do more than just satisfy the law. “Investors and the board, in general, should step up if a problem occurs at the company, regardless of what that problem is,” Teten says. That can include strategic issues as well as personal problems within the executive ranks. The remedy for these problems might be recruiting new leadership for the company, he says.
Founders should take note that bad behavior may also cost them a shot at funding. When investors first get to know the leadership at startups, Teten says, they look for someone with the maturity to properly manage the money they get from backers. If there are issues such as sexism, that is a problem for investors, he says. “But there are lots of other ways they can be immature,” says Teten. “Investors should be looking out for all of this before they sign what is effectively a 10-year contract with the company.”
Recent press coverage of accusations of misogyny, he says, has made the venture capital world a bit more mindful to watch for these issues. And Teten has outlined some steps to prevent workplace problems from occurring, articulate the kind of culture a company wants to have, and drive towards more diversity in the startup community.
Being more mindful of the culture of the startups they back is in the best interests of investors, says Zimmerman. Investors who are on the board of directors may have personal liability, he says, if a sexual harassment issue or a hostile work environment problem arises at a startup they back. If they were aware of (or should have known there was) such an issue, yet failed to ensure appropriate action took place, they may be culpable, he adds.
Even if an investor is not on the board, and does not have responsibility in the eyes of the law, Zimmerman says, he or she may still face some fallout. “You’re probably going to lose some money because there’s a really negative set of things that will happen at that company,” he says. That could include costly litigation, fines, and loss of business or deals that sour the market value of the company.
He says even when board members do step in when issues arise, it still points to an underlying problem. “If board members are called up to do the right thing, it’s because some senior executive [at a startup] has behaved like a jackass,” he says.
Part of the problem, says Julie Levinson Werner, a Lowenstein Sandler attorney who specializes in employment law, may stem from startups’ natural growing pains. Companies often begin with a small group of friends who perhaps went to school together but do not realize their culture must evolve, she says.
“As they grow, they don’t appreciate it’s different than something that started in their basement or dorm room,” says Werner. New levels of accountability pile on, especially after taking funding and hiring employees, she says. “This isn’t just about hanging out and having fun.”
