By Kyle Jeziorski, the market-facing and client leader at Founder Shield, the innovation arm of The Baldwin Group, with illustration by Dom Guzman.

The entrepreneurial journey is often depicted as a heroic quest, where visionaries overcome insurmountable odds to build the future. Founders are expected to be ambitious, charismatic, and relentlessly optimistic, painting a vivid picture of what their nascent companies could become. This "sell the dream" mentality is deeply ingrained in startup culture, particularly when it comes to raising capital. However, the recent guilty plea of Ilit Raz, founder and former CEO of the AI startup Joonko, serves as a stark, sobering reminder that there’s a perilous line between optimistic projection and outright deception—a line that, when crossed, transforms professional traction into severe personal exposure.

Raz’s story is a cautionary tale that has sent ripples through the startup ecosystem. She successfully raised approximately $27 million for Joonko, an AI-powered diversity recruitment platform, by presenting a fabricated reality to investors. Her pitch included claims of customers the company never had and revenue it never actually earned. The illusion began to unravel when an investor, exercising due diligence, requested proof of these claims. In response, Raz resorted to forging a bank statement and fabricating purchase orders—actions that moved her far beyond the realm of "puffery" and squarely into federal securities fraud. Last month, Raz pleaded guilty to these charges, now facing a maximum of 20 years in federal prison. This isn’t merely a business failure; it’s a profound personal downfall that underscores the immense individual stakes involved in misrepresenting a company’s achievements.

The Joonko case is not an isolated incident but rather a potent symbol of a broader trend: investors and regulators are increasingly scrutinizing the claims made by startups, especially in high-growth, high-hype sectors like artificial intelligence. The distinction between future potential and present-day facts is paramount, and the tolerance for ambiguity or outright falsehoods is diminishing rapidly. According to Cornerstone Research, plaintiffs filed 15 AI-related securities class actions in just the first half of 2026, nearly matching the 16 filed in all of 2025. This surge in litigation highlights a critical shift in the investment landscape, where the promise of groundbreaking technology must now be anchored in verifiable truth. For founders, understanding where ambition crosses the line into illegality is no longer just good practice—it’s essential for their freedom and financial well-being.

Where ‘Puffery’ Crosses the Line into Securities Fraud

The legal definition of fraud hinges on deliberate deception, not just over-enthusiasm. In the startup world, "puffery" refers to exaggerated or overly optimistic statements about a product, service, or company’s future prospects. It’s the "we’re going to revolutionize X" or "our market opportunity is Y billion dollars." While such statements are generally permissible and even expected in a pitch, they become problematic when they include knowingly false or misleading factual claims about current metrics.

The issue isn’t whether a pitch sounds optimistic or ambitious, but whether its factual claims mislead investors. Knowingly misrepresenting metrics that matter to an investor’s decision can expose that founder to personal liability. Legally, the question boils down to whether a misstatement or omission is "material." Would a reasonable investor consider the information important when deciding to invest? If the answer is yes, and the statement is false and made with intent to deceive (scienter), it constitutes fraud.

Consider these four key areas where distinctions often become blurred, transforming acceptable salesmanship into potential securities fraud:

1. Customer Relationships: Claiming "signed customers" when only Letters of Intent (LOIs) or pilot programs exist, or worse, listing companies as clients with whom no formal relationship has been established. Raz’s fabrication of customers falls directly into this trap.
2. Revenue Figures: Reporting "contracted revenue" as actual earned revenue, or inflating Annual Recurring Revenue (ARR) by including one-time deals, projected pipeline, or non-binding commitments. Presenting projected revenue as current income is a common, and dangerous, misstep.
3. Product Traction and Development: Asserting a product is "live" or "market-ready" when it’s still in beta, or exaggerating user engagement metrics without proper substantiation. While future potential can be discussed, claiming current, verifiable traction that doesn’t exist is fraudulent.
4. Key Partnerships: Announcing strategic partnerships as concrete agreements when they are merely exploratory discussions or non-binding Memoranda of Understanding. The impact of a false partnership claim can be significant on investor perception.

Let’s be clear: an inaccurate figure doesn’t automatically establish securities fraud. Mistakes happen, and projections can be wrong. However, false claims about customer contracts, recurring revenue, or retention, made with the intent to deceive, can expose founders to severe securities fraud claims. An ambitious forecast is one thing; a false claim about existing customers or revenue is another. The latter can expose founders personally, with no guarantee that Directors and Officers (D&O) insurance will cover the fallout.

Where D&O Coverage May Stop

Founders facing investor claims typically look to Directors and Officers (D&O) insurance for protection. This type of policy is designed to cover legal costs and damages arising from wrongful acts committed by directors and officers in their corporate capacity. However, defending a fraud allegation isn’t the same as covering established misconduct. The policy’s wording and applicable law determine where protection ends, and in cases of deliberate fraud, D&O policies often have significant limitations.

