How I Trick My Investors 🥷

The ultimate guide to commit fraud and trick your investors

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How To Commit Fraud 101

If you are looking to commit fraud or just dip your toe into some financial trickery then this is the newsletter for you!

I have seen EVERY SINGLE ONE of these tricks. I know many of you may already be using some of these tricks, but keep reading because I think you can learn some new ones 🤣

Before you get too excited, the point of this post is to convince you to NOT do these things. But if you are determined to commit fraud…then this is a good place to start.

ARR Tricks

Investors care A LOT about ARR. So if you are going to trick your investors then you need to start with ARR. Investors want to see growth so give it to them!

Deals “agreed in principle”

If you are close to closing a big deal but can’t get it signed by the end of the year then just count the deal as done if it is “agreed in principle”!

The CEO of Telegram did this for the entire world to see. Unfortunately, Elon Musk called him out 🤣. I think Pavel just got a little too excited and wanted to share the pending deal, but still…wait until the there is ink on paper.

Opt-Outs, Trials/POCs, Opt-ins

Maybe the “agreed in principle” counting of ARR feels too much like fraud. The next best options are:

• Have customers sign a contract with an opt-out clause a day into the next period

• Sign a contract with a free 2 week trial and an opt-in clause to the full contract

Maybe the customer couldn’t get the pesky procurement team to approve it by end of quarter, or security review is taking too long, or their manager is looking into budget…Solve it with one of these easy hacks!

Boom! You have a signed contract so it’s legit, right?

Dazzle Them With Pretty Pictures

If things are going really well then show your board something like the below. Board members can see all the context and the components that are driving growth and churn. It helps board members really understand how awesome things are.

CFOPilot

And if things aren’t going well?

Show them an ARR waterfall with the least amount of segmentation and don’t provide any historical context — better yet, show them a bar chart with total ARR and how it’s always increasing. Those dummies will have no idea how bad things are!

Always Be Saving Customers

If you are actively trying to save a customer then you shouldn’t churn it, right?

This is an easy one to convince my CSM friends on — those guys always think they are so close to saving a customer. Let’s “always be saving” and never churn a customer again!

Some Other Good Tricks

• Use the contractual exit ARR as “ARR”

• Remove “one-time” discounts in what you report as ARR

• Count professional services as ARR

Bury the Balance Sheet

This trick unfortunately only works for private companies.

Everything flows through the income statement or the balance sheet. If you don’t show your board the balance then you can hide all sorts of good stuff in there! I have seen many companies just show the board their cash number (and not the full balance sheet) and the board didn’t care at all.

• Capitalized Commissions:

  GAAP accounting requires you to capitalize commissions so capitalizing it isn’t wrong but you can be really aggressive in how long you amortize commissions over (try 10 years?). Then you can calculate all of your efficiency metrics off the GAAP expense instead of actual cash commissions.

• Capitalization of Internal-Use Software:

  Basically the same thing as commissions above. This is typically expensed over 3-5 years…but why not do it over 10 years and take a lot less GAAP expense today?

• Aggressively Manage Cash:

  If things are looking bad toward the end of the period, just stop paying your bills and get *really* aggressive on collections from your customers. You might piss off a few folks, but your cash burn this period will look great! As for the next period….might be tough since this is a hard trick to pull off consistently. But you may keep your job a little bit longer :)

  Burn Multiple = Cash Burn / Net New ARR

  

Categorization of Expenses

If you know what investors care about then you can easily manipulate the categorization of expenses to make things look better.

GAAP defines how a lot of things should be accounted for, but not everything is black and white. There is a sufficient amount of judgment and diversity in practice that make certain financial benchmarks much less meaningful (particularly when companies are smaller).

Protect COGS & Gross Margins!

Customer Success

The customer success org, particularly customer success management, is frequently debated on which expense line the department belongs to. Folks always debate whether they are COGS or S&M or some combination.

Unless they are blatantly technical support roles, I have never heard of anyone not being able to put them into S&M.

Just put all customer success into S&M. And be very loose with your definition of “customer success”. Call a lot of your support team “customer success” and then you can move them from COGS to S&M. Boom!

DevOps

Technically this should be in COGS…but most auditors won’t blink an eye if you leave these folks in R&D. This can help gross margins a lot.

G&A Dumping Ground

This helps gross margins in addition to S&M and R&D. And since no one really cares about G&A just put more expenses there.

This is mostly an early-stage company trick (but I am constantly surprised how many big companies can do it too) since an audit *should* catch it.

While there is some judgment in where expenses can be coded, there are some obvious things that don’t belong in G&A and should be allocated across the expense lines because the entire company benefits from it. But why not try to just keep them in G&A?

• Company offsites or events

• Facilities, utilities, internet, etc

• General software used across the company

• Health insurance

• I have seen lots of other interesting things get dumped into G&A

Dump everything like this in G&A to make all your SaaS metrics look great!

Annual Planning Tricks

This is a classic trick and a personal favorite. I know a lot of companies doing this…

For high-growth companies there is a need to continue to hire within sales and marketing to continue the growth trajectory, otherwise, growth will fall flat fast.

Sales reps and other GTM teams can take up to 6 months to be ramped and productive. This means that companies need to hire GTM folks in the second half of the year which won’t add to sales in the current year, but only help drive sales in the following year.

So if there is a lot of pressure to be efficient this year, just don’t plan on hiring any of these folks in the financial plan. Boom - efficient! Just don’t tell the board that your growth rate will fall from 75% to 20% next year if you don’t revise your plan in H2.

Ultimate Hack

If the above tricks don’t work then here is something that works nearly every time.

Keep changing your definitions and what/how you report to the board. Change everything so it makes you look good every quarter. They will be so confused at every board meeting and also impressed that your metrics are always great!

Final Thoughts

This post isn’t an exhaustive list of all the ways that investors can be tricked, but I hope I accomplished the following:

• Educate non-finance operators a bit so they themselves won’t be misled

• Shame finance leaders who think they are (or maybe actually are) tricking their investors/board/VCs.

• Push investors/VCs to ask more questions, understand how the income statement and balance sheet work together, and call out their portfolio companies that aren’t sharing all the applicable context.

While many of the above tricks aren’t outright fraud, they can certainly be deceiving. You NEED your boards/investors’ trust. If you clearly define your metrics and keep reporting consistent then that solves 90%+ of potential issues.

But the fact is that almost every VC probably has some fraud in their portfolio….

*OnlyCFO DOES NOT promote fraud or tricking your investors. Please don’t do these things. I know many of you are tho…

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Footnotes:

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