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Thanks, this is indeed a better source. A lot of people here are saying this is incredibly common which is frankly pretty surprising to me. Does it really happ

Thanks, this is indeed a better source. A lot of people here are saying this is incredibly common which is frankly pretty surprising to me. Does it really happen through shell LLCs? I am definitely aware of execs prioritizing startups they've invested in, which is... not a great look. But this seems to be a different thing. Kail wasn't an investor. He explicitly drafted agreements that paid him a fraction of the money flowing from Netflix. This seems almost like embezzlement to me (not a lawyer! just a guy using words he has heard!): > Two days before Unix Mercenary was registered, Kail signed a Sales Representative Agreement to receive payments from Netenrich, Inc. amounting to 12% of the billings from Netenrich, Inc. to Netflix for its contract providing staffing and IT services to Netflix. Later in 2012, Kail began to receive 15% of all billing payments that VistaraIT, LLC, a wholly owned company of Netenrich, received from Netflix. From 2012 to 2014, Netenrich, Inc. paid Unix Mercenary approximately $269,986, and VistaraIT, LLC paid Unix Mercenary approximately $177,863. The payments stopped in mid-2014, after Kail left Netflix.

tptacek 5y ago
I think it's probably pretty common, because I've worked jobs where clients have floated the idea (it was gross, we turned them down). Kail's own sentencing memorandum points out that OpenDNS rewarded a different Netflix employee with stock options. Also, presumably, super illegal.
- boppo1 5y ago
  You mean they said "we'll write the contract so you get a finder's fee"?
- sokoloff 5y ago
  I don’t want to come off as holier than average, but I always assumed the standard was to disclose the relationship I had with any company we were considering and to explicitly exclude myself from the evaluation process. Seems like common sense and is drilled into all our leaders as part of code of conduct behavior. Companies that I’ve worked for and companies that I’ve advised or invested in have never had a problem with me making an intro under such terms (and sometimes we bought, sometimes we didn’t, but in either case, I was out of it after the intro; the very most an advised company would get is a better/more truthful explanation of why we decided not to buy.).
- numair 5y ago
  I can’t find the OpenDNS citation — could you post a link? I would be super disappointed to find out that the founder of OpenDNS was involved in this sort of behavior.
  - borski 5y ago
    IANAL, but: One can be both an advisor to a company and their company can be a customer of it. That is not, in itself, illegal. It is illegal when they are tied together as a quid pro quo, and further, when it is undisclosed. In every case any company I ran has ever done this, we fully expected the other party to disclose the conflict of interest to their company before becoming an advisor. Of course we have no way of confirming this, but this is also why none of the startups themselves were charged here.
nilsbunger 5y ago
People often set up an LLC for their consulting thinking it will help with 1) taxes and 2) liability. But neither of those are quite right: 1) the same tax deductions are available on your normal schedule C 2) while acting on behalf of your LLC you’re still personally liable for your actions (let alone your illegal schemes).
- cmeacham98 5y ago
  From my understanding, an LLC does help with _financial_ liability - if the company fails and goes bankrupt, your personal assets generally won't be on the line. Obviously, an LLC cannot shield you from criminal liability.
  - zrail 5y ago
    Small time LLCs are not going to get so much as a credit card without a personal guarantee. Sometimes you can get loans from the company doing your payment processing but only because they're directly involved and can see your cash flow. (disclaimer: I work for Stripe which had a product that works like that, but not anywhere near that team)
    - nilsbunger 5y ago
      What this person said. You'll almost always have a personal guarantee on a loan. And if it's just you consulting, you don't typically have assets in the LLC to borrow against anyway.
  - jacquesm 5y ago
    Not necessarily, see 'piercing the corporate veil'.
    - dahfizz 5y ago
      Sure, but this is the exception that proves the rule: > generally courts have a strong presumption against piercing the corporate veil, and will only do so if there has been serious misconduct. Courts understand the benefits of limited liability... As such, courts typically require corporations to engage in fairly egregious actions in order to justify piercing the corporate veil LLCs still protect personal assets in the general case.
jacquesm 5y ago