As part of a June 2025 court-approved settlement with Joonko, Raz reportedly agreed to abandon claims against the company’s D&O policies. This act, while not fully clarifying whether an insurer had previously funded her legal defense or denied coverage, strongly suggests that the D&O policy either wouldn’t cover the intentional fraud or that the costs advanced would ultimately need to be repaid.

Three policy provisions deserve particular attention for founders:

1. Personal Conduct Exclusions: D&O policies almost universally contain exclusions for intentional criminal acts, dishonest conduct, or fraudulent behavior. If a court or a formal admission (like Raz’s guilty plea) establishes that a founder engaged in deliberate fraud, the insurer can deny coverage, including defense costs, or claw back any costs already advanced. These exclusions are fundamental to the nature of insurance, which is designed to cover unforeseen risks, not intentional wrongdoing.
2. Rescission Rights: Insurers may have the right to "rescind" (void) a D&O policy from its inception if the insurance application contained material misrepresentations. If a founder provided false information about the company’s financials or operations to secure the D&O policy itself, the insurer could argue the policy was never valid, leaving the founder entirely exposed.
3. Advancement of Defense Costs and Recoupment: While many D&O policies will advance legal defense costs as a claim progresses, they often include "recoupment" or "payback" clauses. These clauses state that if it is ultimately determined that the conduct falls under an exclusion (e.g., intentional fraud), the founder must reimburse the insurer for all advanced defense costs. This means that even if a founder receives initial legal support, they could be on the hook for millions in legal fees if the fraud is proven.

D&O insurance can be a crucial lifeline for founders during investor disputes and litigation, but it’s not a guaranteed backstop for established fraud. Founders must understand when coverage can end and whether they’ll have to pay back the legal fees their insurer advanced. Relying on D&O to shield against deliberate deception is a dangerous gamble.

Practical Steps for Founders Before Presenting Metrics

The Joonko case highlights the critical importance of meticulous accuracy and transparent reporting. Founders can take several practical steps to safeguard themselves and their companies from crossing the line into fraud:

1. Create a Comprehensive Metrics Guide: Before sharing a pitch deck, create an easily accessible guide for your team that spells out your math. Specify what counts as a paying customer (e.g., active, paying under contract, post-pilot), how pilots and LOIs are classified (as opportunities, not confirmed revenue or customers), and how recurring revenue and churn are calculated. Use those definitions consistently across all internal and external communications. This internal playbook ensures everyone is on the same page and reduces the risk of accidental misrepresentation.
2. Substantiate Every Claim: Team with finance and legal advisers to connect material claims to supporting records. This includes executed contracts, invoices, accounting data, CRM data, and customer-status reports. For every significant claim—be it a customer count, a revenue figure, or a retention rate—you should have readily accessible, verifiable documentation that can withstand scrutiny. If your team can’t explain how they calculate a number or substantiate a customer claim, resolve the discrepancy before presenting your deck.
3. Clearly Separate Projections from Current Results: Keep projections distinct from current results, and always document the assumptions behind the forecasts. Use clear language like "projected ARR for next fiscal year" versus "current ARR." Investors understand that startups operate on future potential, but they need to know what’s real today. Be transparent about the underlying assumptions for any forward-looking statements (e.g., "assuming X customer acquisition cost and Y conversion rate").
4. Master Revenue Terminology: Don’t confuse Annual Recurring Revenue (ARR) with cash collected, one-time fees, or pipeline opportunities. These do not belong in the same category. Show clearly how the company calculates recurring revenue and distinguishes it from one-time fees, pipeline opportunities, and contracted commitments that haven’t gone live yet. Remember that ARR and contracted ARR are distinct metrics, not to be used interchangeably. Contracted ARR refers to the total value of recurring revenue under contract, regardless of whether it has started or been recognized. Actual ARR should reflect revenue currently being recognized.
5. Date and Update Figures Diligently: Startup metrics are dynamic. Always date the figures in your pitch deck and update material changes before investors rely on them for decision-making. If a major customer churns, a key deal falls through, or a financial projection changes significantly, it is critical to update your materials and communicate these changes to potential investors promptly. Relying on outdated figures, especially if they are materially more favorable than current reality, can be seen as a deliberate misrepresentation.
6. Foster a Culture of Integrity: Beyond specific steps, cultivate an internal culture where honesty and data integrity are paramount. Encourage employees to speak up if they notice discrepancies or feel pressured to inflate numbers. The tone at the top sets the standard for ethical conduct throughout the organization.

The pursuit of traction and growth is fundamental to startup success. However, the Joonko guilty plea serves as a potent reminder that this pursuit must be grounded in unwavering integrity. Investors might buy into your vision, but regulators will look at your math. When founders misrepresent the facts, the personal stakes become devastatingly clear, transforming professional ambition into personal exposure. The lesson is simple: build with conviction, pitch with passion, but always, always operate with uncompromising truth.