Startup Betrayal: 7 Immediate Legal Steps to Take After Discovering Fraud

When Trust Fails, Action Must Follow

The moment a founder discovers fraud, whether it's financial theft by a co-founder, IP theft by a vendor, or misrepresentation by an investor—is devastating. The instinct is often to confront or panic. However, your response in the first 72 hours is critical and can determine whether you can legally recover funds and hold the perpetrators accountable.

At Founders Don't Forget (FDF), we understand the shock of betrayal. This guide provides the 7 immediate legal and structural steps you must take to secure your company's future, preserve evidence, and launch a successful recovery effort.

Immediate Damage Control & Securing Assets

Your first goal is to stop the bleed and prevent the perpetrator from destroying evidence or accessing more funds.

1. Immediately Secure All Digital Access Points

Do not delay this step. Assume the perpetrator still has access to everything.

• Action: Change passwords and revoke access to all critical accounts:
  • Banking & Payment: Change login credentials and PINs for all bank accounts, credit cards, and payment processors (Stripe, PayPal). Consider initiating a temporary freeze on large outgoing transactions.
  • Cloud & Code: Revoke their access to company email, servers, cloud storage (AWS, Google Drive), and all code repositories (GitHub, GitLab).
  • Communication: Revoke access to Slack, shared folders, and CRM.
• Legal Note: Document the exact time and date you revoked access and the reasons why.

2. Isolate and Preserve All Digital Evidence

Evidence is fragile and can be deleted instantly. You must preserve the original files before acting.

• Action: Do not delete, move, or rename any suspicious files or emails. Instead, create forensic copies:
  • Email: Use litigation hold tools or professional archiving to capture all relevant email threads and communication logs.
  • Financial Records: Download complete, date-stamped copies of all accounting ledgers (QuickBooks, Xero), invoices, and bank statements related to the fraud.
• FDF Tip: Treat this evidence like a crime scene. A screenshot is often insufficient; you need the original digital file metadata.

Engaging Experts and Initiating Action

Once the immediate bleed is stopped, you must bring in professionals.

3. Contact Specialized Legal Counsel

General corporate counsel is often insufficient for fraud.

• Action: Immediately engage a law firm specializing in white-collar crime, corporate litigation, or IP theft. They understand the necessary injunctions and evidence handling procedures.
• Key Focus: Ask the attorney about filing a Temporary Restraining Order (TRO) or Preliminary Injunction to legally freeze the perpetrator's assets before they can be moved offshore.

4. Review and Analyze Governing Documents

Your legal framework dictates your next move, especially for internal fraud.

• Action: Pull out and thoroughly review your Founder Agreement, Bylaws, and Operating Agreement.
• Key Focus: Identify the clauses related to Termination for Cause, IP Assignment, and Dispute Resolution. These documents will define the legal steps for firing a co-founder, recovering equity, or initiating arbitration.

Reporting and Documentation

Accountability requires official reporting and thorough logging.

5. Document a Comprehensive Fraud Timeline

Your legal team will need a chronological narrative of the events.

• Action: Create a detailed document listing every relevant event:
  • Date/Time the suspicious activity occurred.
  • Date/Time you discovered it.
  • Specific Evidence (e.g., "Missing $50k wire transfer to Account #123 on June 15th").
  • Internal Action taken (e.g., "Access revoked on June 16th at 10:00 AM EST").

6. File Official Reports with Relevant Agencies

Reporting fraud is vital for both legal recourse and preventing future victims.

• Action: Depending on the nature of the fraud:
  • FBI Internet Crime Complaint Center (IC3): For most online scams, wire fraud, or cross-border theft.
  • Federal Trade Commission (FTC): For general scams and consumer protection.
  • Local Police: For instances involving physical theft or local jurisdiction.
  • Financial Regulators (e.g., SEC): For investment or securities fraud.

7. Strategically Control Internal and External Communication

Your communication should be managed by your attorney.

• Action: Do not confront the perpetrator. Do not discuss the fraud publicly (on social media or internally) until advised by legal counsel. Premature confrontation can lead to the destruction of evidence or a defamation lawsuit.
• FDF Tip: If you must address your team, keep the message strictly factual: "Due to a serious breach of corporate policy, [Name] is no longer with the company. All related inquiries are being handled by legal counsel."

The FDF Call to Accountability

Silence protects abusers. By taking these 7 immediate legal steps, you move from victim to prosecutor, securing your company's integrity and joining the fight for startup accountability. FDF is here to support you in that fight.