My Encounter With A Startup Villain: How Our CTO (Almost) Sunk Our Startup

If you already read my cofounder’s blog post, then you know much of what I am about to share with you. If you haven’t had the chance, then prepare yourselves. This story is one unusual, unfortunate, and eye-opening learning experience I hope no one ever has to experience. The essence of this post is simple: ZoomThru got screwed by our CTO, who ended up being a professional conman that defrauded the company out of thousands of dollars. And the situation was completely avoidable.

My hope is that this blog post helps my network avoid situations like this from occurring at your startup, though I believe many of these lessons can be applied to situations outside of entrepreneurship. So let’s jump right in.

Meeting Dan

Late June 2016 — six weeks until the Start Co. Accelerator Demo Day in Memphis, TN. We had just completed the process of firing our first CTO and needless to say the pressure was on to find a replacement. Scrambling, we reached back into our Rolodex and called an individual we previously interviewed for the position back in April. His name was Dan Eric (or so we thought). He agreed to come onboard and quickly began the process of building our technology (or so we thought). At first, I was very much against the idea of bringing Dan on board. Something about him rubbed me the wrong way. He promised to come down to meet both Lexi and me in Memphis on a few occasions, only to provide some lame excuse as to why he couldn’t make it. Given my initial disdain for Dan, a man I believed had little regard for a startup I had sacrificed everything for, Lexi thought it was best for her to control our dialogue. I understand her reasoning — we desperately needed product development and perhaps my interference might have hindered progress — but I felt that was the wrong way to go about fostering optimal team dynamics.

Let’s now fast forward to the beginning of August, days before our Demo Day. Dan informed us that he had just closed our first customer. In light of this new information, my opinion on Dan began to change. He was building our technology AND bringing on our first customers?? I’m all in!

Fast forward again to the end of September to my first ever encounter with Dan. We met at the ZoomThru’s showcase at Startup Grind LA and immediately hit it off. We saw eye-to-eye on the future direction of the company (the one we are working on today) and shared many of the same views on investing, politics, and life in general. He quickly became not only a Co-Founder…but a friend.

The Turning Point

Everything was rosy and sparkles at ZoomThru HQ for about a month or two…until they weren’t. As time went on, the “check” from our “first customer” never came in. He refused to show Lexi our “technology.” But worst of all, he began to surreptitiously turn me against Lexi through an intricate web of lies and falsehoods. Money was vanishing from the company bank account (will discuss more later). Lexi was afraid to assign him work while I was afraid to question him on suspect purchases that appeared on our bank statements. He had strong-armed the company by continuously threatening to walk away if he wasn’t satisfied — leveraging his “technical expertise” and the contract of our first customer. Dan was becoming erratic and demanding. Although a few of his complaints were valid, the way in which he went about asserting his issues was toxic. The relationship between Lexi and Dan had become so contentious that going to the office was awkward and uncomfortable. And I idly sat there and watched, telling myself that team dynamics would improve once the check came in the mail.

Tensions between Lexi and Dan got to a breaking point. Lexi made the executive decision to fire Dan immediately succeeding another one of his empty threats. I was in an awkward situation…I had to pick sides between my Co-Founders. I would like to sit here and say I made the right choice. And given the circumstances, I wasn’t in the wrong. With all that said, I, unfortunately, sided with Dan. I thought that if we fired Dan, then our technology and customer would be gone, doing a disservice to our shareholders. So I did what I believed was in the best interest of the company AND my investment (I invested 25k into ZoomThru with the belief that we had this contract signed).

Before corporate warfare was about to unfold in our emergency board meeting the next day, Lexi filled me in on a piece of critical information I was not privy to beforehand. Upon looking into his emails, Lexi told me she had discovered a name he had used previously used: Dan Kaufman. That’s when it hit me like a Mac Truck. A marketing girl Dan brought on to perform some consulting for TechWeek (let’s name her Sarah) called Dan “Dan Kaufman” by accident one time. After I had approached him about her mistake (or so I thought!), he shrugged it off, claiming that he and Sarah had a mutual acquaintance named Dan Kaufman and that she must have been confused. Once Lexi filled me in on that piece of suspicious information, I knew he was hiding something. My girlfriend and I began googling everything we could about Dan Eric or Dan Kaufman. Initial searches yielded no remarkable results (gotta love SEO). But when she typed in “Dan Kaufman fraud,” everything became clear. Our very own CTO was a criminal. And a (relatively) famous one.

