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Tilting the Scales

Business Issues with a Legal Slant

Partner Liability: Out of the Woods?

Posted in *Way Out - Advice, Legal Risk Management, Money

Business conceptDebbett Runnup Partnership, a Texas general partnership, was sued by Widgets R Us in 2010 for failing to pay Widgets R Us invoices. Judgment was granted to Widgets in 2012 against Debbett Runnup for $300,000. After chasing Debbett for over three years, Widgets’ lawyer Plinn T. Agreshun realizes that Debbett is penniless. Knowing that partners are also responsible for partnership debts, Agreshun sues Cash Kau, a multimillionaire Debbett partner. Cash’s army of lawyers argue that the Widgets R Us lawsuit is too late and barred by the statute of limitations. Can Widgets R Us collect from Cash Kau almost five years after the invoices were sent?

Partners Are Liable for the Partnership’s Obligations

Yes. Texas law generally makes a partner jointly and severally liable for all of the obligations of the general partnership. However, Widgets R Us must sue and get a judgment against Cash Kau because a judgment against a partnership is not, by itself, a judgment against its partner. To do so, Widgets R Us could have named Cash Kau as a defendant in the lawsuit against the partnership, or in a separate lawsuit. Widgets R Us must get a judgment against the partnership, and the judgment must go unsatisfied for 90 days before Widgets R Us may seek to satisfy from Cash Kau.

A Creditor’s Claim Against a Partner Accrues After Judgment Against the Partnership

But what about the Texas statute of limitations of four years? Widgets R Us slides under the wire. The Texas Supreme Court recently considered whether a creditor’s claim against the partner accrues (i.e., starts the limitations clock) at the time the partnership breached, or on the date the creditor obtained the judgment against the partnership. The court held that the limitations clock does not start running against the partner until the creditor can actually proceed against the partner’s assets, which is 90 days after the judgment, or 2012. The court concluded that Texas partnership law does not require a creditor to sue a partner in the same suit as the partnership, and the creditor could not proceed against the partner until after the 90 day period.

Tilting the Scales in Your Favor

Luckily for Widgets R Us the Texas Supreme Court sided with its interpretation of the statute of limitations. Claimants against general partnerships are better served by naming all of the partnership’s partners as defendants in the collection lawsuit. Doing so also leverages settlement negotiations because the partners probably want to avoid having a judgment rendered against them personally. Additionally, the partners must be careful not to transfer or dissipate assets because those could be considered fraudulent conveyances.

Finally, if you are a partner in a general partnership, strongly consider converting to a limited liability partnership, a limited liability company or a corporation. A valuable aspect of any entity is the shield it offers owners of these entities from personal liability for the entity’s obligations and liabilities.

The Coming Silver Tsunami: Families May Lose 70% in Wealth Transfer

Posted in *Way Out - Advice, Family Issues, Legal Risk Management, Money

baton passRecord Wealth Transfer. Over the next 30-40 years about $12 trillion from those born in 1920s and 30s will be transferred to the baby boomers, and the boomers are expected to transfer some $30 trillion to their heirs, with more than an estimated $59 trillion transferred from 93.6 million American estates from 2007 to 2061. Much of the wealth is the family business.

70% Never Gets to Third Generation. Shirtsleeves to shirtsleeves in three generations. The first generation makes the money, the second spends it, and the third depletes what’s left. For 70% of all wealthy families, the money has been spent, or otherwise lost, before the end of the second generation and 90% of families no longer have their wealth by the end of the third generation. No planning, no leadership, no communication. No money.

High Divorce Rates and Children with Multiple Families. At its peak, the divorce rate at 50% affected these families and their children, many of whom did not grow up with both biological parents. Less than half (46%) of U.S. kids younger than 18 live with two married heterosexual parents in their first marriage. Blood is thicker than water, and often blood isn’t thick enough.

Geographic Separation. In today’s global society, most adult children live a long distance from their parents, relying upon air travel, cell phones and other technological devices to keep in contact across time and distance. Of about 34 million Americans who are caregivers for an older parent, 15% live one or more hours away and nearly one third of those are helping someone with Alzheimer’s disease or dementia.

