Define: Ethics

Ethics refers to the principles, standards, and values that guide individuals and organisations in determining what is right or wrong, fair or unfair, and just or unjust. It encompasses moral principles that govern behaviour and decision-making in various contexts, including personal, professional, and societal interactions. Ethical principles often address issues such as honesty, integrity, fairness, respect for others, and responsibility for one’s actions. In professions such as law, medicine, and business, ethical codes and guidelines provide frameworks for professional conduct and decision-making, ensuring that practitioners uphold high standards of integrity and serve the best interests of their clients, patients, or stakeholders. Ethical considerations play a crucial role in shaping individual and collective behaviour, fostering trust, and promoting social harmony and justice.

The basic concepts and fundamental principles of decent human conduct. It includes the study of universal values such as gender equality, human or natural rights, obedience to the law of the  land, health & safety concerns, and, increasingly, also for the natural environment.

Ethics are critically important in venture capital transactions. The relationship between an entrepreneur and a venture investor is so intertwined that when one acts unfairly, the other almost always suffers. Even when the parties carefully document their agreements, either party can be ruined by the unethical behaviour of the other.

Investors recognise the need to deal only with people they can trust and direct a good bit of their due diligence work towards determining whether an entrepreneur is honest and trustworthy. Entrepreneurs should be just as careful to examine their investors’ reputations.

An unfair or reluctant investor can cause real problems for a company. If he fails to provide funding or delays or reduces the funding he agreed to provide, he can steal a company’s promise and starve it for cash. This cash shortage can delay expansions and product developments. It can cause the collapse of companies that are not yet profitable. At the very least, it distracts management from the day-to-day management of the company and forces it to deal instead with the cash crisis created by the investor.

What is more, this same cash crisis often prevents the company from enforcing its contracts against its investors. Even if the company’s contracts require the investor to fund them, the company may be unable to force the investor to live up to his bargain. This is because the investor’s unwillingness to fund takes away the two assets management needs most to force him to do so: money and time. In many cases, the company simply cannot afford to spend its money or time trying to force an unwilling investor to fund it. Even if it could, the actions required to do so would be a serious drain on the company and might scare other investors away. After all, how many investors want to put money into a company that is suing its prior investor?

At the same time, the investor may frustrate management further with new demands that make it difficult for the company to obtain money from other sources. As a result, just when management needs to concentrate its efforts on building its company, it is forced, instead, to find cash and deal with an uncooperative investor who has acquired significant rights in the company. The best way to avoid these problems is to be careful when selecting investors, to investigate their reputations, and to try, when possible, to deal only with people who are trustworthy.

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This glossary post was last updated: 10th April, 2024.