Random Thoughts – Randocity!

Did Elizabeth Holmes get the correct sentence?

Posted in botch, business, california, criminal, legal by commorancy on March 5, 2023

lab-testing-equipmentAs we should already know, now-disgraced and convicted CEO Elizabeth Holmes operated Theranos. Theranos was to offer the world a fantastical new way of testing people’s health concerns for all manner of blood diagnostics all with the tiniest drop of blood. It’s fantastical because Elizabeth Holmes’s Theranos was never able to make this testing technology actually work (the entire basis for the fraud). Ms. Holmes has now been convicted of wire fraud and defrauding investors, a federal crime. More than this, Ms. Holmes has now been sentenced to serve 11 years in a federal prison.

NBC News Opinion

One NBC opinion piece, written by a former federal prosecutor and current attorney, Andrey Spektor, contends that Elizabeth Holmes’s 11 year sentence is too harsh. This author does not agree. Why? Because of the nature of and, more importantly, the real dangers posed by the device she failed to create.

Andrey’s contention is:

But that calculation was the least important component of determining Holmes’ sentence because the judge ultimately disagreed with the probation estimate and, anyway, no rational judge would have sentenced her to anything approaching life in prison. Among other things, she is a first-time, nonviolent offender whose crime did not lead to anyone’s death.

I contend that this highlighted statement is, at best, inaccurate and is, at its worst, false. There may actually have been illness and death as a result of Theranos’s deception, when the Theranos “Edison miniLab” machine (pictured)theranos_minilab-crop, did not work as purported and likely impacted medical treatments needed (or weren’t needed, as the case may be) for medical patients. For Andrey to contend that no one died (or by extension, weren’t injured or hurt), that’s incredibly wrong thinking.

Ms. Holmes’s deception impacted many people’s health; health which relied on accurate testing results from Theranos’s Edison miniLab machine. Without accurate testing results, the wrong medications could have been prescribed, the wrong treatment plans could be implemented, up to and including not prescribing medications which could save people’s lives… or indeed the opposite may have occurred; the wrong prescription may have been prescribed causing injury or potentially death. Claiming her fraudulent testing equipment couldn’t cause harm is fallacious and disingenuous. Worse, according to the whistleblowers, Ms. Holmes knew that her miniLab testing equipment didn’t work!

Dangers to Society

The fact that the Edison’s machine’s deception was “caught early” is of no consolation to those who received inaccurate test results from Theranos’s intentional equipment deception. In other words, you can’t just play “god” with people’s lives and health and expect to get away with it.

To claim that her defrauding and misleading and intentional deception about her alleged testing methodology, which clearly did not work properly (or at all), didn’t impact people’s health and lives is insulting to those who could have lost their lives to Theranos’s medical fraud. Even still, some still could lose their lives early because of Theranos.

That the fraud was caught early because of two conscientious whistleblowers within Theranos employee ranks is more a testament to those two individual’s forthright and upstanding conscience than of Elizabeth Holmes coming clean about the dangers the Theranos Edison ultimately posed to society. Elizabeth Holmes would likely have continued to play this dangerous game if those two whistleblowers hadn’t come forward. It wasn’t Elizabeth Holmes who “came clean” on the wrongness of her equipment. It was those two Theranos whistleblowers who put their careers in jeopardy to save the lives of others.

11 Year Sentence

For all of these reasons above, I vehemently disagree with Andrey Spektor’s opinion. Elizabeth Holmes’s 11 year sentence is not at all inappropriate or too long. In fact, I’d say her sentence was downright lenient considering the danger she, Theranos and her fraudulent testing equipment posed to society as a whole. If her equipment’s fraud had not been found early, we could have gone perhaps a year or two or longer without knowing how many people might have been misdiagnosed, given the wrong medical treatments or, indeed, given no treatments at all for preventable, but fatal illnesses if left untreated. In short, Elizabeth Holmes (and her fake testing equipment) was (and is) a danger to society.

I contend that 11 years is way too lenient for that level of danger and risk that she and Theranos posed to the world. She doesn’t deserve leniency for having committed this level of medical malfeasance against the public at large. While one can try and argue that the trial wasn’t about her medical malfeasance specifically, the fraud fully stemmed from that malfeasance. Thus, any malfeasance must be considered as part of the sentencing. It can’t be “distanced” or “separated” as though it didn’t exist. That malfeasance was the entire reason Elizabeth Holmes’s machine was found to have caused the defrauding of investors. Eye on the ball, people.