Why do Wealth and Legacy Fail to Survive?

Success in the Immediate Wealth Transfer. Most have all the proper structures in place for assets to be seamlessly transferred to the first generation. However they have not properly planned and accounted for the impact of divorce on family relationships, families separated by time and distance and children unprepared to handle new found wealth. There are stumbling blocks that doom their success.

Tripping on Their Legacy. The greatest stumbling blocks?

  • No Family Mission – Lack of Purpose
  • Distrust or No Trust – Lack of Communication and Mishandled Communication
  • No Family Leadership – Lack of a Family Governance System and Lack of Family Leadership

Tilting the Scales in Your Favor. There’s more to your family legacy and your wealth transfer than your will. Planning to succeed. Hand off your wealth well and your legacy does not end when you sign your Last Will and Testament. That’s the easy part. Unless you plan for your estate to be liquidated and the cash distributed (and your children to have little contact with each other after you die), there’s more to be done. Start planning now.

Communication – Lack of and Mishandled.

The often present lack of communication or mishandling of communication is exacerbated by divorced parents who don’t communicate, ex-spouses who have different agendas, half-brothers and sisters who dislike the divorce and each other, and the separation of long distances. And, there’s no substitute for being there. While they had their promise, increasing use of ever-expanding computer technology innovations, such as the internet, e-mail Skype, , Facebook, Twitter, iPhone, iPad and so many other hardware and software developments redefined interpersonal relationships and family communications in unexpected ways.

Previous Tilting Articles: No Fracking Way!- Differences Between Surface & Mineral Estate Ownership and Come and Take It! – Denton Ordinance Prohibits Fracking

A Measle-ly Lawsuit: Can Parents Who Don’t Vaccinate their Children be Sued?

Posted in *BTW - Noteworthy, Family Issues, Legal Risk Management

vaccineYearning to leave the frozen wasteland of Dallas, Texas behind her if just for a moment, Penny McCrathy, an outspoken anti-vaccination advocate, took her unvaccinated children to Disneyland in Anaheim, California. Not knowing that her children had been exposed to measles by a foreign tourist, Penny brought them back to Texas and sent them back to public school, which they attended under a vaccination exemption based on their “personal beliefs”. One week later, her children came down with measles as well. Most of the children in their school were immunized, but unfortunately one young lady, Ima Munenot, had a severe immunodeficiency disorder and could never receive vaccinations. One week after the McCrathy kids came down with measles, so did Ima – but while the McCrathy children got over the disease, Ima was hospitalized with meningitis and nearly died. In addition to their emotional trauma, Ima’s family incurred tens of thousands of dollars in medical expenses. Might Ima’s family have a legal case against Penny for refusing to vaccinate her children and exposing Ima to a deadly disease?

Perhaps. Texas law recognizes a cause of action for the negligent transmission of infection diseases – for instance, plaintiffs have litigated and won cases involving the negligent transmission of genital herpes. Although there are no cases to date involving the negligent transmission of measles where the negligent act is a failure to vaccinate a child, it is certainly possible that a plaintiff might prevail on such a case if they can prove the essential elements of a negligence cause of action: (1) the existence of a duty from the defendant to the plaintiff, (2) breach of that duty, (3) harm to the plaintiff, and (4) that the breach of the duty caused the harm. The two greatest hurdles to a successful lawsuit in this case are duty and causation.

Is there Causation? Ima’s parents must prove both that Penny’s actions in failing to vaccinate her children was both the cause-in-fact of Ima’s disease and that the injury was foreseeable. According to a recent article in the Journal of Law, Medicine and Ethics, medical science can trace the spread of measles from person to person with a high degree of probability both through laboratory and epidemiological studies. It is thus very likely that Ima’s parents can prove that Penny’s children were the source of Ima’s measles. A jury could certainly find that Penny should have foreseen that Penny’s failure to vaccinate her children might spread the disease to others.

