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It’s Time To Regulate The VC-Founder Relationship To Curb Sexual Harassment In Silicon Valley

Employment law hasn’t caught up with modern work relationships and workplaces, and nowhere is that more obvious than in venture capital.

It’s Time To Regulate The VC-Founder Relationship To Curb Sexual Harassment In Silicon Valley
[Source photos: Bernhard Lang/Getty Images, Vincent.bloch via Wikimedia Commons]

A few weeks ago, my Fast Company coworker Ruth Reader posited that the time was ripe for a mass unmasking of the kind of workplace sexism that has been habitually swept under the rug. With the recent ousting of Fox News founder Roger Ailes and Uber CEO Travis Kalanick, perhaps we were finally seeing signs that allegations of harassment and sexism in the workplace are being taken seriously—that companies would no longer ignore the problem, look the other way, or try to silence women who come forward.

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The fallout from the harassment allegations lobbed at Justin Caldbeck would, at first glance, seem to lend credence to that theory. A cofounder at VC firm Binary Capital, Caldbeck was first exposed by The Information two weeks ago, in a report that documented allegations from six women. By the next day, he had taken a leave of absence and issued a heavy-handed apology. He ended up resigning two days later.

And it wasn’t just Caldbeck who was dealt swift justice. With tales of his misdeeds snowballing, Katie Benner of the New York Times published a story last week detailing several more incidents of harassment in the Valley, some of which involved prominent investors like Chris Sacca and Dave McClure. (Benner spoke with 24 women in tech who recounted similar experiences.) Once again, the dominos fell quickly. McClure, a partner and founder at the incubator 500 Startups, apologized in a post titled “I’m a creep. I’m sorry.” and later stepped down. Sacca disputed the account, but preemptively penned an apology on Medium.

It’s encouraging to see VC firms take swift action, even if the intent might be more to mitigate bad press than to hold executives accountable. But larger questions loom over each of these situations: Why is there so little legal recourse for female entrepreneurs who are harassed and mistreated by the people in power who can make or break their businesses? How can we hope for lasting change—change that will endure beyond the news cycle—when businesswomen enjoy so few workplace-style protections when they are seeking to fund the companies they founded?

These questions aren’t being asked in a vacuum: As LinkedIn’s Reid Hoffman wrote recently, the dynamic between VC and founder should not, in theory, be any different from that of a manager and employee, or professor and student. The VC-founder relationship may not be strictly defined and regulated in the same way as an employer-employee relationship, but legal experts say they are no less dependent on the uneven power dynamic that is so familiar in other professional settings.

“If you think about it, in many of these startup companies, they are supposed to be working together; it’s supposed to be a collaboration,” Miriam Cherry, a law professor at Saint Louis University and director of its center for employment law, told me. “[Investors] are there as advisors and to look out for their investment, but they’re also working together really closely with the management of the company they’re investing in.”

And yet, from a legal standpoint, the VC-founder relationship is not afforded the protections outlined by employment law. Title VII of the Civil Right Act of 1964 granted employees protection from discrimination on the basis of race, gender, religion, or nationality, as enforced by the Equal Employment Opportunity Commission; after a ruling by the Supreme Court in 1986, that definition was expanded to include sexual harassment. But all that only covers the traditional employee-employer relationship. It’s also worth noting that Title VII only applies to companies with 15 employees or more, leaving many smaller startups out of the mix entirely.

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“Employment discrimination law has not caught up with evolving work relationships in many respects,” says Vicki Schultz, a Ford Foundation professor of Law and Social Science at Yale Law School. “Consider the turn toward casual or freelance, contract relationships instead of traditional employment relationships. The law should be changed to cover these relationships, too, when the contractees function the same way as employees.”

Protecting The Powerful

In fact, the laws that do address the VC-founder relationship tend to protect the investor and his or her investment in a company. This means the only option for a founder being harassed by a VC is to sue for intentional infliction of emotional distress—a broad claim that can be levied at even a random person with whom you have no relationship, working or otherwise. But the legal bar is higher in those situations, and such cases are typically harder to win.

“There is this dynamic that is a weird relationship of dependence, and yet there’s not a lot of protection there for the founder,” Cherry says.

In an industry that is overwhelmingly male, that dynamic is egregiously skewed toward the investor. It’s further compounded by the fact that female-led companies struggle to get funding in the first place: According to Fortune, 5% of VC deals last year involved women-led startups—and only 2% of overall VC funding was awarded to female founders. So while VCs invested $58.2 billion in companies with all-male founders, they spent just $1.46 billion on startups led by women. No wonder women are cowed into silence.