We always check the corporate registries to see if any of the legal entities the execs of a company are related to are making substantial turnover from either the company we are looking at, or a subsidiary. In 200+ DDs this has happened a handful of times. So I would not say it is a common thing but it definitely does happen, and often enough that we feel the need to at least try to establish if it is the case during a routine checkup in case of investment or acquisition. Of course that would not help a company while it is happening, we only check a very small fraction of all offerings. In a perfect world an accountant would catch this. One case I ran into was very much like this one: a whole bunch of hardware was sold at above sticker price, on top of that much more hardware was sold than what the business could reasonably expect to be using. The a-technical management never caught on to this until we showed up, the fall out from that case was fairly spectacular.
- bozhark 5y ago
  With so many DDs, do you have any pointers or directions for those looking to learn better DD?
  - jacquesm 5y ago
    I wrote a couple of articles about it: https://jacquesmattheij.com/due-diligence-survival-guide/ https://jacquesmattheij.com/due-diligence-survival-guide/ and part II: https://jacquesmattheij.com/due-diligence-survival-guide-part-ii-nuts-and-bolts/ https://jacquesmattheij.com/due-diligence-survival-guide-par... Note that these articles are now about a decade old, I probably should update them to reflect the experience gained since then and changes to the state of the art in tech.
  - mbesto 5y ago
    I'm the other DD guy (besides jacquesm, who btw is very knowledgable) that regularly posts here. Happy to answer any questions. There really isn't any "public" info about tech DDs that I could share. The tech DD world is growing likely crazy so if you have a business and tech mind, you'll likely find companies hiring for roles, even if you don't have specific experience. These are two books that might help you provide perspective on M&A/PE that you would learn if you got into DD: https://www.amazon.com/dp/1973918927/?coliid=IOSLH6YRD3CP6&colid=3BTISQKNUST1G&psc=1&ref_=lv_ov_lig_dp_it https://www.amazon.com/dp/1973918927/?coliid=IOSLH6YRD3CP6&c... https://www.amazon.com/HBR-Guide-Buying-Small-Business-ebook/dp/B01KP33K4Y/ref=sr_1_2?dchild=1&keywords=how+to+buy+a+business&qid=1634668502&s=books&sr=1-2 https://www.amazon.com/HBR-Guide-Buying-Small-Business-ebook... For reference - I've done 250+ DDs myself and my firm has done over 500 over the last 6 years.
Cd00d 5y ago
>not a lawyer! just a guy using words he has heard! Thank you for your honesty and self-awareness. This framing also amused me.
deleted 5y ago
[deleted]
tootie 5y ago
I worked on the services side for many years and eventually worked my way into the sales and contract writing level of the operation. I was definitely too much of a square for anyone corrupt to want to pull me into their schemes, but I also never caught any kind of whiff of impropriety. We worked for a pretty wide array of clients including Fortune 50s and startups, contracts in the $500K-$20MM range. Never heard a whisper of kickbacks and we were typically squeezed to utilize every penny so it would be really, really hard to make more than 1% of our contract price disappear. The worst I ever saw was small-time expense abuse like buying steak dinners and wine on trips. Second hand, an acquaintance worked on a tobacco account where they were spending government-mandated anti-smoking funds on a digital marketing campaign and they were asked to deliberate overbill and churn on work without delivering. People went to jail. Third handed story because I knew some folks who used this software, a vendor once extracted about 1000% of their contract price in kickbacks building HR software for the city of new york: https://www.nytimes.com/2014/04/29/nyregion/three-men-sentenced-to-20-years-in-citytime-scheme.html https://www.nytimes.com/2014/04/29/nyregion/three-men-senten...
gmadsen 5y ago
this seems like such a low reward high risk grift. A Netflix exec needs to risk his entire life over $450K?
- tptacek 5y ago
  The DOJ adds up Kail's gains into the mid 7 figures, inclusive of the stock grants he was given by the companies he shook down.
  - sizzle 5y ago
    Correct they gave an example xx,xxx stock options for a company that got acquired by mega corp could easily translate into millions.
chunky1994 5y ago
It would be embezzlement (and not fraud) if the money had first gone to Netflix and then been redirected to Kail (without their knowledge).It's only fraud because the funds never went to Netflix in the first place Embezzlement: Misappropriation of funds Fraud (in the inducement): (Specifically wire/mail fraud when talking about contracts): Misrepresentation of contractual terms to induce entering into a contract. (Here the misrepresentation is the amount of money that the vendor was going to charge netflix since technically his kickback would've reduced the expenses to Netflix)
jdavis703 5y ago
> A lot of people here are saying this is incredibly common which is frankly pretty surprising to me. As an intern at one place I had to spend hours studying and then taking a test to ensure I complied with anti-bribery rules. I’m sure this didn’t just come up because one person did something bad.

