I got some reader questions this week. While I normally don't respond (it's not that I don't want to help, but I don't like giving advice to someone whose laws may be different), I thought I could perhaps give general advice to situations like these.
I will caveat that my law license is limited to just North Carolina. However, I hope to give some general principles that can help:
"I just recently opened up a company but the amount of problems and arguments that I am having with my business partner is unbelievable. We are always arguing, during working hours she will just sit there going on about things that are not even necessary, wasting time and money and she will complain over the smallest thing. She has asked me to buy her out but she wants way more money than she actually put in to opening the company--which I am not agreeing to. The company has not even made that amount of money as yet so I don't know what to do. I can not work with the lady anymore ,its come to a stage where I don't even want to work myself but its my company so I am going to have to find a solution to this matter SO CAN I PLEASE GET SOME ADVICE ON WHAT TO DO?"
Unfortunately, your problem is one of the most common. You've not told me whether you are equal partners, or whether there is some unequal distribution of ownership. You've also not told me if your contributions were equal and in-kind (i.e., did you each put in the same amount of money? Or is she putting in money, and you're putting in sweat-equity?). Finally, you've not said if you have a written agreement (though I guess not).
Knowing so little about your situation, at least let me throw an idea your way that I talked about in my last blog: offer a buy/sell deal (see previous blog entry from July 26).
In other words: go to your partner, let her know that you appreciate things need to be resolved one way or another. Then make the offer I discussed in my last blog, and put the ball back in your partner's court.
1. Tell her that one partner should by the other out.
2. Tell her that you'll give her the choice: either you can set the value for the whole business, and then she can decide whether she wants to buy or sell at that value; or she can set the value, and you get to decide whether to buy or sell.
This works even if you're not equal partners (e.g., if you're 60/40, for example, the value would be set at the price for the whole company (assume your partner set value as $100,000), and then you'd decide whether to buy the partner out for $40,000, or sell to her for $60,000.
Here's the good thing that I gathered from your scenario: you're early on in this business relationship. What would be more difficult is if, three years from now, you were wildly successful (no thanks to your partner), and she wanted to be bought out--in essence, getting paid for the equity you created in the company. At this stage, however, you've not turned a profit yet. Also, you know she wants out. Most likely, if she has any sense, she'll let you choose the price of the company. Be sensible, and don't go too low, or she may buy you out. If, however, she wants to set the price of the company--then let her. After all, if she really does think it's worth so much, she may make you an offer that will financially reward you!
Hope this helps.
Here is one very similar:
"Hi Wesley.
A scenario for you:
My partner came up to me and said it would be a good idea to open a shop in
the area [certain medical equipment]. I agreed.
So I found the location, came up with the business name, discussed things
with real estate agents, distributers, employed staff etc etc.
My partner has done minimal work, much to my frustration.
Thus we have decided that one should buy the other out due to this and
we cant see eye to eye on decisions.
We have a lease for 18 months.
The shop isn't open yet and therefore no stock purchased.
We have put in $X each.
Does one just pay the other that $X back?
Do we get more than that from the other because I did more than my partner
or that it was his initial instigation not mine?
Does this count at all?
Do we just work out a number randomly?"
Ok, lots of good questions here. First, my usual disclaimer is that your jurisdiction (while another common law country) is not the same as mine, so remember that my free advice MAY be just worth what you've paid for it!
That being said, let me take care of the biggest question: since you're equal owners, unless your courts are different than ours, you'll be unlikely to get paid more for your share than your partner's. Sorry. The good news though, is, like the other reader, you didn't get too far into the relationship before realizing its inequalities.
I'm going to give you very similar advice to what I gave the other reader, with a few additional opening questions:
1. First, are you enjoying this business? I.e., would you want to continue it if you could buy your partner out?
2. Second, can you afford to continue the business?
It sounds to me as if, now that the ball is rolling, you'd like to try and make a go at it if you could.
3. Is it more likely that your partner would just like to be bought out and leave?
If so, offering your partner his initial start-up money might buy him out.
If you're not sure as to question number 3, then you might want to make your partner the offer I suggested to the first reader:
Offer them a buy/sell workout. One of you sets the price, the other gets to choose whether to buy or sell at that price. In my mind, the best thing in the world that could happen to you (or the reader above) is that your partner would want to set the price. In such situations, the partner (who truly wants to be bought out anyway), could set the price so high in their greed that you'd rather take a buyout, and start a new business.