While a trial for the affected patients was not allowed to move forward, that doesn’t preclude the absolute sheer negligence and willful malfeasance Holmes performed against an unsuspecting public. Elizabeth Holmes knew her machine didn’t work. Yet she STILL went ahead with placing it into Walgreens knowing its problems. That’s not innocent happenstance; that’s willful malfeasance and, at worst, malevolence. Conscientious people don’t put other people in harm’s way intentionally. Elizabeth Holmes put people in harm’s way. One might want to call that blind ambition. Call it what you will. Blind ambition can still result in someone doing the wrong things for the wrong reasons, even knowing that the outcome might cause harm to others. That can’t be dismissed with an 18 month sentence (as Ms. Holmes has requested), a mere slap on the wrist.

No, the 11 year sentence by federal sentencing Judge Edward Davilla was definitely of a sufficient length as to give her pause AND send her a solid message for what Theranos and she had done to the public… even if not specifically stated by judge Davilla; this judge knew the stakes.

Babies as Shields?

One thing Elizabeth Holmes appears to also be shrewd at is trying to get out of her 11 year sentence. She’s now attempting this by getting pregnant. There’s absolutely nothing wrong with starting a family… but on the heels of beginning an 11 year federal criminal sentence? I get that her biological clock is ticking, but it primarily says she’s using an infant as a shield. That’s not a good look and it fully supports the above malfeasance. She’s putting her baby in harm’s way to protect herself from going to prison, or at least so she hopes. It’s a crude and crass way to begin prison… and it leaves her kids in the lurch without a parent for 11 years.

She knew she had been convicted, yet she chose to get pregnant anyway? A judge should have held her in contempt of court over that. When Holmes’s first child was born, her trial had not yet begun. Thus, there was no way to know which way her trial might go. Her second child, however, is simply being used as a pawn against incarceration. That’s both a nasty and very vile reason to have a child. It doesn’t show compassion for the child, it shows self-preservation by Holmes. It’s an incredibly uncaring and self-centered tactic, especially for a baby that’s now caught in her manipulative crossfire. As I said, distasteful.

She’s now delivered her second child, but it’s almost certain she’s working hard to conceive a third as yet another shield. Enough’s enough here. If she pops up pregnant again, cite her for contempt of court, let her carry that child to term in prison and give birth to that child behind bars. The sentence was issued and it must be carried out. Having a baby shouldn’t become a “get out of jail free” card… not for her, not for anyone. Worse, babies should never be used as incarceration blockers.

Judges should make it perfectly clear to any convicted felon who decides to conceive a baby after conviction means possible contempt of court and that neither the pregnancy nor the birth will stop the incarceration from occurring. Playing these games with the court should always mean contempt of court and possible longer incarceration time.

Did Elizabeth Holmes get the correct sentence?

No, but not for the reasons Andrey Spektor proposed. In fact, Ms. Holmes got a far more lenient sentence than she should have been given considering the real medical dangers both she and her testing machine imposed on society. Ms. Holmes should count herself lucky at receiving only 11 years. Let’s hope that when she gets out of prison, she doesn’t try to start yet another dangerous “medical testing” company.

As for those 11 years Ms. Holmes faces? This amount of incarceration also sends a clear message to other would-be CEOs not to play with people’s lives using untested medical technologies in the goal of gaining personal fame, wealth or for any other reason.


How not to run a business (Part 10.1) — Case Study: Startup Funding

Posted in botch, business by commorancy on July 11, 2015

Note, for this case study article, I have abandoned the Don’t phraseology to allow studying this topic in detail.

A few months back, I was thinking how I had previously used GetSatisfaction to, of all things, try to get some satisfaction from would-be shyster companies. It wasn’t that I was in need of that type of service by the time as there were plenty of other functional and more effective complaint sites (i.e., Twitter, Ripoff Report, Consumerist), but I was interested in checking in on what’s up with some of those forums where I used to post.

Interestingly, the site had drastically changed. No longer was the once familiar interface there. Instead, the site was now closed. No, no in the sense that they were out of business, but more that when you visited the home page, consumers could no longer start or post to individual company complaint sites. Now it was designed to be used by companies to direct their own customers to getsatsifaction.com when the customer had a comment. Indeed, it was no longer the same GetSatisfaction that I knew. I also knew something was up, but I didn’t know what. Let’s explore.

GetSatisfaction sold to Sprinklr

In April of 2015, GetSatisfaction was bought by Sprinklr for an undisclosed sum of money, apparently on a fire sale. What this meant was that the new owners likely wanted some parts of GetSatisfaction for their own purpose, but not to keep it whole or intact. That’s quite obvious merely visiting the new www.getsatisfaction.com today.

In that sale, the founders of the site (some had been pushed out as early as 2010), received nothing from the sale. Indeed, according to Lane Becker (one of the co-founders), the company was sold to Sprinklr for less than the amount the company had received in initial rounds of funding (~$16 million). Additionally, the original founders also apparently didn’t receive a dime from the sale, but that’s kind of to be expected since they were no longer at the company at the time.