tptacek 5y ago

I think it's probably pretty common, because I've worked jobs where clients have floated the idea (it was gross, we turned them down). Kail's own sentencing memorandum points out that OpenDNS rewarded a different Netflix employee with stock options. Also, presumably, super illegal.

boppo1 5y ago
You mean they said "we'll write the contract so you get a finder's fee"?
sokoloff 5y ago
I don’t want to come off as holier than average, but I always assumed the standard was to disclose the relationship I had with any company we were considering and to explicitly exclude myself from the evaluation process. Seems like common sense and is drilled into all our leaders as part of code of conduct behavior. Companies that I’ve worked for and companies that I’ve advised or invested in have never had a problem with me making an intro under such terms (and sometimes we bought, sometimes we didn’t, but in either case, I was out of it after the intro; the very most an advised company would get is a better/more truthful explanation of why we decided not to buy.).
numair 5y ago
I can’t find the OpenDNS citation — could you post a link? I would be super disappointed to find out that the founder of OpenDNS was involved in this sort of behavior.
- borski 5y ago
  IANAL, but: One can be both an advisor to a company and their company can be a customer of it. That is not, in itself, illegal. It is illegal when they are tied together as a quid pro quo, and further, when it is undisclosed. In every case any company I ran has ever done this, we fully expected the other party to disclose the conflict of interest to their company before becoming an advisor. Of course we have no way of confirming this, but this is also why none of the startups themselves were charged here.

nilsbunger 5y ago

People often set up an LLC for their consulting thinking it will help with 1) taxes and 2) liability. But neither of those are quite right: 1) the same tax deductions are available on your normal schedule C 2) while acting on behalf of your LLC you’re still personally liable for your actions (let alone your illegal schemes).

cmeacham98 5y ago
From my understanding, an LLC does help with _financial_ liability - if the company fails and goes bankrupt, your personal assets generally won't be on the line. Obviously, an LLC cannot shield you from criminal liability.
- zrail 5y ago
  Small time LLCs are not going to get so much as a credit card without a personal guarantee. Sometimes you can get loans from the company doing your payment processing but only because they're directly involved and can see your cash flow. (disclaimer: I work for Stripe which had a product that works like that, but not anywhere near that team)
  - nilsbunger 5y ago
    What this person said. You'll almost always have a personal guarantee on a loan. And if it's just you consulting, you don't typically have assets in the LLC to borrow against anyway.
- jacquesm 5y ago
  Not necessarily, see 'piercing the corporate veil'.
  - dahfizz 5y ago
    Sure, but this is the exception that proves the rule: > generally courts have a strong presumption against piercing the corporate veil, and will only do so if there has been serious misconduct. Courts understand the benefits of limited liability... As such, courts typically require corporations to engage in fairly egregious actions in order to justify piercing the corporate veil LLCs still protect personal assets in the general case.

jacquesm 5y ago

We always check the corporate registries to see if any of the legal entities the execs of a company are related to are making substantial turnover from either the company we are looking at, or a subsidiary. In 200+ DDs this has happened a handful of times. So I would not say it is a common thing but it definitely does happen, and often enough that we feel the need to at least try to establish if it is the case during a routine checkup in case of investment or acquisition. Of course that would not help a company while it is happening, we only check a very small fraction of all offerings. In a perfect world an accountant would catch this. One case I ran into was very much like this one: a whole bunch of hardware was sold at above sticker price, on top of that much more hardware was sold than what the business could reasonably expect to be using. The a-technical management never caught on to this until we showed up, the fall out from that case was fairly spectacular.