But considering that your partner will be scared of this happening, he'll most likely ask you to make the price. Unfortunately, then, you've got a hard decision. Probably, in your mind there's one price you think HE should be bought out at (a low price), and a different price that YOU'D be content with being bought out at (the high price). The buy/sell price you make, will likely need to be somewhere in between.
The best advice I can give you for the price you set is not really legal advice--it's more practical. Set a price, and then make yourself comfortable--before offering it--that, come what may, you'll be happy with the results. Think of all the benefits you'll get if you can buy your partner out. But then think of the freedom you'll have if your partner buys you out and you go your own way (perhaps you can start your own business now, or take a regular job with shorter hours, etc.).
Finally, there is a legal consideration. As part of this buy/sell deal that I suggest you offer your client, you need to agree, as part of the deal (before either of you makes a decision), that the BUYING partner will take over the lease and all partnership obligations and indemnify the SELLING partner from any liability therefrom. Even better, if at all feasible, see if the landlord will be willing to release the SELLING partner from the lease's liability (I'd say chances are against it, but at least try).
It's only fair to the selling partner that he (or you) not have to worry about any partnership liabilities creeping back in the next 18 months.
For both of the individuals above, I'd suggest that if your disgruntled partner takes you up on the offer, that you then hire a qualified attorney/solicitor to draw up the paperwork. I'll be happy to recommend someone in your area if you desire. And please, let me know how things turn out!
Minggu, 17 Agustus 2008
Sabtu, 26 Juli 2008
The easiest and fairest way to resolve a partnership dispute
If you read my posts regularly, you know that in my business practice I run across business ventures in which--for whatever reason--the owners no longer have the same goals. Sometimes, they outright dislike each other, in others, they simply want to do different things. Sometimes these differences involve LLCs, corporations or true partnerships (and here, I'll refer generically to the co-owners as "partners").
Hopefully, a good organizational agreement will provide for a way to resolve these disputes between partners, but, as you have seen in previous posts, they don't always.
What I'm going to provide you today is the easiest, fairest, most common sense way to resolve a dispute between two partners over the direction of the business. First, however, a few caveats:
1. You'll need to have your finances in order.
2. You'll need to understand the possible ramifications that will result from this method.
3. You'll need to prepare yourself to be satisifed with whichever result occurs.
Those warnings are cryptic, aren't they?
Here it is, then: If you and you partner are at odds, or are wanting to go in different directions and can't resolve your differences, meet with your partner, and make him this offer (and for this example, I'm assuming two partners who are equal owners).
1. You think that the partnership between the two of you is going in different directions.
2. The best thing for everyone is if one partner buys the other one out.
3. One partner should set a value for the business (i.e., what that partner thinks the partnership, or at least his half of it, is worth).
4. The other partner then gets to decide whether to sell at that price, or to buy at that price.
5. You give him the option to decide whether he wants to set the price, or whether he'd rather decide whether to buy or sell.
6. You wait.
Think about how absolutely, finally, quickly and fairly this can effect a business buyout and a resolution of the dispute--whether you're running a lucrative partnership or one that is barely struggling along.
I was involved with a buyout, recently, where this occurred. One partner decided to make this offer to the other. Before he made the offer, he searched his soul, and made a decision at what value he'd place on a partnership interest. Then he determined that he'd be happy either way--if he got bought at for that price, he could live with it, or if he was asked to buy the partner out at that price, he'd live with it.
He then approached his partner, and made the suggestion for a buy/sell. The other partner agreed. Now, think about how easy things become at this point: My client had already decided his value point. If the other partner decided to set the value, my client could make his buy/sell decision in about 30 seconds, simply based on whether the offer was higher or lower than my client's buy/sell point he had already mentally set.
Or if (as was the case in this instance) the partner asked my client to set the price, my client could offer the price he'd already decided, and then sit back and wait for the partner to make the decision of whether to buy or to be bought out.
The two hardest parts about this mechanism are (1) coming up with a value that you can live with whether you buy or sell and (2) convincing the other partner to do this (for example, perhaps the other partner would only want to sell, or would only want to buy, etc.). But once the other partner agrees to this mechanism, the buyout will be fair.
