5 ms·

My $3.3M Mistake

251 points by sivers 17y ago

jedc 17y ago
Ouch. Big mistake, but great advice NOT to ignore the legal paperwork. As mind-numbing as it can be to go over contracts, NDA's, etc., you need to know what you're signing. At least in his case it was his father, so he didn't have to worry about getting a raw deal there.
- stcredzero 17y ago
  Kudos for publishing this example! I praise you for your civic-mindedness! (It takes guts to admit a mistake this big.)
michael_dorfman 17y ago
All I can say is "amen, brother." Not following his first 3 general purpose lessons have cost me if not millions, at least many hundreds of thousands of dollars. I urge others to commit these to memory: +Really understand something before you sign it. +Ask all questions, dumb questions, hypothetical questions, extreme-scenario questions, what if questions, until you’re sure you really fully understand it as well as anyone on earth. +It’s also very worth paying for an hour meeting with your accountant, and asking 100 questions there, too.
stijnm 17y ago
Comments like this on a serious well written post with some good advice make me smile: "Ibod Catooga wrote on May 27th, 2009 Shit, negro, I woulda punched my dad in the NUTS if he tried that shizzle on me!" (http://sivers.org/mistake#comment-15816 http://sivers.org/mistake#comment-15816) Beautifully eloquent.
matt1 17y ago
He writes: Each separate business venture should usually have its own LLC. It’s very cheap through companies like LegalZoom, and well worth it. If I plan to launch a few websites over the next couple years. am I supposed to create an LLC for each one? I think I've read elsewhere that you can form an umbrella LLC to cover them all. What have your experiences been with this? (FWIW: Before I do anything I'm going to meet with a lawyer... but the more background knowledge the better.)
- davidw 17y ago
  Seems like the 'transaction costs' (registering the LLC, bank account, etc...) could add up unless the sites really are independent, perhaps with different people working on them.
- RiderOfGiraffes 17y ago
  Each business should have its own company. Are these web sites separate businesses? Or are they different faces of the same business? I have five web sites, but two businesses. Each business has and is its own presence and personality. Each web site clearly belongs to exactly one of those businesses.
- sivers 17y ago
  There are legal ("asset protection") reasons that many taxi companies have each car as its own LLC, or ski slopes register each slope as its own LLC. So if someone has a legal problem with one, and you can really show that you've been treating them separately in your bookkeeping and bank accounts, it's clear to the creditor that they're not going to be able to go after everything you've got. Then of course as they grow there are reasons why you may want to sell one of your websites, but not the others, etc. The reasons why to do it are vague and different for everyone, but to me, it's a "can't hurt" and "why not?" type decision. You go to LegalZoom (or any similar service) and pay $400. They mail you a certificate you bring to your bank to open a separate account. Total spent: $400 and 30 minutes of your time. California is an exception: They make you pay $800 per year to the state for each entity. Most states it's only $50 and some states (like New Mexico) you never need to renew or pay any annual fees at all. If you're a virtual company with no physical office, you can set up your LLC in any business-friendly state you want. (Delaware, Nevada, Wyoming, etc.) Outside the U.S., British Virgin Islands is the quickest, cheapest, easiest place to do it: http://www.google.com/search?q=bvi+corporation http://www.google.com/search?q=bvi+corporation
  - encoderer 17y ago
    NY has high costs as well: You have to issue public notice when creating a new LLC. I've found that Earth Class Mail's Beaverton, OR street address (which has no add'l cost past the standard ECM fees) works fantastic. The Oregon SoS website lets you register an LLC online on the cheap, less than $100.
pclark 17y ago
Why wouldn't his Dad just give him the $3.3M back after he'd paid it him?
- sivers 17y ago
  It wasn't my dad that lent me the money - it was his company. So his company couldn't just pay me $3.3M for no reason.
  - swombat 17y ago
    Can't it licence your intellectual property to attempt to create a clone of CDBaby? Maybe the licencing deal will cost $100k/month, including consulting services from you to build the service, and unfortunately, it will turn out that the cloned CDBaby service is not profitable, and so it will be shut down after 33 months. You'll still have to pay corporation tax on it (or whatever the equivalent is in the US), but hopefully that's less than trying to extract that money out of your dad's company. Note: IANAA
    - maukdaddy 17y ago
      Ideas like that get people sent to prison. Better to be ethical and just eat the $3.3 mil.
      - staunch 17y ago
        I agree his idea is probably not a good method to pay the money back but what's unethical is collecting that $3.3 million, and then saying "oops", without finding a legal and legit way to give it back.
        brk 17y ago
        How is collecting a payback on a legitimate investment unethical? His fathers business invested some money in his corporation. Now, from the story it appears that they didn't expect much of a return on this investment, but I don't think they acted predatory in any way. I don't see why there should be any reason for a "payback" here, that is not how investing works, and quite frankly sounds very selfish and biased to me. If his business had completely failed and he ended up broke, would he be looking for a legal loophole to repay that $20,000 investment back to the company? I would tend to doubt it. His scenario is almost exactly the model/concept of VC investing... Money is invested in seed companies knowing that it is highly probable it will be lost, but the slim chance of a large payoff makes the risk worthwhile.
vaksel 17y ago
I don't get it...didn't you need to file before that point? Wouldn't you have found out this info the first year you paid taxes? At which point you would have just been starting out, and the "buyout" would have been for pennies since the company wasn't showing profit
- bobbyi 17y ago
  How would his taxes have reflected the percentage of this company he owned? You pay taxes on your income, which wouldn't be affected here. You pay capital gains tax on stock when you sell which he didn't do at any point.
  - vaksel 17y ago
    It wouldn't...but it should have given him a headsup that he doesn't own 90% of his company early on. Early enough, so that if he decided to "buy" his dad out, it would have been for a much smaller amount.
  - mediaman 17y ago
    When you are a stockholder in a company -- LLC or subchapter S corp -- you prepare a K-1 for the owners in the firm, who each pay taxes on the passthrough income. In order to calculate personal tax due, the form includes the percentage ownership, which is also reported to the IRS. So the commenter is correct; I'm not sure why this wouldn't have been discovered earlier, unless he wasn't doing his taxes (even if there's a loss, taxes should be filed to claim carryover losses).
    - Retric 17y ago
      If he had 3.3 million to buy out the company he probably was not filling out his own taxes.
philjackson 17y ago
I hope your dad got you a nice Christmas gift that year.