Is There a Duty? The larger hurdle for Ima is proving the existence of a duty. Courts, in determining whether a duty exists, traditionally apply a “risk-utility” test comparing the risk of harm by the actor against the social utility of the actor’s conduct. In this case, Penny’s conduct in not vaccinating her children has zero social utility and the risk is high: measles is one of the leading causes of death among young children and the measles vaccine is safe, readily available and inexpensive. Additionally, Texas statutes require that all children be vaccinated. However, those same statutes also state that a failure to comply with the statute requiring vaccination does not create a cause of action, and further that there is a statutory exemption for persons who sign an affidavit stating that they do not wish to vaccinate their children for “reasons of conscience”. In addition, persons who refuse to vaccinate their children for religious reasons may be protected by the Texas and United States Constitutions. Thus, Penny likely has a strong legal argument that she is not liable for Ima’s illness.

Tilting the Scales in Your Favor. The best protection against measles is vaccination, not litigation. However, infants and persons with suppressed immune systems cannot get vaccinated. Parents of children who cannot be vaccinated should demand that schools protect vulnerable students by banning unvaccinated children from attending school during outbreaks of measles and other diseases. In the worst case scenario, however, the threat of litigation may convince parents who are on the fence to have their children vaccinated.

Selling What You Don’t Have…What Happened to my Super Bowl Tickets?

Posted in *Weighing In - IMHO, Legal Risk Management, Money

Thursday before Super Bowl XLIX in Phoenix Ima Goen Nomattawatta, a huge Patriots fan, found an online broker Izzure Scalp with Super Bowl tickets for $2,500 apiece. Not believing that he could get 4 tickets at only $750 above face value, Nomattawatta quickly called three buddies, found flights and non-refundable hotel rooms, and all four headed for Phoenix. Although the Scalp promised ticket delivery to Nomattawatta’s hotel on Saturday, on Friday afternoon Scalp reported that he did not have tickets, and would be refunding the purchase price pursuant to their online contract. Angered at Izzure Scalp, Nomattawatta and his friends threatened to sue Scalp for their tickets, airfare and hotel accommodations. Does Izzure Scalp have any liability other than the cost of the tickets?

The “Fine Print.” No, probably not. Remember those mile long, unread online “terms and conditions” that you see when buying a smartphone, television, or new company service? Like you, I generally skim the document and routinely check the box that I “read, understand and agree” to the terms and conditions. Important contractual language in those online approvals include limitations of liability, arbitration agreements, and where you can sue provisions. Generally they are enforceable unless the consumer proves they are unconscionable or there is a public policy prohibiting them.   When Nomattawatta bought the tickets online, the broker’s terms of service limited the broker’s liability only to what Nomattawatta paid for the tickets.

Limitation of Liability Benefits. Companies include limitation of liability provisions for multiple reasons, including prohibiting certain types of damages such as punitive damages, capping damage exposures to the contract’s purchase price and limiting risk exposure to money damages, and eliminating non-monetary relief, such as an injunction. These provisions can substantially limit a company’s liability exposure. In fact, in one reported instance a company’s liability exposure was reduced by 90% because of the clause.

Tilting the Scales in Your Favor. Consider reviewing your company agreements with your attorney’s assistance. Limitation of liability clauses are common in many different types of contracts and across many industries. Generally-speaking they are more likely to be enforceable when found in contracts between sophisticated parties and employment contracts. Inclusion in online terms and conditions protecting vendors who do not have product needs to be addressed; as yet, default is to the ticket seller. It is not just advisable, but highly recommended, to include these provisions in your contracts.

Remember, though, that your customers are your company’s lifeblood, and treating them fairly will keep them around. This was exemplified during the Super Bowl where ticket brokers were simply refunding the purchase price, while others would honor their verbal agreements to provide tickets at the agreed-upon price.

Left Shark and Lawsuits – Who Gets Bitten in the End?