In my client's case, if his partner had thought the price offered was too low, then the partner had the right to buy my client out at that low price. If he thought the price was unrealistically high, then he could sell out to my client at that price. Conversely, my client had to be realistic about the price. Perhaps he would've liked to have sold for a higher price, or to have bought out his partner for a lower price, but since he did not know which choice his partner would make, he had to make a price that he could live with either way.
If you have any more questions about partnership issues in North Carolina, feel free to schedule an appointment at 704-735-0483.
Hopefully, a good organizational agreement will provide for a way to resolve these disputes between partners, but, as you have seen in previous posts, they don't always.
What I'm going to provide you today is the easiest, fairest, most common sense way to resolve a dispute between two partners over the direction of the business. First, however, a few caveats:
1. You'll need to have your finances in order.
2. You'll need to understand the possible ramifications that will result from this method.
3. You'll need to prepare yourself to be satisifed with whichever result occurs.
Those warnings are cryptic, aren't they?
Here it is, then: If you and you partner are at odds, or are wanting to go in different directions and can't resolve your differences, meet with your partner, and make him this offer (and for this example, I'm assuming two partners who are equal owners).
1. You think that the partnership between the two of you is going in different directions.
2. The best thing for everyone is if one partner buys the other one out.
3. One partner should set a value for the business (i.e., what that partner thinks the partnership, or at least his half of it, is worth).
4. The other partner then gets to decide whether to sell at that price, or to buy at that price.
5. You give him the option to decide whether he wants to set the price, or whether he'd rather decide whether to buy or sell.
6. You wait.
Think about how absolutely, finally, quickly and fairly this can effect a business buyout and a resolution of the dispute--whether you're running a lucrative partnership or one that is barely struggling along.
I was involved with a buyout, recently, where this occurred. One partner decided to make this offer to the other. Before he made the offer, he searched his soul, and made a decision at what value he'd place on a partnership interest. Then he determined that he'd be happy either way--if he got bought at for that price, he could live with it, or if he was asked to buy the partner out at that price, he'd live with it.
He then approached his partner, and made the suggestion for a buy/sell. The other partner agreed. Now, think about how easy things become at this point: My client had already decided his value point. If the other partner decided to set the value, my client could make his buy/sell decision in about 30 seconds, simply based on whether the offer was higher or lower than my client's buy/sell point he had already mentally set.
Or if (as was the case in this instance) the partner asked my client to set the price, my client could offer the price he'd already decided, and then sit back and wait for the partner to make the decision of whether to buy or to be bought out.
The two hardest parts about this mechanism are (1) coming up with a value that you can live with whether you buy or sell and (2) convincing the other partner to do this (for example, perhaps the other partner would only want to sell, or would only want to buy, etc.). But once the other partner agrees to this mechanism, the buyout will be fair.
In my client's case, if his partner had thought the price offered was too low, then the partner had the right to buy my client out at that low price. If he thought the price was unrealistically high, then he could sell out to my client at that price. Conversely, my client had to be realistic about the price. Perhaps he would've liked to have sold for a higher price, or to have bought out his partner for a lower price, but since he did not know which choice his partner would make, he had to make a price that he could live with either way.
If you have any more questions about partnership issues in North Carolina, feel free to schedule an appointment at 704-735-0483.
Sabtu, 12 Juli 2008
Limited Liability Company Buyouts
A client and his wife came in a few weeks ago with some questions. He, his wife, and another couple had formed an LLC for a new business venture. Each member owned 25 percent. The venture was still fairly new, though experiencing some apparent success already, when one of the two couples decided it wanted out. My clients, who wanted to keep the business going, came to me for some counsel about what to do.
Fortunately for all parties, we reached a very easy and amicable solution by which my clients will, next week, buy out the other couple for a sum representing their initial investment. It's a good thing that everyone was reasonable, however, because the Operating Agreemeent did not provide a good "dissolution" mechanism, in the event that the discussions had become acrimonius, and it made me realize the importance of a good buyout provision in these operating agreements.
The operating agreement, like most in our state, was written so that the departing couple could not have sold its interest in the company without my clients' approval. And without my clients' approval, they'd have been out of look. Worse yet, my clients owned the physical location of the LLC's business, and, if they'd wanted, could have evicted the LLC from the location and simply set up a new LLC to run practically the same business.
