Sweat Equity v. Money Investors: Who Makes the Rules? [The Golden Rule of Business]

Many years ago, while working as the General Counsel to a large public company going through a Chapter 11 Bankruptcy, I learned that the Golden Rule as we all learned it in kindergarten [do unto others as you would have other do unto you] is not the only Golden Rule when it comes to business. I certainly support and believe in the Golden Rule we learned in kindergarten and try my best to adhere to it, but when it comes to money and business, I have learned that the Golden Rule really is: the person with the gold makes the rules.

In business large and small, there is often reward and equity for those who have a great idea or are the work horses driving success (the “Sweat Equity Owner”). Typically, however, the greatest percentage of equity and, hence, the greatest return in pure dollars, goes to the person who put up the money in the first place (the “Cash Equity Owner”). Once the business gets going, this often leads to resentment of the Sweat Equity Owner and frustration of the Cash Equity Owner.

Not surprisingly, the Sweat Equity Owner often feels like he has worked harder and should be compensated for the hard work and ideas. In addition, the family of the Sweat Equity Owner has started to feel the pain of long hours and missed meals and events, resenting the Cash Equity Owner whose life and lifestyle has not changed at all.

The Cash Equity Owner is frustrated because the project is taking longer than expected to show a return and the Sweat Equity Owner continues to ask for cash, primarily to meet living expenses in the form of  salaries for business personnel. The Cash Equity Owner usually has other investments or businesses and more business experience and wants the Sweat Equity Owner to work differently and take his advice on how to get the work done more quickly so that product can get to market faster. His family (or fund investors) wants to know when they will see a return on investment.

Not to sound like a broken record on the reasons for Business Divorce, but there are some things that can be done at the onset of a relationship to avoid these dilemmas. Too often, when the relationship is formed, there is no substantive discussion of duties, timing for deliverables and exit strategy for the Cash Equity Owner. The conversations are very high level and never transcribed into a detailed agreement. One party calls cash loans while the other considers it equity.

In the last 12 months, I have encountered among other missteps: companies in which the equity was never issued despite cash being infused; standard Bylaws from companies like Legal Zoom were used, but no one ever read or understood what they meant; Articles were filed on www.Sunbiz.org indicating the names of managers, managing members, officers, owners … who were not in fact in the positions indicated and who had no authority to act on behalf of the business; domain names and other intellectual property placed in the name of one owner instead of the business …. This list is hardly exhaustive, but all have led to expensive legal battles between business partners on break-up.

When I get the call, whether as an attorney or mediator, that business partners are seeking to terminate their business relationship, the first step in my analysis is to look at the agreements between the partners.  These documents become the guide on how to proceed. If they have been carefully crafted and reflect the partners intent, often the cost to the business as well as the individuals for navigating the business divorce is emotionally and financially insignificant —- Owners typically know what to expect and time is spent implementing already agreed plans. Without these written agreements or mutual acknowledgment of intent of unwritten agreements by the Owners, the cost in the first days of efforts to separate can be thousands, and at times, tens of thousands, of dollars.

At this point you are probably thinking that I am exaggerating, but in fact, if a lawsuit needs to be filed  in order to keep the business running and make it clear who has authority to act, the effort is significant and lawyer time and cost is high. We start by preparing a complaint seeking injunctive relief and serve it with requests for admissions, production of documents and interrogatories. At times, we demand a receiver be appointed if we are representing the Cash Equity Owner and our client is not ready or able to step in and run the business. We seek emergency hearings to ensure if our client in good faith believes irreparable harm to, or waste of, business assets will occur if action is not immediate.  We often need to include third parties such as the domain hosts or banks to require them to turn over account codes and keys or to freeze assets.

Courts do not like to get involved in daily business activities and if the situation  lacks clarity, the court may appoint a receiver on its own. Domains and intellectual property will need to be be place in escrow; bank accounts will need to be frozen or unfrozen; payroll companies, customers, vendors, employees will all need to be notified as to who has authority to direct activities just to keep the business operating  and attorneys will be stepping into conversations with domain hosts, bankers, customers, vendors and employees…. all while on the clock. By the way, the Receiver will hire an attorney as well and both the receiver and attorney will also be on the clock.

