Find file
Fetching contributors…
Cannot retrieve contributors at this time
70 lines (58 sloc) 4.16 KB
<title>My $3.3M mistake </title>
<p>
Ever since I was a teenager, my dad would occasionally send me things to sign. Things for the family business, where I was part owner. I didn't understand the complexities of it, and didn't need to, so I'd just sign without question.
</p><p>
In 1994, as I was recording my first album, I needed to borrow $20,000 to buy studio equipment. He said, “Instead of lending you money, start a corporation. Then the family business can buy shares in your corporation.”
</p><p>
So I did. Because my band was called <a href="http://sivers.org/music">Hit Me</a>, I called the company <a href="http://hitmedia.com/">Hit Media Inc</a>.
</p><p>
My dad's company bought some shares, and that helped me finish my album, and continued to run my record studio at a profit.
</p>
<hr /><p>
Four years later, I was living in Woodstock New York, and started this little hobby called <a href="http://www.jpfolks.com/ECRoadTrip00/ECpages/cdbaby.html">CD Baby</a>.
</p><p>
The first time I got a check addressed to “CD Baby”, I brought it down to the bank and told the bank teller, “I need to set this up as a new business, so let's open a new business account.”
</p><p>
She said, “Oh you don't need to do that. You can just make it a <a href="http://en.wikipedia.org/wiki/Doing_business_as">DBA</a> on your Hit Media account.” (At that time, Hit Media was a recording studio and booking agency.)
</p><p>
Seemed a little strange since CD Baby was definitely a new business, but it saved 10 minutes and $100, so I said OK.
</p>
<hr /><p>
Four years later, CD Baby is doing really well. A few million dollars in sales. Probably half a million dollars in net profits. I paid my dad back the $20,000 I borrowed.
</p><p>
I call up my accountant in January to say, “OK. I got all the Quicken books balanced. Should we file early this year?”
</p><p>
He said, “Oh, you don't need to file. CD Baby is just a lineitem on your dad's company's tax return.”
</p><p>
I said, “Uh... what?”
</p><p>
“You didn't know that your dad's company owns 90% of CD Baby?”
</p><p>
“Uh... what?”
</p><p>
“You should talk to your dad.”
</p><p>
Yes, it turns out that one of those pieces of paper I signed without question had sold 90% of the shares of Hit Media Inc to his company.
</p><p>
That would have been fine, except the bank teller advised me to make CD Baby a DBA of Hit Media, so now that meant my dad's company owned 90% of CD Baby.
</p><p>
FFFFffff.... SSSSssss.... RRRRrrrr.... Oh, what a sinking feeling.
</p><p>
I couldn't be mad at my dad. He was doing me a favor in 1994, and thought I knew the deal. Nobody thought my little hobby was going to turn into a multi-million-dollar company.
</p><p>
It was my fault for not reading what I signed. My fault for letting a bank teller's quick advice make that major decision for my business structure.
</p><p>
What made it even worse is that I couldn't just buy it back for the original $20,000. The <a href="http://www.irs.gov/">IRS</a> won't allow that. The only way was to pay full market value, as determined by an outside valuation company.
</p><p>
In the end, I had to pay $3.3 million dollars to buy back that 90%.
</p>
<hr /><h3>Lessons learned:</h3>
<ul>
<li>Really understand something before you sign it.</li>
<li>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.</li>
<li>It's also very worth paying for an hour meeting with your accountant, and asking 100 questions there, too.</li>
<li>Each separate business venture should usually have its own <a href="http://en.wikipedia.org/wiki/Limited_liability_company">LLC</a>. It's very cheap through companies like <a href="http://www.legalzoom.com/limited-liability-company/limited-liability-company-overview.html">LegalZoom</a>, and well worth it.</li>
<li>This was definitely all my fault. No one else to blame.</li>
<li>... plus whatever other lessons you're going to teach me in the comments, below. :-) </li>
</ul>
<img src="http://sivers.org/images/contract.jpg" width="500" height="400" alt="http://www.flickr.com/photos/25143703@N04/2491903629/" />