Of course, the departing husband and wife were decent people, and my clients were decent people, and they quickly and fairly negotiated a fair resolution that was mutually beneficial.
The majority of limited liability companies I set up seem to be two parties (usually two men, but sometimes two couples), and in these LLCs, when you're setting them up, think about the exit provisions:
1. Consider putting in a provision that would allow you to sell your interest to a third party if the remaining owners are not willing to buy you out; and/or
2. Consider a provision that will value your interest and set up a payment plan so that while you can force the remaining parties to buy you out, conversely a mechanism is in place so that they can do it without ruining their cashflow.
Of course, picture yourself in the reverse provision: what if you want to stay in but your co-owners do not? A good operating agreement will provide provisions that will provide you a comfort level so that if you start going different ways, you'll already ahead of time know that Agreement has provided a way for all of you to easily separate your interests.
Fortunately for all parties, we reached a very easy and amicable solution by which my clients will, next week, buy out the other couple for a sum representing their initial investment. It's a good thing that everyone was reasonable, however, because the Operating Agreemeent did not provide a good "dissolution" mechanism, in the event that the discussions had become acrimonius, and it made me realize the importance of a good buyout provision in these operating agreements.
The operating agreement, like most in our state, was written so that the departing couple could not have sold its interest in the company without my clients' approval. And without my clients' approval, they'd have been out of look. Worse yet, my clients owned the physical location of the LLC's business, and, if they'd wanted, could have evicted the LLC from the location and simply set up a new LLC to run practically the same business.
Of course, the departing husband and wife were decent people, and my clients were decent people, and they quickly and fairly negotiated a fair resolution that was mutually beneficial.
The majority of limited liability companies I set up seem to be two parties (usually two men, but sometimes two couples), and in these LLCs, when you're setting them up, think about the exit provisions:
1. Consider putting in a provision that would allow you to sell your interest to a third party if the remaining owners are not willing to buy you out; and/or
2. Consider a provision that will value your interest and set up a payment plan so that while you can force the remaining parties to buy you out, conversely a mechanism is in place so that they can do it without ruining their cashflow.
Of course, picture yourself in the reverse provision: what if you want to stay in but your co-owners do not? A good operating agreement will provide provisions that will provide you a comfort level so that if you start going different ways, you'll already ahead of time know that Agreement has provided a way for all of you to easily separate your interests.
Rabu, 18 Juni 2008
Business Litigation, pt. 2 Victory
We won our trial, and now I can describe more details about it. My client, a real estate developer, had been sued for issues arising from a former partnership. My client and three other men had formed a partnership to develop a tract of land. One of the partners, who happened to work for my client, was bought out years ago. However, in 2006, when the partnership sold its last lots in 2006, the former partner sued, saying he was still a partner and entitled to partnership proceeds. The Plaintiff lost and received nothing. My client received satisfaction and bragging rights--but at what cost? Here is what I believe my client learned from this lawsuit:
1. Get everything in writing and keep good records.
My client had evidence that he'd gotten, in writing, something showing the Plaintiff had given up his interest, but that the file mysteriously disappeared when the Plaintiff quit working for my client. What could my Plaintiff have done differently? He could've had his lawyer at the time draw up the document, make it legally clear, and keep triplicate originals--one for the client, one for the man who gave up his interest, and one for the lawyer (just to be safe). Also, my client could have kept his employee files locked (the testimony was that the files weren't locked).
2. Understand the sheer randomness of a jury.
I always tell clients that you never know what a jury is going to do in a trial, and I really couldn't tell, until they returned a verdict in our favor, what the jurors were thinking. I try to pick up on body cues (do they appear bored when I talk? Are there arms crossed? Are they attentive), but this is not an exact science, and worse yet, an attorney (or his client) can drive himself crazy trying to put meaning into every action of a juror. At one point, the jury sent a question to the judge, and when it was read, my client thought we had lost. Instead, we won; jurors create an emotional rollercoaster for the parties involved, and I think my client knows this now.