251 points by sivers 17y ago

jedc 17y ago

Ouch. Big mistake, but great advice NOT to ignore the legal paperwork. As mind-numbing as it can be to go over contracts, NDA's, etc., you need to know what you're signing. At least in his case it was his father, so he didn't have to worry about getting a raw deal there.

stcredzero 17y ago
Kudos for publishing this example! I praise you for your civic-mindedness! (It takes guts to admit a mistake this big.)

michael_dorfman 17y ago

All I can say is "amen, brother." Not following his first 3 general purpose lessons have cost me if not millions, at least many hundreds of thousands of dollars. I urge others to commit these to memory: +Really understand something before you sign it. +Ask all questions, dumb questions, hypothetical questions, extreme-scenario questions, what if questions, until you’re sure you really fully understand it as well as anyone on earth. +It’s also very worth paying for an hour meeting with your accountant, and asking 100 questions there, too.

stijnm 17y ago

Comments like this on a serious well written post with some good advice make me smile: "Ibod Catooga wrote on May 27th, 2009 Shit, negro, I woulda punched my dad in the NUTS if he tried that shizzle on me!" (http://sivers.org/mistake#comment-15816 http://sivers.org/mistake#comment-15816) Beautifully eloquent.

matt1 17y ago

He writes: Each separate business venture should usually have its own LLC. It’s very cheap through companies like LegalZoom, and well worth it. If I plan to launch a few websites over the next couple years. am I supposed to create an LLC for each one? I think I've read elsewhere that you can form an umbrella LLC to cover them all. What have your experiences been with this? (FWIW: Before I do anything I'm going to meet with a lawyer... but the more background knowledge the better.)

