If in fact the controller was correct you would have no choice but to tell the investors the truth. Public companies should have a high degree of transparency. Open and honest reporting of financial data has become more important especially since recent cases like Enron and Global Crossing.

This is a good example of why you should make sure everyone involved in a presentation is on the same page before you begin.  If this person saw a flaw, it should have been identified and addressed much earlier.  I would say that it was the controller’s responsibility to say something to you sooner.  Ethically, your job at that point is to tell the investors that you will investigate, and recalculate if there turns out to be a problem.  However the controller needs to learn some business ethics too.  Offer transparency (making sure you have honest sharing of numbers).

If you knew about the problem already and tried to hush it up, that’s different.  Hushing it up by trying to keep the controller quiet would have been unethical, and the controller would basically be a whistle-blower in this situation.  Your only response would be to kill the deal.

The potential investors have only given a verbal commitment. If you, as the rising CEO, want to preserve your reputation and attractiveness to other potential employers, you have no choice but to be absolutely honest and forthcoming with them. Not telling them would probably result in legal actions down the road and, as a side effect, would certainly destroy any future career prospects you might have harbored.

I completely agree with the previous post.  You have no choice but to tell the investors the truth.  If you do not tell them the truth, you would probably be guilty of fraud.  I don't really see a dilemma here.  You pretty much have to tell the venture capitalists what is really going on.

The first thing to do would be to ascertain that the corporate controller is, in fact, correct. If she is, then the ethically responsible thing to do would be to notify the venture capitalists. It would also be an astute business decision, since it will be very difficult for your firm to attract investors if you gain a reputation for knowingly lying about such a thing. It is also, I suspect, illegal.