Despite growing scholarly attention on entrepreneurial misconduct, little is known about how founders shape and sustain fraudulent practices through their influence over employees. Using an in-depth case study of Theranos—a fraudulent startup—we develop a grounded process model that explains how startup fraud is not simply the result of regulatory gaps or individual overreach but a multilevel embedded phenomenon. We provide insights into how founders shape employee responses to fraud in startups, eliciting both resistance and complicity. Employees, in turn, engage in a fluctuating moral evaluation process, oscillating between condoning and condemning fraud. We contribute to the literature on startup fraud by distinguishing it from fraud in established organizations, advancing a social process perspective on employee moral processes, and illuminating how founders enact multilevel influence mechanisms that embed fraud in startup contexts.
Crivelli et al. (Tue,) studied this question.