davidw 17y ago
Seems like the 'transaction costs' (registering the LLC, bank account, etc...) could add up unless the sites really are independent, perhaps with different people working on them.
RiderOfGiraffes 17y ago
Each business should have its own company. Are these web sites separate businesses? Or are they different faces of the same business? I have five web sites, but two businesses. Each business has and is its own presence and personality. Each web site clearly belongs to exactly one of those businesses.
sivers 17y ago
There are legal ("asset protection") reasons that many taxi companies have each car as its own LLC, or ski slopes register each slope as its own LLC. So if someone has a legal problem with one, and you can really show that you've been treating them separately in your bookkeeping and bank accounts, it's clear to the creditor that they're not going to be able to go after everything you've got. Then of course as they grow there are reasons why you may want to sell one of your websites, but not the others, etc. The reasons why to do it are vague and different for everyone, but to me, it's a "can't hurt" and "why not?" type decision. You go to LegalZoom (or any similar service) and pay $400. They mail you a certificate you bring to your bank to open a separate account. Total spent: $400 and 30 minutes of your time. California is an exception: They make you pay $800 per year to the state for each entity. Most states it's only $50 and some states (like New Mexico) you never need to renew or pay any annual fees at all. If you're a virtual company with no physical office, you can set up your LLC in any business-friendly state you want. (Delaware, Nevada, Wyoming, etc.) Outside the U.S., British Virgin Islands is the quickest, cheapest, easiest place to do it: http://www.google.com/search?q=bvi+corporation http://www.google.com/search?q=bvi+corporation
- encoderer 17y ago
  NY has high costs as well: You have to issue public notice when creating a new LLC. I've found that Earth Class Mail's Beaverton, OR street address (which has no add'l cost past the standard ECM fees) works fantastic. The Oregon SoS website lets you register an LLC online on the cheap, less than $100.

pclark 17y ago

Why wouldn't his Dad just give him the $3.3M back after he'd paid it him?

sivers 17y ago
It wasn't my dad that lent me the money - it was his company. So his company couldn't just pay me $3.3M for no reason.
- swombat 17y ago
  Can't it licence your intellectual property to attempt to create a clone of CDBaby? Maybe the licencing deal will cost $100k/month, including consulting services from you to build the service, and unfortunately, it will turn out that the cloned CDBaby service is not profitable, and so it will be shut down after 33 months. You'll still have to pay corporation tax on it (or whatever the equivalent is in the US), but hopefully that's less than trying to extract that money out of your dad's company. Note: IANAA
  - maukdaddy 17y ago
    Ideas like that get people sent to prison. Better to be ethical and just eat the $3.3 mil.
    - staunch 17y ago
      I agree his idea is probably not a good method to pay the money back but what's unethical is collecting that $3.3 million, and then saying "oops", without finding a legal and legit way to give it back.
      - brk 17y ago
        How is collecting a payback on a legitimate investment unethical? His fathers business invested some money in his corporation. Now, from the story it appears that they didn't expect much of a return on this investment, but I don't think they acted predatory in any way. I don't see why there should be any reason for a "payback" here, that is not how investing works, and quite frankly sounds very selfish and biased to me. If his business had completely failed and he ended up broke, would he be looking for a legal loophole to repay that $20,000 investment back to the company? I would tend to doubt it. His scenario is almost exactly the model/concept of VC investing... Money is invested in seed companies knowing that it is highly probable it will be lost, but the slim chance of a large payoff makes the risk worthwhile.

vaksel 17y ago

I don't get it...didn't you need to file before that point? Wouldn't you have found out this info the first year you paid taxes? At which point you would have just been starting out, and the "buyout" would have been for pennies since the company wasn't showing profit

bobbyi 17y ago
How would his taxes have reflected the percentage of this company he owned? You pay taxes on your income, which wouldn't be affected here. You pay capital gains tax on stock when you sell which he didn't do at any point.
- vaksel 17y ago
  It wouldn't...but it should have given him a headsup that he doesn't own 90% of his company early on. Early enough, so that if he decided to "buy" his dad out, it would have been for a much smaller amount.
- mediaman 17y ago
  When you are a stockholder in a company -- LLC or subchapter S corp -- you prepare a K-1 for the owners in the firm, who each pay taxes on the passthrough income. In order to calculate personal tax due, the form includes the percentage ownership, which is also reported to the IRS. So the commenter is correct; I'm not sure why this wouldn't have been discovered earlier, unless he wasn't doing his taxes (even if there's a loss, taxes should be filed to claim carryover losses).
  - Retric 17y ago
    If he had 3.3 million to buy out the company he probably was not filling out his own taxes.

philjackson 17y ago

I hope your dad got you a nice Christmas gift that year.