3. Place a value on your opportunity costs and your time. This case, in the grand scheme of things, did not involve a lot of money. In fact, early on it became clear that--if carried to its finish--my fees would eclipse the value of the case. However, this case involved (to my client) principle, and, honestly, a bit of a grudge between two individuals. My client was fully prepared to to pay my costs to the end. However, I believe if he were to be asked now, he'd rethink settling earlier, not for the fees he's having to be me, but for the amount of money he probably lost having to sit at trial for a week. My client is an entrepeneur, a commercial real estate developer, who travels the country. During the time he spent in trial, my client missed an important meeting with his largest customer in South Carolina (who, in fact, was going to present him with an achievement award), and also had to forego trips to other parts of the country to oversee and/or initiate start-up projects. The greatest loss, for a client like this, is not the court costs, but the missed opportunity costs.
Things aren't all bad, however. I obtained this client because he was on the opposite side of a lawsuit about five years ago and, though I'd handled many cases for him in the interim, they'd all either gotten dismissed or settled. This was the first opportunity I'd had to show my client how I reacted in the stressful setting of a courtroom in a week-long jury trial. Many corporate lawyers sit behind their desks advising clients, but I hope that my client has now seen my advice put to action.
1. Get everything in writing and keep good records.
My client had evidence that he'd gotten, in writing, something showing the Plaintiff had given up his interest, but that the file mysteriously disappeared when the Plaintiff quit working for my client. What could my Plaintiff have done differently? He could've had his lawyer at the time draw up the document, make it legally clear, and keep triplicate originals--one for the client, one for the man who gave up his interest, and one for the lawyer (just to be safe). Also, my client could have kept his employee files locked (the testimony was that the files weren't locked).
2. Understand the sheer randomness of a jury.
I always tell clients that you never know what a jury is going to do in a trial, and I really couldn't tell, until they returned a verdict in our favor, what the jurors were thinking. I try to pick up on body cues (do they appear bored when I talk? Are there arms crossed? Are they attentive), but this is not an exact science, and worse yet, an attorney (or his client) can drive himself crazy trying to put meaning into every action of a juror. At one point, the jury sent a question to the judge, and when it was read, my client thought we had lost. Instead, we won; jurors create an emotional rollercoaster for the parties involved, and I think my client knows this now.
3. Place a value on your opportunity costs and your time. This case, in the grand scheme of things, did not involve a lot of money. In fact, early on it became clear that--if carried to its finish--my fees would eclipse the value of the case. However, this case involved (to my client) principle, and, honestly, a bit of a grudge between two individuals. My client was fully prepared to to pay my costs to the end. However, I believe if he were to be asked now, he'd rethink settling earlier, not for the fees he's having to be me, but for the amount of money he probably lost having to sit at trial for a week. My client is an entrepeneur, a commercial real estate developer, who travels the country. During the time he spent in trial, my client missed an important meeting with his largest customer in South Carolina (who, in fact, was going to present him with an achievement award), and also had to forego trips to other parts of the country to oversee and/or initiate start-up projects. The greatest loss, for a client like this, is not the court costs, but the missed opportunity costs.
Things aren't all bad, however. I obtained this client because he was on the opposite side of a lawsuit about five years ago and, though I'd handled many cases for him in the interim, they'd all either gotten dismissed or settled. This was the first opportunity I'd had to show my client how I reacted in the stressful setting of a courtroom in a week-long jury trial. Many corporate lawyers sit behind their desks advising clients, but I hope that my client has now seen my advice put to action.
Sabtu, 07 Juni 2008
The Business of Business Litigation
In cities larger than the one in which I practice, most attorneys either fall into the category of litigators (i.e., trial lawyers) or office attorneys who never see the inside of a courtroom.
I've volunteered to be part of a working group of the Bar Association's Business Section, that is comparing the corporate laws of North Carolina versus the analogous laws of Delaware. I'm going to have to miss the group's first face-to-face meeting next week because it appears that I'm going to be in court trying out a partnership case.
The benefit I believe I bring to the table for prospective business clients is that, when I'm advising them or drafting something for them, my experience comes not just from a knowledge of the law or from what someone has taught me, but quite often from my experience in litigating similar issues.
When I reach a trial, I already feel in a sense as if I've failed, because I have been unable to reach a resolution of the case (whether through obtaining a court dismissal or a settlement) for my client. At trial, you see, there comes a point at which the result will be out of the hands of myself and my client: that is, the jury will take over.
In my experience, juries really do try to do the right thing, and also in my experience, I've found they most times have done the right thing. We've all heard the stories of runaway jury verdicts that appear to rape justice, but at least where I practice, the jurors have good common sense and try to do the right thing.