A Case Study

According to Lane Becker, the two initial rounds of funding accepted by the executives at the time led them astray from the beginning. He also states that it wasn’t so much the $6 million in Series A funding, but it was the additional $10 million they also accepted far too early in company’s lifecycle.

So let’s understand the problem in this scenario. While Lane doesn’t elaborate on the above statements, I take them to mean that for the $6 million, they likely signed over at least 20-30% equity in the company. With the extra $10 million, considering the company valuation was $50 million, they were likely required to sign over another 20-30% (pushing them into the high 40s percentage range for equity ownership given over to investors. Once you’ve given over that much of your company to early investors, your company is no longer safe from outside influences. Indeed, for that money that you’ve just accepted, you’ve just paid the highest price of all: loss of control.

This is what I assume happened at GetSatisfaction and why the founders were ousted from the company. After all, when you give over that much equity to investors and when your company doesn’t perform as the investors expected, out you go.

Be Honest with Yourself

What lesson does this teach small business owners? It teaches to not only be shrewd about your business, but you have to be honest about your goals, what you want out of your business and why you are in business in the first place. If you can’t be honest with yourself and your co-founders, you will fall into traps that can end your business before you get started.

In other words, asking for funding doesn’t come without strings attached. In fact, once you pull the trigger on funding, your world as a small business owner is effectively over. Not only do you now need to worry about becoming profitable, you need to do it on someone else’s agenda, not yours. It also means that the outside investors will steer your company, sometimes whether you like the direction or not.

For all of these reasons, you’ll need to be brutally honest with yourself about what you expect in return from your business. Meaning, if you open a business to create and sell lollipops, investors might step in and want you to expand your business into areas where you don’t belong. Such as not only making lollipops, but also taking in contracting business to create lollipops for other candy companies. They might even have you move your manufacturing to China or Asia to ‘save costs’. Worse, they could steer your company into producing t-shirts or electronics or some direction that makes no sense. Mind you, you just wanted to make and sell lollipops. Investors want a much bigger return, so they’re going to hire and find people who will achieve their agendas, not yours.

Investors Gone Bad

Courting investors to your business isn’t a bad thing as long as you know what you’re getting into and you know how to deal with an investor who isn’t the right fit for your business. In other words, don’t accept any offer that comes along because, as GetSatisfaction is a clear example, your company may cease to exist under the wrong investor. Additionally, don’t immediately dip into investor capital to satisfy business needs. You should sit on that cash and wait until you really need it. This gives you time to pay out the investor and take your equity back if the investor becomes overbearing in their demands on your business.

Not all investors are good for your business. As the saying goes, “Nothing comes for free”. If the investor offer seems too good to be true, it likely is. So, you shouldn’t be willing to accept all offers that come along. You need to not only haggle the equity far lower than what they are asking, you also need to dictate just how much and how far the investor has input into the business. This all needs to be put in writing, so you need to have a good attorney on retainer to help you craft such documents. This also gives you the ammo you need to tell the investor to back off.

Protecting Your Business

When you open your new business, you need to understand that it’s a matter of thirds.  One third of your time goes to producing your product and keeping it functional. One third of your time goes to managing your business finances, marketing, employees and protecting your business through legal contracts. One third of your time is spent trying to finding outside funding to help you grow your business. Each of these thirds being equally important.

If you fail to devote enough time to any one of these thirds, your business will suffer. So, while it’s important to produce a functional product that users need, you need to be able to protect your business plan from people looking to take advantage of you. Such attacks on your business can come from anywhere. These risks include:

  • Technical attacks (DDoS, hacks, breaches, etc)
  • Social engineering
    • People sending fake invoices to be paid
    • People calling asking to pay for fake yellow pages ads
    • People sending toner and expecting you to pay
  • Legal attacks
    • Lawsuits
    • Patents and/or Copyright ownership disputes
    • Ex-employee
    • Contractual breaches
    • Unpaid invoices
  • Investors attacks over
    • Revenues
    • Management
    • Budget Allocation
    • Direction of Company

These above are just a short list of the kinds of attacks that can be levied against your business. These are risks that you can mitigate if you think ahead and plan for each step of your business. For example, you probably shouldn’t accept rounds of funding unless you already have money in the bank. Basically, even though you may not need the money from the investor, having money in the bank means that the extra investment capital may allow you to take your business to the next level even if you don’t dip into the money right away.

On the other hand, if you accept investment capital because you actually need to use it immediately, your business is vulnerable. Unscrupulous investors will swoop in and take advantage of that predicament. They will then be able to scoop up more equity in your company than they are really due. If you’re in such a desperate predicament, you’re not at liberty to haggle with them over this. If you haggle, they walk and your business may fail. This leads to…

Failing Business

If your business is close to failure, this is the wrong time to be looking for investors. Instead, you should be looking for buyers to buy out your business. The right time to look for investors is when your business is just getting started and still has enough funds to stay afloat. The wrong time is when you’re desperate for a cash infusion or else the doors close.