“The Montauk Grifter” AKA “The Busy Chef” AKA the “Busted Chef” are just a few of his infamous criminal labels. Dan Katze, Dan Kay, Dan Eric. All of these names, as well as everything he ever said or did for the company, are as real as Santa Clause. And the money that “vanished”? Dan was using company funds for personal consumption his entire time at ZoomThru. That is what we call “fraud.” Dan Kaufman has a long and decorated history of ripping off unsuspecting business owners. He defrauded a company called CloudMob media for over $40,000, and has defrauded numerous clients of his restaurants, grifted harmless women from dating websites, and was charged with multiple counts of Fraud and Grand Larceny over the past 10 or so years.

Everything was a lie: his experience and expertise, our first customer, and the technology. Everything.

It goes without saying that, upon uncovering this information, everything became clear. The vanished money, the complete lack of transparency, and hostility towards Lexi were all calculated maneuvers by a professional criminal to con young, optimistic entrepreneurs like Lexi and I. ZoomThru had been duped.

The Damage

All in all, Dan’s lies hurt the company to the tune of thousands of critical funding and three or four months of our time diverted away from business development. However, I believe the real damage was in the spending habits we implemented thinking we had a customer paying us $125,000(or so we thought!). We built new logos, websites, materials, and other excessive marketing ploys to legitimize our business externally.

If you have read Lexi’s blog post, then you know of the internal rifts Dan caused between us. Team dynamics (and the skill of the entrepreneurs) are the most important considerations in determining the future success of an organization. Dan (unbelievably) did our company a favor in this regard…he exposed critical flaws in ZoomThru’s company culture and team DNA that would have probably sunk the company in the future either way. If there is a silver lining, it is that. I choose not to victimize ZoomThru and are accordingly lucky enough to have many learning lessons to take away from this unfortunate encounter.

In this next section, I outline those key lessons. I intend these lessons to represent actionable pointers founders can adopt to avoid situations like these.

What I Learned

Take your time during the hiring process

No matter your circumstances, please commit the proper time to conduct thorough due diligence on people you bring into your company. This is YOUR company — vet whoever joins your cult ☺.

• DO BACKGROUND CHECKS. There are a million resources one has at their disposal to do criminal background checks. The person has a DUI? Not the end of the world, people make mistakes! Such is life. The person defrauded a startup in the past? Run!!

• Check all the candidate’s references, then dig deeper. Call companies on the prospective employee’s resume or Linkedin page. Ask around. Was he/she a good worker? Was he/she a genuine person? Manageable and insightful? DID THE PERSON EVEN WORK FOR THE COMPANY? All relevant questions founders should try to look into before bringing on the individual.

• Hire slow. Never let some external event affect your business’s onboarding process. Our accelerator placed pressure on Lexi and me to find technical expertise before our Demo Day in an area void of the necessary talent. Bottom line — take the time your company needs to find the right person to join your team for years to come (hopefully).

Company DNA is Everything

This lesson feeds off my first point. In the world of entrepreneurship, there are many important critical success factors. Is your product solving a problem? Will people pay for your solution? How big is your market? All these are relevant questions an investor will ask you when you are raising capital. However, none of them touch on the most important success factor of them all.

Company Culture.

Even if the contract had been real and the technology built, ZoomThru would have failed. And it would have failed because we didn’t establish company guidelines.

If ZoomThru had built vision statements, company principles, operational processes, and for lack of a better word — RULES — then we would have prevented this entire situation. Even if your business partner is your best friend, it is vital for Co-founders to come up with reasons as to why you are unique and what values your organization holds as important. Dan was able to disrupt our company because we did not have those rules in place. If we had created a list (let’s call them the “Rules of ZoomThru”) that outlined our belief system, we would have been able to prevent these rifts. Lexi said it great last week: “Nobody should be able to get between you and me!” Now that’s our #1 rule.