Posted in *BTW - Noteworthy

Halftime was just the Beginning: A backup dancer in Katy Perry’s Super Bowl halftime show goes viral upstaging the singer, Tom Brady and Russell Wilson for MVP. Thanks to social media, “Left Shark” became a “thing” overnight and an enterprising entrepreneur (Frederick Sosa) sells internet 3D printed figurines to cash in on the immediate success of the carefree creature.

The Real Shark? Katy Perry’s lawyers issued a cease and desist letter claiming copyright violations and threatening a lawsuit. No surprise there.

The Victim?  Protecting some 10 sales of a $24.99 “Left Shark Desk Figurine” versus litigation threatened by a 1,000+ attorney law firm?  No contest – Frederick Sosa of Orlando. Even assuming he did have the resources to fight, it’s not worth the time or the argument. At $24.99 a pop, the economics are obvious. The good news is that Sosa got a lot of airtime for his 3-D online printing business. In the social media world he and Left Shark upstaged everyone on the big stage.

Legal Issues? Plenty to go around on Copyright Law and 3D Printing.

Copyright. Generally speaking: Can a non-generic animal costume be copyrighted? Probably. But, who owns the right to the copyright? If used before, it may be in the public domain. If not, it depends. Who designed the shark costume? What do the contracts say among any number of possible claimants – a third party designer, Perry’s team, the NFL, NBC or someone else? Finally, if it is protectable, was it properly perfected? For the real answer to any specific copyright questions, our very own Gray Reed copyright, trademark and patent experts David Lisch and David Henry can provide the right answers to the hard questions.

Last Bite? After removing the figurine for sale from Shapeways.com, Sosa put his Left Shark figurine design on MakerBot’s Thingiverse site as a free download for anyone with a 3D printer. A modified version is still available as “Blue Drunk Shark.”

3D Printing. The more novel question? Can a 3-D printing-on-demand company be liable for the infringements of its users? The 3D printing industry blog notes that federal law provides a safe harbor for websites and services that provide a platform for users to publish their own works. Manufacturing-on-demand services could be considered analogous to sites such as YouTube and Tumblr; the only real difference is that their products are physical, not virtual. Yet a federal judge ruled last year that CafePress, which makes T-shirts and coffee mugs on demand, didn’t qualify for that safe harbor, allowing a photographer’s infringement claims against the company to proceed. A year ago, Tilting wrote about 3D printing of guns, the fact that the innovative emerging ideas of 3D printing is a disruptive technology and its likely impact on copyright issues. No doubt, more to come.

Tilting the Scales in Your Favor. Evaluate the risk. Be realistic. Identify the opportunity and the near term goal. In this case, better to use sound judgment at the beginning and maximize the social media limelight, then be prepared graciously bow out.

Previous Tilting Articles: There’s a Printer for That!


When Should You Turn Down a Billion Dollars?

Posted in *Way Out - Advice, Money

Oil tycoon Harold Hamm and his now ex-wife, Sue Ann Arnall – whose divorce we have written about before – were involved in one of the largest and nastiest divorces in US history. Just last week, Mr. Hamm sent Ms. Arnall a personal check for $975 million in full payment of the cash award she received from the divorce court. According to Reuters – and amazingly for us non-billionaire types – Ms. Arnall rejected the check because she was afraid that cashing it would harm her chances of securing a better judgment after an appeal.

As litigators, we know that collecting on a judgment is often more difficult than securing it in the first place. So when should any plaintiff turn down a check paying a court judgment in full? Only when (a) they have a truly outstanding claim that will entitle them to a great deal more money than is offered, and (b) they know with certainty that they can collect against their target. It is a rare case where rejecting full payment of a judgment is a wise move, and a rare client with the fortitude to make that call.

In the end, and as Mr. Hamm’s personal fortune dropped along with oil prices, it looks like Ms. Arnall thought better of her initial decision and cashed the check, very likely settling the case.

Settling a case is always a judgment call that calls for collaboration between an attorney and their client and a clear-eyed weighing of the risks and rewards involved. But some cases are easier than others. Our personal opinion on when you should turn down a billion dollars in cash in full payment of a court’s judgment? You shouldn’t.