bozhark 5y ago
With so many DDs, do you have any pointers or directions for those looking to learn better DD?
- jacquesm 5y ago
  I wrote a couple of articles about it: https://jacquesmattheij.com/due-diligence-survival-guide/ https://jacquesmattheij.com/due-diligence-survival-guide/ and part II: https://jacquesmattheij.com/due-diligence-survival-guide-part-ii-nuts-and-bolts/ https://jacquesmattheij.com/due-diligence-survival-guide-par... Note that these articles are now about a decade old, I probably should update them to reflect the experience gained since then and changes to the state of the art in tech.
- mbesto 5y ago
  I'm the other DD guy (besides jacquesm, who btw is very knowledgable) that regularly posts here. Happy to answer any questions. There really isn't any "public" info about tech DDs that I could share. The tech DD world is growing likely crazy so if you have a business and tech mind, you'll likely find companies hiring for roles, even if you don't have specific experience. These are two books that might help you provide perspective on M&A/PE that you would learn if you got into DD: https://www.amazon.com/dp/1973918927/?coliid=IOSLH6YRD3CP6&colid=3BTISQKNUST1G&psc=1&ref_=lv_ov_lig_dp_it https://www.amazon.com/dp/1973918927/?coliid=IOSLH6YRD3CP6&c... https://www.amazon.com/HBR-Guide-Buying-Small-Business-ebook/dp/B01KP33K4Y/ref=sr_1_2?dchild=1&keywords=how+to+buy+a+business&qid=1634668502&s=books&sr=1-2 https://www.amazon.com/HBR-Guide-Buying-Small-Business-ebook... For reference - I've done 250+ DDs myself and my firm has done over 500 over the last 6 years.

Cd00d 5y ago

>not a lawyer! just a guy using words he has heard! Thank you for your honesty and self-awareness. This framing also amused me.

deleted 5y ago

[deleted]

tootie 5y ago

I worked on the services side for many years and eventually worked my way into the sales and contract writing level of the operation. I was definitely too much of a square for anyone corrupt to want to pull me into their schemes, but I also never caught any kind of whiff of impropriety. We worked for a pretty wide array of clients including Fortune 50s and startups, contracts in the $500K-$20MM range. Never heard a whisper of kickbacks and we were typically squeezed to utilize every penny so it would be really, really hard to make more than 1% of our contract price disappear. The worst I ever saw was small-time expense abuse like buying steak dinners and wine on trips. Second hand, an acquaintance worked on a tobacco account where they were spending government-mandated anti-smoking funds on a digital marketing campaign and they were asked to deliberate overbill and churn on work without delivering. People went to jail. Third handed story because I knew some folks who used this software, a vendor once extracted about 1000% of their contract price in kickbacks building HR software for the city of new york: https://www.nytimes.com/2014/04/29/nyregion/three-men-sentenced-to-20-years-in-citytime-scheme.html https://www.nytimes.com/2014/04/29/nyregion/three-men-senten...

gmadsen 5y ago

this seems like such a low reward high risk grift. A Netflix exec needs to risk his entire life over $450K?

tptacek 5y ago
The DOJ adds up Kail's gains into the mid 7 figures, inclusive of the stock grants he was given by the companies he shook down.
- sizzle 5y ago
  Correct they gave an example xx,xxx stock options for a company that got acquired by mega corp could easily translate into millions.

chunky1994 5y ago

It would be embezzlement (and not fraud) if the money had first gone to Netflix and then been redirected to Kail (without their knowledge).It's only fraud because the funds never went to Netflix in the first place Embezzlement: Misappropriation of funds Fraud (in the inducement): (Specifically wire/mail fraud when talking about contracts): Misrepresentation of contractual terms to induce entering into a contract. (Here the misrepresentation is the amount of money that the vendor was going to charge netflix since technically his kickback would've reduced the expenses to Netflix)

jdavis703 5y ago

> A lot of people here are saying this is incredibly common which is frankly pretty surprising to me. As an intern at one place I had to spend hours studying and then taking a test to ensure I complied with anti-bribery rules. I’m sure this didn’t just come up because one person did something bad.