In any new business or in any new industry it is easy to get excited and emotionally attached to the idea of striking it rich. Here is a story I see on a fairly regular basis, especially when it comes to small businesses in new and emerging industries (e.g. Cannabis):
You are looking to invest into a new industry. Maybe you met someone through a friend, or at a seminar or industry gathering, and they present you with a business plan. You are presented with an offer: you put money into the business and this other person will do the work and get it off the ground. “It’s a great investment.” “There has never been an opportunity like this.” “Let’s get you retired.” Words and phrases like this are what you will probably hear.
Some months pass and your investment has shown no return. In fact, you have been asked to invest even more. This makes you stop and think. Did you take all the proper precautions before you turned over your money? A lot of people believe they did what they thought they were supposed to do. They made sure the business was actually filed with the State. They read and signed a partnership or operating agreement, often drafted by this someone else’s lawyer (generally not designed to protect them). Then, they saw a few tasks finished. The business license was filed. The facebook page was created. A lease was even signed. There was just enough accomplished to make an investor feel satisfied.
Now, the money has run out. You have been asked to invest more and told that things are close. “It’s going to work. It is only a matter of time.” Of course, while the business is getting off the ground, the one responsible for doing the work has been drawing a salary. At first it seemed fair, you were told it would take about 3 to 6 months to get this project off the ground. 1 year later, progress has stalled. You realize you do not really know what this person has been doing for months other than taking a salary from your money. At this point, most people tell me they feel like they just got robbed.
As a lawyer I have to tell people all the time that, unfortunately, it is very difficult to prove this person did anything wrong and it is very expensive to even try.
We do not want this to be your story. There are many ways to keep this from happening, but you will have to be diligent on making sure there is accountability throughout the entire business process. The most important thing you can do is maintain control of your investment, in other words, the money. Using a well-thought partnership agreement and practical solutions to control the bank accounts. For example, something as simple as requiring two signatures on a check can end up saving you valuable time and money. This, and other precautions need to be taken long before any money exchanges hands.
This is the value of your business lawyer. You should work with one before you put anyone else in control of your money.
Chase Morinaka practices law in Portland, Oregon with a focus on Small Business Law,, Personal Injury, Estate Planning, and Elder Law.