Successful Business

If your business is in a good place financially, then you can shop around for investors. Again, you don’t want to take VC investment just because you can. If your business is doing well on its own, then you can haggle with investors. If an investor is unwilling to budge on the equity requirements, tell them to take a hike. There are other investors for whom you can seek to fit with your business needs.

Unscrupulous investors are everywhere. Sometimes they’re loan sharks, other times they’re just sharks. So, you need to get your business to a place where you have the ability to haggle and walk away if it isn’t the deal you want. Keep in mind that while the investor is doing you a favor by offering you money, you are doing them an even bigger favor by allowing them to invest. If your company succeeds, they will make a huge windfall from that investment. A windfall, I might add, that you can’t put back into your company coffers. You will be required to pay that investor off. So, for every dollar made, for each percentage of equity, you’ll need to compensate each investor. In other words, with a VC, you might as well consider it a loan with a super high interest rate and open ended payback terms.

What those terms mean is that as soon as your business has the cash to pay off the investor, expect for them to ask for it. This could be an inopportune moment for your business.

Business Loans

You should consider bank loans before considering VC money because with bank loans, the only thing due back to the bank is your payment. No equity is involved. Bank loans are typically for lower amounts than what some VCs offer, but it doesn’t have nearly the strings attached.

Crowd funding?

Sites like Kickstarter or Indiegogo are great for raising funding. But, there’s no free meal ticket here either. Not only does your project need to be accepted by the crowd funding site, you have to be willing to offer something to each investor for investing in your project. While that may not be equity in your company, it is usually something tangible (shirt, trip, book, product, etc). Don’t expect to receive millions in crowd funding, either. In fact, if you get $100k out of the deal, you’re doing well. Though, most projects end up getting far lower amounts. So, while crowd funding might help you get a product out the door, it’s not going be enough capital to run your business.

The Takeaway

You must treat your business as the most important thing. You should always put any money you receive towards your business… not towards house payments, car payments, boats, amenities, personal trips or other frivolous personal agendas. I’ve seen too many startups waste money on silly things like purchasing a company limo, or spending for outrageous parties or other wasteful uses… even so far as sending the CEOs kids to college. As a startup, wasteful spending will only lead your business down the tubes. Oh, and don’t expect the investors to stop you in that. They won’t. Though, they will let you spend your way down to nothing and then take your business away from you to liquidate it. I’ve seen this directly happen at least 5 times in my career and twice were companies where I directly worked.

Being a business owner is tough. But, it’s even tougher to make common sense and rational business decisions, especially early on. If you happen to have an up-and-coming star company that’s winning awards and being touted as the ‘next big thing’, don’t assume that means your business is shielded from bankruptcy or will make it big. No. It means that you’ve worked hard to get to that point and you need to work even harder to get to the next level. Again, I’ve personally seen co-founders wildly and lavishly spend on stupid things instead of investing that money back into the company. Or, more specifically, in finding a way to become profitable faster.

The fastest way to kill your startup is by taking excessive capital, giving away too much equity, wasteful spending and seeing all of those dollars as free loot to do with as you please. This is a recipe for failure. This was also the mentality of so many startups in Silicon Valley during the dot-com boom. This thinking is even somewhat prevalent today. Yet, I don’t see many of those co-founders in jail. Stealing millions of dollars to ‘play’ would land you in jail in any other place. However, in Silicon Valley, startup founders seem to be able to get away with this behavior.

When Lane Becker claims he got nothing from GetSatisfaction’s sale, that’s deceptive. He got to start a business in Silicon Valley. He got to operate that business for several years. He got to control millions of dollars in capital. He took home a salary. If he and his co-founders made the wrong decisions for the company, that was his fault and no one else’s. If he didn’t get anything from that business after having been ousted, then he should have made better decisions. GetSatsifaction’s sale to Sprinklr should be taken as a learning experience. Even though Lane may be somewhat bitter about the whole deal, he and his colleagues made the early decisions. We all have to live with our decisions in life. If those decision led to an outcome where he made no money from a company he founded, he has only one person to blame.. himself.

The ultimate takeaway is to educate yourself. Learn how businesses operate. Learn how venture capitalists operate. Learn how angel investors operate. Understand what equity is and how it can affect your business. This is all education. If you don’t educate yourself, you can’t possibly see when a decision is bad or good. If you feel you can’t learn every aspect of your business, then hire people who do understand it. If you don’t understand venture capital, then hire a CFO that does and who can help protect your business from unscrupulous investors and wasteful spending. As I said above, one third if your time should be spent protecting your business.

Part 10 | Chapter Index | Part 11

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