Why a Former Netflix Exec Facing 7 Years in Prison for Bribery is a Cautionary Tale for Startups (businessofbusiness.com) 29
A contract with a tech giant can put a startup on the map with venture capitalists and the market at large. That's what happened for Netskope, a cloud-based data security provider. Founded in 2012, the company was able to quickly scale up and secure multiple rounds of funding -- in part because it had a top-tier customer right out of the gate: Netflix. From a report: There was just one catch to landing that deal: It had to hire the streaming company's vice president of IT operations, Michael Kail, as a consultant and an advisor, and pay him with fees and stock options. Netskope (not to be confused with the now-defunct Netscape) wasn't the only startup confronted with that proposition. At least nine firms that worked for Netflix entered into similar arrangements, according to the U.S. Justice Department. Other companies drawn into Kail's web included software, cloud-storage and analytics companies Docurated, Numerify, NetEnrich, Platfora, VistaraIT, ElasticBox, Maginatics and Sumo Logic. The shady-sounding plot was described by the government during a criminal trial earlier this year in San Jose federal court. Kail was found guilty of more than two dozen fraud and money laundering counts. At his sentencing Oct. 19, prosecutors will ask that he get a stiff punishment of seven years in prison as well as be ordered to pay fines, restitution, and forfeit a $3.3 million home in Los Gatos, California.
The former Netflix VP, who also briefly served as chief information officer at Yahoo, "leveraged his status as a leader of the IT community in Silicon Valley to subvert the trust of Netflix and others to profit at their expense," prosecutors said in a recent court filing. They added that the similar schemes are "almost certainly" common among high-level tech executives, but that in no way excuses the behavior. The startups that paid to play, and possibly many others, believed this was how Netflix did business." A disturbing element of this narrative is the unequal playing field startups are on when they negotiate with big companies. As the government suggested, the crimes also seem relatively easy for an influential executive to carry out -- especially since the founders of fledgling firms have little if any incentive to blow the whistle, and may feel they have no choice but to go along with a pay-to-play scheme. In his own memorandum to the court, requesting that he be sentenced to a year of house arrest, Kail, 49, described himself as a "global power leader, top dev ops influencer and a thought leader." He appeared to minimize the impact of the crimes, describing them as "regrettable flaws in communication and transparency," and asserting that his undisclosed business relationships were more helpful than harmful to all involved. Yet many startup founders already have ample complaints about overly-generous advisor compensation and messy cap tables, even without the added corporate bribery wrinkle.
The former Netflix VP, who also briefly served as chief information officer at Yahoo, "leveraged his status as a leader of the IT community in Silicon Valley to subvert the trust of Netflix and others to profit at their expense," prosecutors said in a recent court filing. They added that the similar schemes are "almost certainly" common among high-level tech executives, but that in no way excuses the behavior. The startups that paid to play, and possibly many others, believed this was how Netflix did business." A disturbing element of this narrative is the unequal playing field startups are on when they negotiate with big companies. As the government suggested, the crimes also seem relatively easy for an influential executive to carry out -- especially since the founders of fledgling firms have little if any incentive to blow the whistle, and may feel they have no choice but to go along with a pay-to-play scheme. In his own memorandum to the court, requesting that he be sentenced to a year of house arrest, Kail, 49, described himself as a "global power leader, top dev ops influencer and a thought leader." He appeared to minimize the impact of the crimes, describing them as "regrettable flaws in communication and transparency," and asserting that his undisclosed business relationships were more helpful than harmful to all involved. Yet many startup founders already have ample complaints about overly-generous advisor compensation and messy cap tables, even without the added corporate bribery wrinkle.
regulation helps control these eventualities (Score:3)
There are already laws around the world about whether, as a certain kind of company, you can accept gifts from customers or government representatives, or give them. In large companies you receive mandatory training about this in order to protect both yourself, and the company, from liability.
The same could be applied to start-ups, in the sense that there could be mandatory training to explain to start-ups what kind of behaviors to avoid, and to report those behaviors to the government for investigation. This would catch people like Kail, and also encourage companies like Netflix to crack down more on how their employees handle deals with partners. But definitely the start-ups need to be responsible here, too, in terms of not going into deals which already look shady (which perpetuates what is clearly a trend already).
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There are already laws around the world about whether, as a certain kind of company, you can accept gifts from customers or government representatives, or give them. In large companies you receive mandatory training about this in order to protect both yourself, and the company, from liability.
The same could be applied to start-ups, in the sense that there could be mandatory training to explain to start-ups what kind of behaviors to avoid, and to report those behaviors to the government for investigation. This would catch people like Kail, and also encourage companies like Netflix to crack down more on how their employees handle deals with partners. But definitely the start-ups need to be responsible here, too, in terms of not going into deals which already look shady (which perpetuates what is clearly a trend already).