Still, a business tries to control uncertainty as much as possible. Sure there's risk--without which, we wouldn't have entrepeneurism--but most businesses I represent don't want uncertainty (which is different than risk). A jury trial is the ultimate uncertainty. I can do my best for a client in court, but on any given day, something can happen--a bad judge, a runaway jury, whatever--and the unbelievable happens.
Therefore, though I'm happy to litigate for clients, I always advise them that they need to be in the business of THEIR business--not in the business of fighting in court. Because no matter how good your lawyer is, and no matter how good your case is, there are always two sides, and there's always uncertainty.
I've volunteered to be part of a working group of the Bar Association's Business Section, that is comparing the corporate laws of North Carolina versus the analogous laws of Delaware. I'm going to have to miss the group's first face-to-face meeting next week because it appears that I'm going to be in court trying out a partnership case.
The benefit I believe I bring to the table for prospective business clients is that, when I'm advising them or drafting something for them, my experience comes not just from a knowledge of the law or from what someone has taught me, but quite often from my experience in litigating similar issues.
When I reach a trial, I already feel in a sense as if I've failed, because I have been unable to reach a resolution of the case (whether through obtaining a court dismissal or a settlement) for my client. At trial, you see, there comes a point at which the result will be out of the hands of myself and my client: that is, the jury will take over.
In my experience, juries really do try to do the right thing, and also in my experience, I've found they most times have done the right thing. We've all heard the stories of runaway jury verdicts that appear to rape justice, but at least where I practice, the jurors have good common sense and try to do the right thing.
Still, a business tries to control uncertainty as much as possible. Sure there's risk--without which, we wouldn't have entrepeneurism--but most businesses I represent don't want uncertainty (which is different than risk). A jury trial is the ultimate uncertainty. I can do my best for a client in court, but on any given day, something can happen--a bad judge, a runaway jury, whatever--and the unbelievable happens.
Therefore, though I'm happy to litigate for clients, I always advise them that they need to be in the business of THEIR business--not in the business of fighting in court. Because no matter how good your lawyer is, and no matter how good your case is, there are always two sides, and there's always uncertainty.
Sabtu, 31 Mei 2008
Minority Shareholders, Revisited
A friend of mine finally resolved a longstanding situation in which he was involved, and I thought I'd revisit a commonly queried subject of mine--buying shares of stock in startup companies.
During the Dot Com bubble, my friend, and many other intelligent, financially astute professionals, were talked into investing in a startup corporation. What it did or was supposed to do don't matter for the purposes of this discussion, but recently, the corporation was bought out by a larger company. My friend received five cents on the dollar for his investment, and by the time it had arrived, was happy that he even saw that much of his money back--he'd resigned himself to having lost it all.
The purpose of this blog is not to speak to that company's business plan, or why the business never really took off. However, in retrospect, my friend's experience demonstrates a cautionary tale for investors who are buying minority shares in a startup company.
1. Understand what you're buying into. Ok, in the strictest sense, this isn't legal advice, but it bears repeating. At the time this company was started, technology companies were the rage, and everyone wanted to be a part of a new tech startup that "took it public" (sounds like the recent "flipping" craze, doesn't it?). I listened to my friend and other investors describe the company's goals, but I never could understand it--and I don't consider myself too terribly slow. What I heard were lots of big academic words, such as "shifting of paradigms," but I never was satisfactorily told exactly WHAT the company would do. Looking back on it, I'm not sure my friends understood either. If you don't understand what it is the company is supposed to do, I'd submit that you shouldn't invest in it.
2. Understand what it means to be a minority shareholder. Being a minority shareholder means that, unless specific safeguards are put into place, you have very few rights. For example, you can't force the sale of a company, you can't get your money back upon demand, and you pretty much have to do what the majority dictates.
