Really, seriously: We teach this, we write this, we talk about it, but people (and yes, I mean you) somehow think it’s about some theoretical storybook startup, and not about them. They’re immune.

prison1. Asking people to invest is pretty much against the law.

Sure, there are some loopholes and exceptions, but you should understand that for the most part, if you go around asking people to invest in your company, you are breaking the law.

You don’t believe me, I know, because you see people doing it. You read about it. You go to a local startups meeting and the panelists tell the crowd that they’re looking for investors. That’s against the law. You can talk to friends and family, if you’re careful and you have a good lawyer advising you. Or you can talk to accredited investors, as defined by the Securities and Exchange Commission (SEC). But you can’t go around asking people to invest and, far worse, taking their money. That’s against the law.

2. Faking financials is against the law.

It should be obvious, I’d think. But spreadsheets are powerful, and the results can look so formal and reliable, even when they’re just made-up numbers.

Maybe we forget because we’re used to business plan projections, which are just that, projections. Presenting financial results is serious business. When you show an investor financial results that you made up, that’s called fraud. It’s against the law. Don’t do it.

Seems obvious, but …

Recently I heard some horror stories along these lines, real people, real companies and, potentially at least, real criminal charges and real jail. I heard it second- and third-hand, so I don’t know whether it’s true. But it’s shocking.

Don’t forget. There are rules you can’t break.


Tim BerryTim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Follow him on Twitter @Timberry.