September 13, 2019

Don’t Let Lack of Compliance Derail Your Startup:  Practical Approaches to Compliance & Ethics

Entrepreneurs have too many things to do while launching their startups and too little time to do everything well.  In order to be successful and sustainable, entrepreneurs need to develop a winning business model that will attract investors and meet their expectations regarding liquidity.  Entrepreneurs also need to develop products and services that are innovative and competitive and demonstrate that a group of loyal followers willing to pay for the product or service can be identified and recruited.  On top of all that, entrepreneurs need to fill out their management teams, recruit the necessary talent, build an infrastructure and forge relationships with multiple stakeholders. 

With all this on his or her plate, it should come as no surprise that a formal compliance program is probably near the bottom of the “to do” list.  There is no question that startups and emerging companies typically lack the financial and human resources to take all of the steps that would be taken by larger organizations to design and implement effective and scalable compliance program.  Even so they must nonetheless be prepared to manage significant compliance risks from Day One for essentially two basic reasons.  First, a compliance failure exposes the company, its directors, executives and employees to criminal, civil or administrative investigations and liability.  Even if liability is avoided, the legal and investigative costs can be straggering as can the toll such a matter takes on the time and morale of a burgeoning organizations human capital.

Although ethics and compliance programs legally mandated through the U.S. Sentencing Guidelines and other statutory and regulatory schemes, for example by Sarbanes-Oxley, the Federal Acquisition Regulations; anti-money laundering laws; or strongly encouraged by the U.S. Department of Justice, these legal schemes contemplate that the smaller organization need not deploy the resources toward an ethics and compliance program to the same degree as a large, well-established company.  Specifically, the comments to the U.S. Sentencing Guidelines provide that the formality and scope of the program depends on the size of the organization.  U.S. Federal Sentencing Guidelines, §8B2.1, Comments
While large organizations are expected to make a significant resource commitment, a smaller organization may rely on existing processes as long as it demonstrates a commitment to operating ethically and in compliance with laws.  Id. The Guidelines also encourage larger organizations to collaborate with their smaller business partners in developing an effective ethics and compliance program. Id.