3. Understand the value of stock offered. Let's say this startup corporation issued 100,000 shares, each of which were valued at $1.00. Pretty simple right? You put in $25,000, and you own 25 percent of the company. Except you might not. Unless a shareholder's agreement is put into place, there's no restriction against the company issuing additional stock. Stock can be issued when needed to bring in additional money. For example, using the above example, if the corporation needed another $100,000, it could issue 100,000 more shares. But what if some of the shareholders were issued shares because they were the startup engineers (i.e., the "idea men")? What if, even though your stock was valued at $1.00 per share, the company issued 100,000 shares to monetary investors, and then 200,000 shares to the two guys who thought up the idea, yet put no money into the company. That simple math can show you that the company would take quite a bit of growth before the stock you had might really sell back at $1.00 per share. Worse yet, what if the two original startup guys decided to issue more stock--to themselves? They might be able to do it--they're the majority, after all.
When buying stock in a startup company, understand the real value of the stock--in other words, is its value initially diluted by investors who are holding stock but have contributed no money or assets? Can the stock value later be diluted by the issuance of additional stock without your consent? Think about these things. In the case of my friend, the only person who appears to have profited from the corporation was the "idea guy," who'd issued himself so much stock with having placed a minimal amount of money into it that, even being paid a nickel on the dollar, he has profited well.
4. Understand what it means to own stock that's not publicly traded. Lots of stocks on publicly traded exchanges gain and lose value every day, sometimes because of the poor acts of the officers or directors. However, when you buy publicly traded stock, you know that, at the very least, you're not captive--you can sell your stocks on the open market for whatever price it will bring. However, when stock is in a very small company and isn't publicly traded, you may simply be stuck--as my friend was. He knew for years that the company was doing poorly, and simply had to watch as the value of his stock went down the drain.
There's nothing wrong with investing in a private startup company--in fact, I've both invested and started such companies. However, at least understand your rights when you invest!
During the Dot Com bubble, my friend, and many other intelligent, financially astute professionals, were talked into investing in a startup corporation. What it did or was supposed to do don't matter for the purposes of this discussion, but recently, the corporation was bought out by a larger company. My friend received five cents on the dollar for his investment, and by the time it had arrived, was happy that he even saw that much of his money back--he'd resigned himself to having lost it all.
The purpose of this blog is not to speak to that company's business plan, or why the business never really took off. However, in retrospect, my friend's experience demonstrates a cautionary tale for investors who are buying minority shares in a startup company.
1. Understand what you're buying into. Ok, in the strictest sense, this isn't legal advice, but it bears repeating. At the time this company was started, technology companies were the rage, and everyone wanted to be a part of a new tech startup that "took it public" (sounds like the recent "flipping" craze, doesn't it?). I listened to my friend and other investors describe the company's goals, but I never could understand it--and I don't consider myself too terribly slow. What I heard were lots of big academic words, such as "shifting of paradigms," but I never was satisfactorily told exactly WHAT the company would do. Looking back on it, I'm not sure my friends understood either. If you don't understand what it is the company is supposed to do, I'd submit that you shouldn't invest in it.
2. Understand what it means to be a minority shareholder. Being a minority shareholder means that, unless specific safeguards are put into place, you have very few rights. For example, you can't force the sale of a company, you can't get your money back upon demand, and you pretty much have to do what the majority dictates.
3. Understand the value of stock offered. Let's say this startup corporation issued 100,000 shares, each of which were valued at $1.00. Pretty simple right? You put in $25,000, and you own 25 percent of the company. Except you might not. Unless a shareholder's agreement is put into place, there's no restriction against the company issuing additional stock. Stock can be issued when needed to bring in additional money. For example, using the above example, if the corporation needed another $100,000, it could issue 100,000 more shares. But what if some of the shareholders were issued shares because they were the startup engineers (i.e., the "idea men")? What if, even though your stock was valued at $1.00 per share, the company issued 100,000 shares to monetary investors, and then 200,000 shares to the two guys who thought up the idea, yet put no money into the company. That simple math can show you that the company would take quite a bit of growth before the stock you had might really sell back at $1.00 per share. Worse yet, what if the two original startup guys decided to issue more stock--to themselves? They might be able to do it--they're the majority, after all.
When buying stock in a startup company, understand the real value of the stock--in other words, is its value initially diluted by investors who are holding stock but have contributed no money or assets? Can the stock value later be diluted by the issuance of additional stock without your consent? Think about these things. In the case of my friend, the only person who appears to have profited from the corporation was the "idea guy," who'd issued himself so much stock with having placed a minimal amount of money into it that, even being paid a nickel on the dollar, he has profited well.