My recommendation is to have company obsessions. Whether these are hobbies, sports teams, or even favorite books or movies, having team passions are essential for building distinct cultures. These give your team a unique, identifiable culture that can be expanded upon as the team grows from a village to a tribe to a nation. What commonalities exist between your Co-founders? Paraphrasing from Peter Thiel’s “Zero to One,” your company is a cult. You shouldn’t let anyone with talent into your cult. Be selective and targeted as to who you bring on. Make sure they are someone who will perpetuate the prevailing culture. But remember: the culture of the company is the founding team. The DNA of the team is the synergy and commonalities exhibited by the founders projected internally and externally. It’s difficult to create a culture artificially. It should be organic. But its importance can’t be overstated.

Which leads me to my next lesson.

Trust, But Verify.

Dan refused to show Lexi the signed document from our make-believe first customer, citing lack of confidence in her ability to keep the deal alive.

In addition, I would see transactions on our bank account for food delivery and Ubers. When I would approach Dan, he would give excuses as to why he needed those services at that time. I trusted him, and that was that. On numerous occasions, I would see unfamiliar transactions appear on the statements, and when I would approach Dan, he explained the expenses away by saying they were “essential technology costs.”

You need to be able to trust your co-founders. Without trust, then an organization cannot function properly. If too many checks and balances are implemented, the whole team decreases growth velocity. Some checks and balances are necessary, yes. But don’t go overboard. However, VERIFY EVERYTHING IMPORTANT. I’m going to repeat this because it is so incredibly vital to team trust and transparency….VERIFY EVERYTHING. If you control your company’s finances, make sure you have a system in place that allows your cofounders to interact with your financial statements, bank accounts, and budgets. Do not let anyone in your organization adopt any attitude other than one that invites collaboration, verification, and support. Anybody that is afraid to show the CEO the technology or financial statements is one of two things: they are terrible to work with, or they are hiding something ( and therefore untrustworthy).

So make it a point in your company rules (or principles, tenants, or whatever you’d like to call them) to not only allow but encourage the “trust but verify” mentality. If it’s in the rules, then one never has to feel guilty about asking for updates and progress reports.

Spend your capital given your financial situation AT THAT EXACT TIME.

ZoomThru was thinking like an income statement when it should have been acting like a balance sheet. What does this mean? If you aren’t financially savvy, allow me to explain. An income statement is a review of financial performance over a set duration of time (typically quarters or years). A balance sheet, on the other hand, is a snapshot of the current financial standing of the company.

ZoomThru’s thinking: Ok, we are about to generate $125,000. Let’s go ahead and start scaling the business since we have found a proof of concept (or so we thought!). Let’s change our logo, showcase at events, build a fancy website, think about expanding the team, and lease spiffy office space! Even with all these expenses, we are very profitable. Let’s spend to continue our growth.

How we should have thought: Ok, this contract is substantial, but hasn’t hit the bank account yet. Let’s develop our plan to scale the business, but not act until the cash hits the bank account.

I knew we were going about this incorrectly, but I irrationally justified our spending habits because I knew we were getting that massive contract (Or so I thought!). Even worse, I trusted Dan and didn’t verify anything! If I had known back then what I know now, we would be much better off.

If you are expecting to close a financing or major contract, fantastic! No harm in planning how to utilize that capital once hits the bank account. Before the money hits the bank, don’t spend. Think balance sheet…spend and act according to the financial standing at that exact moment in time.

Never Victimize, and learn from negative encounters

It has been said that Thomas Edison responded with a Joke when an employee informed him a major factory had completely burned to the ground.

Life throws curveballs all the time. Whether the curveball was self-imposed or out of our control, everyone has a choice in how they respond. As indicated by my anecdote on Thomas Edison, how you respond to adversity is what makes all the difference. Adversity is a natural and consistent part of the human condition. Your response to this adversity is what separates the survivors and the thrivers. Lexi and I choose to learn and move on. ZoomThru could have died, but it didn’t because Lexi and I opted not to let it. We picked ourselves up by our bootstraps and marched on. We didn’t stop. #Neverstop

Learning, growing, and extracting the positives from bad experiences are crucial in the development of startups and the individual founders alike. Dan helped us pivot our company strategy to what it is today. Our plan has changed numerous times since our days at Draper University, and I don’t know if we would be on the right path if it weren’t for Dan. So thanks for that!

I hope these lessons better equip founders with the knowledge to handle the less-obvious complexities of entrepreneurship. To non-founders, I hope I didn’t scare you away from pursuing a dream of eventually being an entrepreneur and changing the world.

To better days and future success to us all!