Back to the Golden Rule — needless to say, the Cash Equity Owner often has the gold necessary to stay afloat while the Sweat Equity Owner does not.

Although good friends and family members make great investors because they are trustworthy, life changes and needs change over time. By having a frank conversation up-front and documenting the deal, before money is invested, much of the financial and emotional cost can be minimized on business divorce and friendships and family relations can remain favorably intact. Like a good pre-nuptial, shareholder agreements, operating agreements, and buy-sell agreements, can minimize cost in the future and avoid undue emotional harm. To me, it is well worth spending a couple hours in frank discussion and a couple thousand dollars up-front when investing in a business to avoid a later fight at ten times that expense.

At the Walk Law Firm, we regularly advise clients on these matters and encourage open discussion between owners. We can work as company counsel or as counsel to a business owner in helping businesses sort through these issues.

Credibility Education for Tampa’s Small Businesses

Summary: Tampa Bay based company creates partnership with national and local businesses to provide credit and business growth strategies for qualified small businesses.

Tampa, FL – October 1, 2013 – Nationally recognized consumer and small business finance advocate, S.E. Day will host the For Small Business Only, LLC (FSBO) Business Education seminar.  Utilizing strategic alignments with corporate creditors and vendors, the FSBO seminar will provide qualified small businesses with credit building tools that assist in establishing their business credit profiles through credit reporting bureaus including Dun & Bradstreet’s PAYDEX® score.  The seminar is a one day event and will be held on October 22, 2013 at the Steinbrenner Pavilion (across from the Bucs stadium).

“The #1 challenge faced by every small business is successfully establishing business credit without using the owner’s personal credit,” states S.E. Day, founder of FSBO and host of The Legally Steal Show hosted by S.E. Day™.  “At FSBO, we work from the top down through innovation and strategy. We have aligned with major U.S. corporate creditors to provide credit tools and accounts that assist small businesses in building business credit and establishing their PAYDEX® Score.  We are also partnering with local small business owners and thought leaders like attorney Rochelle Walk to provide education and strategies to assist the participant in growing their businesses from sustainability to profitability.”

“Our firm represents and works with many small businesses and we strongly believe that success of small business is fundamental to the success of our economy ,” states Rochelle Walk, President and Owner of Walk Law Firm, PA.  “The FSBO Event will be an opportunity to provide the participants with education  regarding legal concerns and legal planning aspects of being properly prepared to grow their businesses to the next level.”

For further information and registration about the For Small Business Only Business Education seminar, please visit the website at www.ForSmallBusinessOnly.com or call 813-379-7248.  To determine if a business qualifies for credit products through FSBO, please email Info@ForSmallBusinessOnly; or, visit LinkedIn, click on groups, and join the For Small Business Only group today and get registered.

About For Small Business Only (FSBO)
FSBO is a Florida-based company providing qualified small business owners with practical knowledge and applications specifically designed to enhance their business presence and increase their bottom line.

To qualify for credit products and trade accounts, participants with For Small Business Only, LLC must meet the following requirements: be in business for a period of one to two years; possess a current, legal business structure with their state’s Secretary of State; possess a complete business address and business telephone number (no P.O. Boxes allowed, home office addresses are acceptable); and, have an IRS issued tax ID number.

Contact

S.E. Day
The Legally Steal Show
813-379-7248 ph
FSBO@legallysteal.com
www.ForSmallBusinessOnly.com

IP Basics for Start-Ups and Business

When you start a businessintellectual property protection should be a primary part of your start-up business plan.  What intellectually property (IP) has your business developed?  Why should you protect it? And, more importantly, how do you go about protecting the various types of intellectual property that your business owns?  Every business is different and will have different intellectual property considerations, so it’s important to develop a strategy on how your business intends to protect its unique inventions, innovations, and information. It is important to remember that your trade name, ideas,  concepts and customer lists are important assets of your business — assets that need protection.