Previous Tilting Articles: Divorce – Impacting Your Meddlin Hands Partners!; Protecting your Business from a Lack of “Wedded Bliss”;

TAGS: Business, settlement.

KEYWORDS: Business divorce, divorce, company agreement, operating agreement, shareholders agreement, buy-sell agreement, judgment, settlement.


Have You Made Your New Year’s Resolutions for Your Business?

Posted in *Way Out - Advice

With 2015 upon her, Cinda Bossey is making her action item list for her business, Bossey Boots.  Although the bulk of her time and efforts are spent on getting the business running and generating revenue, occasionally she asks herself whether she has cleared all of the necessary legal hurdles.  What should Bossey ask her attorney?

When the calendar turns the page to a new year, many people reflect on what happened in the last year and create a list of tasks designed to improve their business in the upcoming year.  Several years ago Jamie Ribman, who used to write for Tilting, published a similar New Year’s article.  We wanted to remind you of those and some additional legal resolutions to help get your business off to a fast start in 2015.

Get Incorporated

Whether you just started a new business, or you’ve been in business for a long time, it is important to make sure you establish an entity for your business and not operate as a sole proprietorship.  Running your business through an entity may provide tax advantages, and can also help limit your liability.

Review and Update Corporate Documents

As Jamie pointed in his article, reviewing your corporate documents is like getting your annual physical – no one likes it, but a checkup can be a good thing.  Several things may have changed in your business during the past year:

  • You changed locations
  • You added or lost a partner
  • You elected new officers or directors
  • New tax laws

Take the time to go over your corporate documents with your attorney to make sure everything is in order.

Company Agreements

If you own the business with other people, even if it is a spouse or other family member, it is very important to have a company agreement establishing each co-owner’s rights and obligations.  As we have previously talked about on this blog, 50/50 business relationships can be fraught with problems.    Having company agreements in place are very beneficial in the event there is a significant change in your personal life (such as death or divorce) or if you and your co-owners decide to go your separate ways.

Customer Contracts

Abraham Lincoln (who was an attorney) famously said, “He who represents himself has a fool for a client.”  Many clients draft their own contracts to use with their customers, or borrow a form contract used by one of their competitors.  Most business litigation disputes involve contracts that were drafted and negotiated by parties who did not involve an attorney.  If you have just formed your business, use an attorney to help you draft a solid form contract.  If you are an existing business, it is always good to have your contract reviewed annually so that it can be updated based on any changes in the law.  The old adage penny wise, pound foolish applies here: it is better to spend a little bit of money to have your attorney prepare or review a proposed contract than to pay that same attorney a lot of money to litigate over that same contract.

Employee Issues

If you have employees, it is important to have a handbook that sets forth company policies to protect your business from liability.  You want to make sure that your handbook is tailored to your business.  And like your corporate documents, you want to make sure your handbook is reviewed each year and updated to reflect any changes in the law.  And depending on what type of business you are in, you may want to consider having certain employees sign non-compete and non-solicitation agreements.  Our colleague Michael Kelsheimer recently wrote a great blog article on employee handbooks, and I recommend you review it.

We hope that 2015 is a joyful and prosperous year for you and your business!

Finding Fault with Fracing – Lawsuits and Earthquakes

Posted in *BTW - Noteworthy, Property Issues

Lisa Frick, our fictional Denton resident, who collected anti-fracing ordinance signatures to put on the Denton City Ballot now complains that fracing near old Texas Stadium caused earthquakes that harmed her twin sister Linda. Linda wants to sue our November fictional friend Frac Petroleum Company, contending that her Irving home was damaged by the January series of earthquakes caused by Frac’s hydraulic fracing that “felt like a semi hit the side of our house,” causing it to shake so badly it left structure cracks at least a half-inch wide. Can Lisa Frick’s sister Linda sue Frac Petroleum Company?


