All In podcast “bestie”) aired dirty laundry about the infamous Zenefits collapse.

I’ll briefly explain the backstory from both sides below, but the TLDR is that the company’s founder had lied about some things that got him in trouble with the SEC.

And it brought me back to thinking about one of the more controversial topics in the startup world:

Can founders lie?

You might read that and think “of course not!” and obviously there are some things where the ethics are clear (don’t lie that your company’s blood test devices work, for example).

But there are many situations that put founders in a grey area where inconsequential lies are not often punished, and even encouraged.

So… where’s the line?

Can Founders Lie?

What Happened with Zenefits?

Zenefits was one of YC’s early success stories, and became a massive unicorn within a few years with Parker Conrad as the founder/CEO and Sacks as an early investor.

The company faced attacks from the press for it’s perceived techbro culture and, critically, allegations of cutting corners when having their employees get licensed as insurance brokers.

If memory serves, the primary issue was that Parker had created a browser extension that would simulate movement of the mouse during exceedingly long training videos and courses.

That may sound pretty innocuous, but it ended up causing an SEC investigation and led to Parker’s eventual resignation. Sacks jumped in as CEO to, in his words, “right the ship.”

The story is fascinating and much more detailed. I’ve included links to podcasts where both Parker and David talk about what happened:

• From Parker’s perspective

• From David’s perspective

Why Would a Founder Need to Lie?

This sounds like a loaded question, right?

No founder needs to lie.

But they often do.

Sometimes just about small things — for example, posting on X that you did a few thousand dollars of revenue more last month than you actually did so it’s a nice, round number.

But other times about big things, like what you’re planning to use an investor’s money for, or that your company’s revolutionary blood testing devices work.

They can do this because founders are special.

In a brilliant essay that first got me thinking about this topic back in 2020, Alex Danco compared founders to kings.

He asserted that in Silicon Valley’s social contract, founders “stand apart” from everyone else (even non-founder CEOs) because founder is the only title that can’t be earned in any way other than founding the company.

The soft-power that this gives is limitless as long as the founder observes some unwritten rules that, according to Alex, are:

1. You can’t push over the invisible line (Elon is a master at avoiding this).

2. You can only exaggerate in certain ways but not others (a Theranos-style lie is not ok).

3. Your reasoning for lying must be authentically that you’re trying to make the future real (who’s the judge of that is left up for debate).

The last rule is key.

Here’s an example.

In 2016 Amazon launched some grocery stores called Amazon Go where you could just pick up your items and walk out. I went to one in Seattle. It was weird but honestly great. No lines.

The implication was that the cameras in the store were hooked up to an AI system that charged your Amazon account automatically based on what you left with.

Well… in reality it turns out it was pretty much just a lot of people in India manually labeling the video feeds and processing the payments.

Their marketing around it being AI was a lie.

But it was ok. No one organized an Amazon boycott after finding out a few years ago.

Why? Because it was effectively an MVP where they were testing whether the store concept itself was viable. If the answer was yes, they’d invest in building the (likely quite expensive at the time) AI-powered system.

It didn’t violate rule #3.

When you’re an early stage founder many situations you’ll be in are more existential to your startup’s success or failure than Amazon’s experiment was to them.

As a result you may feel the need to lie more often, or about bigger things.

It’s not my place to tell you how to make that decision, but what is important is finding your line…

Where’s the Line?

Alex’s conclusion in his article was that the boundary of when to lie vs when not to was murky and context dependent, but I’ll try and be a little more specific here.

If you’re going to tell a lie, you need to have a high amount of confidence that it will be true in the future.

You need to decide at what probability level you gain that confidence. For Adam Neumann that threshold was likely quite low — he had irrational belief in WeWork’s potential. Eventually it caught up with him.

Since predicting the future is incredibly hard and startups are also very volatile, this often means lying is only even remotely ok about inconsequential things in the very near future.

Also, be sure your line is at roughly the same level as your co-founder(s). I’ve personally experienced situations where a co-founder was much more comfortable lying to investors than I was, and once I witnessed it it made it incredibly hard to trust that person about anything at all.

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