 

What is your intellectual property?

Intellectual property refers to creative and innovative inventions, marks, designs, or works of authorship that you or your business independently created.  Ask yourself this question, “If you gave this product, information, or design away, could it hinder or prevent you from competing in your industry’s market; would it prevent or impact your profitability?” If the answer is yes, then it is more than likely some form of intellectual property.

 

There are several different types of intellectual property that your business should consider when taking an inventory of its IP for business planning purposes, including: (i)patents, or new or improved inventions, including products and processes; (ii)trademarks, or logos, brands, and designs; (iii) copyrights, or unique works of authorship, including software, articles, books, brochures, artwork, music, etc.; and (iv)trade secrets, or formulas, patterns, compilations used in a business to gain an economic or commercial edge over competitors.

 

In the early stages of your business plan, you should take an inventory of what types of intellectual property that your company owns and which intellectual property is worth protecting.  In other words, examine your business to see what might be eligible for intellectual property protection, including patent, trademark, copyright or trade secret protection, and determine the value that these inventions, innovations, or information provide to your business.  The state and federal protections afforded to intellectual property owners are designed to reward your creativity and provide you with an economic or commercial benefit, so take advantage of these protections.

 

Why should you protect your intellectual property?

Your intellectual property is an asset of your company just like your office, or your bank account.  In fact, depending on the size of your company, and the importance or value of the intellectual property, you can easily include your IP as an asset value on your corporate balance sheet.  Your intellectual property distinguishes you and your product or services from those of your competitors and their products and services.  Just like any other corporate asset, you need to safeguard your intellectual property.  If you fail to adequately protect and police your intellectual property, your competitors, and even worse, your own employees or contractors, can study, steal, and improve upon your product or service and run you right out of the market.

 

Also, social media has exponentially increased the speed of informational posting and exchanges.   This is important for a number of reasons – one, the simplicity of these social media outlets allows you to quickly and easily put information out there that you may have failed to adequately protect that is accessible to consumers, clients, and competitors; and two, a competitor can just as easily steal, improve, and disseminate the information, which could seriously impact the economic benefit of the intellectual property to your business.

 

Additionally, registration is sometimes a requirement for pursuing a legal remedy (e.g., copyrights), so it is extremely important to register early.  And finally, another reason why you should invest now in your IP’s adequate protections is because a lawsuit later will be far more costly than the application and registration fees and the attorneys’ fees for consultation and filing.

 

How do you protect your intellectual property?

It is extremely important to consider and build intellectual property concerns into your business plan. You should educate yourself and your team on the basics of trademarks, copyrights, patents, and trade secrets, so at the very least, you know when something has been created that has the potential to be afforded protection.  Next, you will want to register your IP, either at the state or federal level, depending on the level of protection you desire.  Because of the unique nature of your business, and because the various types of intellectual property are protected in different ways through various registration processes, it is good idea to at least consult with an intellectual property attorney who is familiar with start-up businesses and familiar with your industry.  An attorney can help you file the appropriate state or federal registration, and often such tasks can be completed on flat or capped fees.  They can also help you protect your IP while registration is pending.

You should also establish corporate policies regulating ownership of your business’s new and existing intellectual property.  Often times, it’s not a competitor stealing a business’s IP; it’s a former employee, independent contractor, or partner who undermines the business. Have your employees and contractors execute adequate protection documentation, including well-drafted non-disclosure and confidentiality agreements, employment agreements, independent contractor agreements, etc.

Finally, once you have registered your IP, you should actively police it.  Collaborate with your clients, vendors, merchants, and anybody else who helps you get your product or service into the stream of commerce and keep your eyes open for illegal duplication of your product and/or services.  It is the owner’s responsibility to police its own intellectual property and to insist on legal compliance of the respective laws, rules, and regulations when you find someone infringing upon your IP rights.