I find it hard to fault the startup. They were basically given the choice between giving Kail a chunk of stock or possibly failing altogether, screwing over not only themselves but all the friends, family, and existing investors who'd helped them out. In some cases they were probably pure victims, needing to give up equity to secure contracts they would have won fairly.
Full blame goes to Kail for exploiting his position. Netflix could also have done better to protect itself by having other parties inside th
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I find it hard to fault the [starting actresses]. They were basically given the choice between [blowing Harvey Weinstein] or possibly failing altogether, screwing over not only themselves but all the friends, family, and existing investors who'd helped them out. In some cases they were probably pure victims, needing to give up equity to secure contracts they would have won fairly.
So.... are you trying to imply that the women sexually assaulted by Weinstein were the guilty ones?
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By your logic they ruined the playing field for all the other women that conducted business appropriately.
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The problem these days is lack of enforcement, if the regulators never bite, hard, then there is little incentive to be compliant. How many Wells Fargo executives ended up in jail for opening accounts behind the back of their customers?
I was working at a startup that had Netflix as an early customer, they really liked us and provided great feedback, then our Netflix partner was overridden by Kail for no logical reason ... until we found out Kail was on the board of one of the competitors mentioned above. Th
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None of the above is exaggerated or made up. In fact, if anything, it's toned down...
Your posts are stupid and you're an idiot.
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I would like to thank you not only for saying what you said, but managing to use "Your" and "you're" in the same sentence the correct way. I would have modded you up, but don't have points at the moment. Would you settle for a standing ovation?
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Before we all go clutching our pearls here (Score:5, Insightful)
Look at what he was convicted of:
"The shady-sounding plot was described by the government during a criminal trial earlier this year in San Jose federal court. Kail was found guilty of more than two dozen fraud and money laundering counts."
He was convicted of fraud (against Netflix for non-disclosure) and money laundering (looking the indictment and other articles it looks like he was structuring the money to try and defeat bank reporting).
There were no corruption or other manner of anti-trust charges because the fact of the matter is influence peddling and cutting these side deals is not illegal, contrary to the outraged tone of this article. Neither is inserting yourself into the deal as a transaction cost or taking broker fees.
If this deal had been disclosed to Netflix and the funds reported, we're not reading this right now.
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Kickbacks may not be illegal but they're definitely unethical, and I would argue should be illegal. That's a viewpoint that may get majority support.
Funny that this "thought leader" got arrested for money laundering in the age of cryptocurrency though. I'm sure he'll be able to pull some strings to avoid prison since he's a "global power leader" ;-)
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That was my question, is this even illegal? You say no, but aren't public companies (such as Netflix) and their officers subject to some restrictions along these lines that would not apply to a purely privately-held company?
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Non-disclosure of conflicts of interest for profit constitutes fraud, as far as I am aware. At least that's what my yearly training tells me.
Regardless of whether it is or not, it's exceedingly unlikely to be in the best interest of the employer, so it's an offense that is usually met with immediate termination of employment.
Re:Before we all go clutching our pearls here (Score:4, Informative)
My training working for both GE and a small, privately held defense contractor included pretty strict limits on the value of gifts we could give to or receive from our subs and suppliers ($20, IIRC). I don't know if this was due to a criminal law, a standard FSC stipulation, or something else, but the training was remarkably similar. So I suspect that at least if you do business with the government, you are obligated by some sort of regulation in regards to how individuals are allowed to interact with organizations their employer does business with, even if you aren't a public company.
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Pretty sure Netflix has these same policies and regular employees are trained yearly for code of conduct. But this guy was a VP and he thought the rules didn't apply to him. His opinion about his crimes speak to that train of thought.
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The fraud was actually against Netflix since he chose suppliers based on who was paying him and not on who would provide the best service for his employer. If he had cut Netflix in on the deal the outcome would be much different.
I have signed agreements that said I wouldn't do exactly what he did as a condition of employment and have no doubt Netflix will have the same conditions in their employment contracts. Shouldn't even be that hard. I have companies who I have sales agreements with and if I recomme
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Every VC deal that includes putting one of their reps on the startup's board is exactly the same sort of influence peddling. That should be a tip-off on which parts of his behavior were illegal.
Kail is like a tech version of Harvey Weinstein (Score:3)
How many startups never got going because they refused to get in bed with the powerful?
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Not many startups fail for that reason. Most of them take VC money, after all.
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Not many startups fail for that reason. Most of them take VC money, after all.
VCs tend to come in at the seed-funding stage. I suspect most startups fail when they're still pre-seed.
And connections to the rich & powerful probably matters more to a startups success than anything else.
Need a few months of rent money to get your idea off the ground? Hope you have some friends & family who can risk a few 10's of thousands to get you started.
Want to talk to an Angel about a more substantial investment? You better get a personal introduction.
Want an early contract? Hope you have co
Cuties (Score:2)
No computers ever again (Score:3)
Netflix in prison (Score:1)
The question is, will he get Netflix in prison?
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If he was in a real hard core facility it would be over the air broadcast TV.