4. Understand what it means to own stock that's not publicly traded. Lots of stocks on publicly traded exchanges gain and lose value every day, sometimes because of the poor acts of the officers or directors. However, when you buy publicly traded stock, you know that, at the very least, you're not captive--you can sell your stocks on the open market for whatever price it will bring. However, when stock is in a very small company and isn't publicly traded, you may simply be stuck--as my friend was. He knew for years that the company was doing poorly, and simply had to watch as the value of his stock went down the drain.
There's nothing wrong with investing in a private startup company--in fact, I've both invested and started such companies. However, at least understand your rights when you invest!
Minggu, 11 Mei 2008
Arbitration, Part 3 -- Right of Appeal
Binding arbitration is designed to be a quick and final extrajudicial disolution to disputes. However, experience has shown that this forced expediency often sacrifices accuracy and correctness.
Typically, binding arbitration does not allow for a right of appeal--either through an appellate arbitration panel or through judicial appeal. This means that the entire dispute will be decided by one individual.
In Court, though the process is admittedly often too long, too expensive, and too arbitrary, one benefit is that the judicial procedure provides for sufficient checks and balances that will prevent many egregious judicial errors. If the judge inappropriately dismisses a case before trial, the courts of appeal will typically reverse the trial court's decision and remand (send) the case back to the trial level.
If the trial judge makes an error of law in his ruling, the appellate courts will likely catch this error and reverse it. Furthermore, most, if not all state courts (and the federal courts) provide for additional layers of appellate oversite such that there are appellate courts to which you can appeal the decisions of other appellate courts.
All of these layers of judicial oversite create a heavy cost to taxpayers and to the individual litigant. However, of all the criticisms of the judicial system, one that you rarely hear is that, at the end of the day, after all appeals are through, that the courts got it wrong.
In the Arbitration proceeding, however, if a party is unhappy with the Arbitrator's decisions, there is little recourse. The aggrieved party will not be able to seek further redress within the Arbitration procedure. Furthermore, the party will not have access to the courts either. Typically, the role of the courts is limited to (1) enforcing an arbitration award into an official enforceable judgment or (2) to set aside arbitration awards in only the most egregious circumstances (i.e., beyond just mere errors of law and erroneous rulings).
This means that your entire case is in the hands of one arbitrator, sometimes not even an individual trained in the law, who holds your interest in the palms of his hand, secure further in the knowledge that--whatever he does--he likely will not be overturned.
Therefore, before entering into an agreement for binding arbitration, decide whether accurate and correct rulings should be sacrificed to the potentially arbitrary and unappealable ruling of an arbitrator.
Typically, binding arbitration does not allow for a right of appeal--either through an appellate arbitration panel or through judicial appeal. This means that the entire dispute will be decided by one individual.
In Court, though the process is admittedly often too long, too expensive, and too arbitrary, one benefit is that the judicial procedure provides for sufficient checks and balances that will prevent many egregious judicial errors. If the judge inappropriately dismisses a case before trial, the courts of appeal will typically reverse the trial court's decision and remand (send) the case back to the trial level.
If the trial judge makes an error of law in his ruling, the appellate courts will likely catch this error and reverse it. Furthermore, most, if not all state courts (and the federal courts) provide for additional layers of appellate oversite such that there are appellate courts to which you can appeal the decisions of other appellate courts.
All of these layers of judicial oversite create a heavy cost to taxpayers and to the individual litigant. However, of all the criticisms of the judicial system, one that you rarely hear is that, at the end of the day, after all appeals are through, that the courts got it wrong.
In the Arbitration proceeding, however, if a party is unhappy with the Arbitrator's decisions, there is little recourse. The aggrieved party will not be able to seek further redress within the Arbitration procedure. Furthermore, the party will not have access to the courts either. Typically, the role of the courts is limited to (1) enforcing an arbitration award into an official enforceable judgment or (2) to set aside arbitration awards in only the most egregious circumstances (i.e., beyond just mere errors of law and erroneous rulings).
This means that your entire case is in the hands of one arbitrator, sometimes not even an individual trained in the law, who holds your interest in the palms of his hand, secure further in the knowledge that--whatever he does--he likely will not be overturned.
Therefore, before entering into an agreement for binding arbitration, decide whether accurate and correct rulings should be sacrificed to the potentially arbitrary and unappealable ruling of an arbitrator.
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