As the saying goes, anybody can file a lawsuit, but given the current status of Texas case law Linda probably won’t win. Scientific testimony relating earthquakes to hydraulic fracing is not widely accepted. Expert trial testimony requires reasoning or methodology that is scientifically valid and can properly be applied to the facts at issue – it must have attracted widespread acceptance within a relevant scientific community, the Daubert standard.

The Claim

It’s not the fracing, but rather the disposal of the leftover briny water known as “flowback” that is at the center of the hubbub. Typically, millions of gallons of wastewater are trucked from the fracing site to a second well site and injected thousands of feet underground into porous rock layers. Some seismologists say the flowback injection can cause tiny “micro earthquakes” rarely felt on the surface. While recognizing that the disposal process can trigger slightly larger quakes when water is pumped near an already stressed fault, the U.S. Geological Survey reports that only a handful of the 30,000 injection wells across the country have been suspected of causing earthquakes. While research doesn’t prove all fracing causes earthquakes, it does suggest that fracing occurring near fault lines has the potential to cause them.

Possible Lawsuit Claims

Even assuming unlikely supporting scientific Daubert evidence, a party claiming property damages in Texas could not prove that it was damaged under its most probable claim – trespass. The Texas Supreme Court held that damages for drainage by hydraulic fracturing are precluded by the rule of capture – a rule that gives a mineral rights owner title to the oil and gas produced from a lawful well bottomed on the property, even if the oil and gas flowed to the well from beneath another owner’s tract. No earthquake lawsuits have been successful in Texas, only lawsuits claiming damages from exposure to the compounds in the “flowback” – benzene, toluene, ethylbenzene, xylene, and other compounds – that allegedly contaminated adjacent property.

My esteemed Gray Reed partner Charlie Sartain and expert Oil and Gas attorney regularly blogs at Energy and The Law and has several compelling and humorous entries worth your read:

What’s Going On in Denton, Texas?
Truth and Illusion in the Fracking Debate
Frac(k)ing, Parr v. Aruba, and Minority Oppression
In Wyoming, a Higher Burden for Chemical Disclosure Exemption?
Barnett Shale Drilling Increased North Texas Ozone – Fact or Fiction?
Hydrocarbon Exposure Reconsidered

Previous Tilting Articles: No Fracing Way!- Differences Between Surface & Mineral Estate Ownership and Come and Take It! – Denton Ordinance Prohibits Fracing


Sony vs. N. Korea – Let Capitalism Fight Totalitarianism!

Posted in *Weighing In - IMHO, Legal Risk Management

Cyber terrorism, North Korea, Sony, extortion, free speech, The Interview, international relations, journalistic ethics, cyber security… can it get any better than this?

Implausible - a C grade comedy movie The Interview about two hapless TV journalists recruited by the CIA to assassinate a sitting world leader North Korean Supreme Leader Kim Jong-un.

Appalling - Sony’s capitulation to terrorism and extortion and the horrific precedent leaves speechless any advocate of free speech. Who would have thunk it?

What Happened?  Poor judgment closely followed by really bad judgment.

Poor Judgment.

Imagine a large Chinese film studio produces a comedy where President Obama is mockingly portrayed by a bumbling black buffoon of a man who has no business running a country and is flamboyantly assassinated. Americans would be rightly offended and would cry racism followed by widespread condemnation of both the studio and the movie. Although Americans may accept lampooning themselves, much of the world does not. This was not the first depiction of the killing of a living international leader: Charlie Chaplin’s “The Great Dictator” about Adolf Hitler, and “Team America: World Police,” about former North Korean leader Kim Jong Il. The difference? Now you can attack the film studio without bombs and guns.

Really Bad Judgment.

Capitulating to demands of “someone” which, by many accounts, may be multiple groups posing as the “Guardians of Peace.” Even President Obama chastised Sony as doing “the wrong thing when it backed down and pulled The Interview in the face of North Korean hacker threats.” Ignoring the $44 million to produce the movie, by caving to the “Guardians of Peace” Sony emboldens other hackers to harass companies with the expectation of similar results.


