Over $35,000 in personal expenses: A lawsuit against a tech CEO reveals a bigger problem with startups

A Hawaiian vacation, complete with a stay at the Four Seasons for $12,000. A few nights at a castle on the Hudson River for $700. More than $1,000 for Whole Foods groceries delivered to her doorstep. It's only a small sampling of the more than $35,000 a Series A startup CEO racked up on the company’s American Express card during the span of a year and four months, according to court documents obtained by The Block.

The startup in question is Token, which pivoted from cryptocurrency wallets to wearable tech, making a high-profile public appearance in 2017 with the promise to launch a futuristic ring that could replace all keys and badges. However, it has not delivered on that promise after two years. 

Meanwhile, its CEO Melanie Shapiro, who has been featured in TED Talk and various other conspicuous tech gatherings as a champion of identity protection, spent tens of thousands of company dollars on personal expenses, according to a court record.

In a legal fight between Token and one of its venture investors, Ken Seiff, over Shapiro’s alleged embezzlement of company funds, around 2,000 transactions made on the company’s bank account between January 2018 to April 2019 were revealed, 20% of which covered Shapiro’s personal expenditures. This lengthy list of transactions speaks to the problematic ambiguity in startup culture, where the sparse internal policies may lead to an abuse of power. 

Among the transactions, 261 were classified as Shapiro’s personal expenditures, amounting to a total of $35,607. Among these purchases, a significant portion were made on Amazon, along with several flight tickets purchased on various airlines and short-term rentals made through HomeAway. In one particular instance, $140.45 was paid to a locksmith for allegedly unlocking Shapiro’s personal apartment in Greenwich Village. In another, Shapiro used the company card to pay for $362 in membership dues to the New York Junior League, a women’s non-profit volunteer organization. 

After Seiff filed his initial complaint to seek access to Token’s financial records, the startup's board of directors formed a special committee to investigate the matter. In a final report dated in September, the committee published the aforementioned transactions and admitted that Token lacked formal procedures to discipline the misuse of corporate funds. However, it also deemed it unnecessary to remove Shapiro as the CEO or continue the investigation further. 

As the committee states in the report, “it is the Committee’s determination that past practices were not best practices, were unsatisfactory, and require the corrective action recommended by the Committee in this report.” The fix, according to the committee, does not have to be onerous. According to the committee, a bookkeeper and some board oversights of Token’s accounting practices would suffice to keep the company in check, read: everyone should move on with their lives and let Token operate.

However, the report did not become the final word on this matter. In a follow-up lawsuit filed by Seiff, the investor accused Shapiro of failing to disclose all of “the critical documentation,” including receipts from some expenses classified as corporate in the special committee’s report.  

Seiff’s persistence in the matter may be precipitated by the discrepancy between the investigation he independently conducted and that of the committee. In the lawsuit, he notes some suspicious charges on the company’s credit cards that were characterized as corporate expenses.

For example, in one transaction of $2,416.31, which in the committee report was characterized as half-business and half-personal, Seiff alleged that it may have been entirely personal. The money was used to cover Shapiro’s stay in Berlin for a conference in March 2018. Her lodgings, however, were at a luxury resort in the Bavarian Alps, a seven-hour drive from the conference venue. In other instances, $578 was allegedly spent at the clothing store Vince, although this expense is classified as business related. Eighteen transactions were made for Whole Foods grocery delivery, including items such as raw meat, vegetables, and grains that “would likely be purchased for personal, rather than corporate, use,” per the lawsuit. 

Moreover, Shapiro might have allegedly increased and decreased her salary without even consulting the company's board of directors, according to the lawsuit. In October 2018, Shapiro allegedly more than doubled her annual salary to $210,000 without the board's awareness. She then reduced her salary to the previous amount, only to increase it again to $170,000, the suit alleges.

The rules governing separating personal and corporate expenses have probably been in existence since the dawn of corporate culture, but in the Wild West of startup land, such boundaries are even blurrier. According to a survey by human resource consulting firm Robert Half, 56% of CFOs reported an increase in inappropriate expense requests over the last three years. 

In 2016, co-founders of smart motorcycle helmet startup Skully were sued for using the company as a "personal piggy bank." Customers who pre-ordered the firm's $1,500 helmets were also likely left empty-handed after Skully filed for bankruptcy. 

For Token, a company that has raised $8.3 million, the best course of action now seems to be shaking off the management drama as fast as possible, as any further investigation or litigation would not "be in the Company's best interests." 

"In the Committee's view, Tokenize and its stockholders would be best served by the Board of Directors turning its focus away from any type of infighting and towards the Company's strategic plans and future prospects," stated the special committee in the report.  

However, to Seiff, who also sits on the board, the ambiguity that allowed Shapiro to allegedly misuse company funds remains as long as there are still transactions that cannot be classified as personal or corporate due to lack of evidence.  

"[The company's] partial production of books and records has bolstered Seiff’s suspicions that Shapiro has engaged in extensive misconduct, the magnitude of which is increasing with each document production." 

Token has not responded to The Block's requests for comments. 

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