One viable option for regulating the VC-founder relationship might be at the state level. Perhaps the industry could take a cue from the state law in California that protects unpaid interns from workplace harassment and discrimination. Unpaid interns are not considered employees unless they receive “significant remuneration,” and even paid interns are not automatically considered employees. In 2013, a New York City judge dismissed a sexual harassment claim by an unpaid intern, ruling that she did not qualify as an employee. New York and a handful of other states have since introduced laws shielding interns from harassment, but the majority of states still don’t offer any such protection.

Cherry says it’s unlikely anything would be done on the national level to address the gray area of a relationship such as the one between VC and founder. But if lawmakers in California took up the cause, they could effect change on a state level, or even by municipality. In some states, Cherry says, extending protection to interns was as simple as tweaking the wording of existing laws to say “employees and interns” rather than just “employees.” It’s possible to apply that to the VC-founder relationship too, according to Cherry.

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“Maybe there’s enough interest in a place like Silicon Valley that there would be a push toward doing something like that—to expanding that protection,” she says.

A Lesson In NDAs

After the Caldbeck story broke, we soon found out that his behavior was something of an open secret in Silicon Valley, stretching all the way back to his time at another VC firm, Lightspeed Ventures Partners. There, he harassed Stitch Fix founder and CEO Katrina Lake, who was coerced into signing a non-disparagement agreement that barred her from discussing Caldbeck’s misconduct. Niniane Wang, one of the women who spoke to The Information, claimed she had tried to expose Caldbeck for seven years and that he “kept threatening reporters.”

One approach to regulating the VC-founder relationship might be found in state laws aimed at non-disparagement agreements: California law bars employers from requiring employees to sign NDAs that prohibit them from talking about their working conditions. Of course, as with Title VII, this excludes the VC-founder relationship, which likely explains why someone like Katrina Lake had few options when presented with one by Lightspeed.

But Schultz believes that making changes to state law alone isn’t enough. “Federal solutions are needed so that VC firms and founders will be subject to uniform regulations throughout the country,” she says. Schultz claims that VC firms could sometimes be treated as an employment agency under Title VII. She points to Niniane Wang’s allegation against Caldbeck: According to The Information, Caldbeck tried to sleep with Wang “while informally trying to recruit her for a tech company job.”

This would, however, only apply to select cases. A broader solution, Schultz says, would be to amend a statute that “prohibits racial discrimination in the making, enforcement performance, modification, and termination of contracts.” Expanding that to include sex discrimination would “reach not only the VC firms, but also potentially impose personal liability on the founders or other supervisors who participate in harassment,” she says.

Tweaking the law could also be a preventive measure—perhaps investors would think twice about acting inappropriately with female entrepreneurs, or at the very least, they might not enjoy impunity. Still, while changes to the law are significant, they likely won’t be as effective without a sweeping change in mind-set. Harassment is often less about sexual desire and more about making women feel like they don’t belong in that space. “I think harassment has often been used to exclude people,” Cherry says.

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Many employers sidestep the protections in Title VII, for example, by forcing employees to sign a non-disparagement agreement in exchange for a generous severance package. Non-disparagement agreements are “commonplace in the settlement of employment discrimination and harassment cases,” according to FIU Law professor Kerri Stone. “Even when there are protective laws that an employee can make use of, employees often settle cases and agree to these clauses in the settlement agreements,” she says.

And even if states rewrite harassment laws to protect the VC-founder relationship, it’s impossible to regulate every such interaction. The women who spoke to The Information about Caldbeck had approached him for advice and funding, but ultimately had decided against working with him. Their interactions with him had taken place over drinks, presumably without any formal agreement between the two parties. Talking shop over drinks isn’t uncommon in tech—or in many other industries—which raises the question: How can the law protect female entrepreneurs when so many work-related conversations happen outside the walls of an office?

Here’s something the tech industry can start doing today, regardless of whether the law catches up: Hire more women and invest in more women. Tip the power dynamic, and chances are male VCs won’t feel as entitled to using Silicon Valley’s female entrepreneurs as their own personal dating pool.

If you’re a female VC who is willing to share your experiences working in the industry, I’d love to hear from you. You can shoot me an email at pmohan@fastcompany.com.

About the author

Pavithra Mohan is an assistant editor for Fast Company Digital. Her writing has previously been featured in Gizmodo and Popular Science magazine.

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