Win-Win for Capitalism and Free Speech Sony could have released the movie online through its own streaming service Crackle and distributed it through Netflix, Hulu, Vudu, iTunes, or any one of the other online video services. By reaching more people, safely, Sony could potentially make more money than in theaters. Many would have watched / bought online just to snub the North Korean hackers. And, in doing so, Sony could possibly turn negative press into positive PR.

Good Call – The Theaters.

The theaters made the right decision not to show “The Interview.” Although the Department of Homeland Security dismissed the emails as not credible, the theaters were forewarned. As Tilting reported in a January 2013 article “Have Gun, Will Travel: Owner’s Liability to Patrons for Violent Acts,” the best, and perhaps only, viable defense to the movie theater that suffered a mass shooting was that there was no past history of violent acts and no violence had been threatened.

Tilting the Scales in Your Favor.

Better to use sound judgment at the beginning, than try to catch up later. Poor judgment can be forgiven. Poor judgment followed by really bad judgment is hard to overlook.


Previous Tilting Articles:

An Invitation to Investors Risks Losing Control of Your Business

Posted in *Way Out - Advice, Legal Risk Management

Cleve and I recently discussed how a business owner’s divorce might result in losing control of the business. While loss of business control by marital divorce is a real threat, many business owners lose their companies through “business divorces” after squabbling with their investors.

Some new businesses are overnight successes, like Ben Distiller’s Texas Whiskey Distillery in San Marcos, Texas. Ben’s craft whiskeys caught on with connoisseurs around the world, gaining Ben a great reputation and huge orders for his whiskey – but without the inventory to fill the demand. Although Ben was rich in ideas, he was cash-poor – so to raise money for expansion he sold a controlling interest in his distillery to venture capitalists from California. Ben’s management style clashed with his investors – Ben wanted to maintain the same high quality product he built his reputation on, but his investors wanted to ramp up production to generate cash flow. Ben’s complaints resulted in the investors locking him out of the company he founded.

What can Ben do?

Not much. By selling a controlling interest in his company, Ben has ceded control of the company to his investors – all too common a tale. So what should Ben have done?

Tilting the Scales in Your Favor – Dealing With Investors.

Before jumping on the cash wagon, Ben should have consulted a lawyer before dealing with the venture capitalists. David Earhart, a Gray Reed corporate and M&A attorney, notes that VC’s will almost always demand control of a company, but a clever attorney can help a business owner retain as advantageous a position as possible. For example, when setting up the company Ben could have retained ownership of the intellectual property – i.e., the whiskey recipes – and licensed the IP to the company for a set period of time, thus giving him negotiating leverage with the VC’s. Other things to consider are to:

  1. Stay Capitalized: Too many business owners get into trouble when they realize – too late – that they are undercapitalized. Plan ahead and start negotiations with investors before you need their money – and are desperate enough for it to fully cede control of the company.
  2. Consult an attorney. A good corporate attorney can negotiate with investors and draw up corporate documents that give you the best possible terms for retaining some control over your company.
  3. Structure the Company and Shareholder Agreements: Set up the Company and Shareholder Agreements on the best possible terms on the front end, giving the most leverage possible.
  4. Choose Board Members and employees wisely: Make sure your board members and employees are experienced and capable, to prevent VC’s from demanding a wholesale replacement of your loyalists with members loyal to them.
  5. Get an employment contract: Ben could have secured an employment contract minimizing the grounds to fire him and maximizing his benefits if he is removed.
  6. Get a business divorce: If all else fails, negotiate an exit and a buy-out from the company. You will need an attorney involved to advise you on the best terms and navigate the shoals of possible non-competition and trade secret agreements.

A Real Life Example

Our example above was based on the real-life case of Balcones Distilling in Waco, Texas. After a bitter fight, Balcones’ founder and master distiller was just bought out of the business he started by the investors who bought a controlling stake in the business. For those wise souls interested in good whiskey, more information is available here.

Previous Tilting Articles: Protecting your Business from a Lack of “Wedded Bliss”; How to Dissolve a Business