Unless there are some major details missing here it sounds like the author got terrible legal advice.
One cannot cause another party to onw their own business through essentially a clerical error. Contracts are created out of a meeting of minds, without a shared understanding there could be no agreement. It might have been a gnarly account / tax mess to clean up, but that should have been the extent of it.
That’s true - where or how a bank account is opened has no bearing on a company’s ownership structure, which is established by contract. There is something big missing in this story. Maybe the accountant also worked for his parents and handled everything in autopilot?
Was this really a clerical error? He sold 90% of the shares to his dad and signed it without reading. If he forgot to sign it or signed the incorrect form, I'd call that a clerical error, but does not reading what you're signing also fall in that category?
The clerical error is in treating the money deposited in CD Baby's account as belonging to CD Baby. It's completely normal that one business has funds in its bank account which are actually owed to another entity, and that's the way that it could have been treated here. With some technicalities of law (does this mean CD Baby was running an unlicensed money transmitter?) that fall under the category of "gnarly account / tax mess to clean up".
As long as you can prove that there was no intention of selling and that something like that was not even on the table, then no, merely signing a contract would not be enough.
Of course, usually, it's hard to prove that you didn't know what you were singing. The other party can just say, "ya, that was what we talked about then we drew up that contract."
That's why it's legally necessary to involve a notary for these kind of transactions in Europe. They can be expensive, but not nearly as expensive as mistakes like this.
```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.```
Not buying this...
His father should have told him that he was taking ownership of his company for the loan. The fact is, the guy loaned him $20K, had him sign "paperwork" and didn't tell him is the issue here -- pretty sure right there what he signed was a loan and sales of 90% of the company.
I've read Siver's stories over the years. Entertaining and certainly one of the Ruby guys to listen too... but this is just a bit of a stretch to say "I'm not mad at my Dad." -- he should have been furious unless he knew and this is just another one of Derek's "stories".
Dad sounds like he wasn't forthcoming with what Derek was signing -- or maybe Derek knew and needed a good blog post?
This problem with the IRS seems to have influenced his life direction quite a bit judging from his blog. Transferred assets to a charity; acquired foreign citizenship; renounced US citizenship; moved to a country where foreign-sourced income is tax exempt. Guess it really stung!
Check sivers.org. He has blogged about this pretty extensively. I want to say it was 2010-2011 when he posted it, but my memory is failing. I came away from reading the blog thinking something was going on that he wasn’t mentioning in his blog. He generally posts in a positive tone but some of his choices seemed at odds with the tone of his blog. Namely, sell the business and put the money into a charitable trust, renounce citizenship and move abroad. I also seem to remember that the folks left holding the bag at cd baby weren’t exactly thrilled with his management style.
Not here to throw shade at the dude and I think he definitely has some gems in his blog, but it’s also showing the best self and not necessarily the real self.
To everyone arguing against his story: the trail of paperwork for CD Baby showed that it’s just an alias for Hit Media, so it would be hard for him to argue otherwise to the IRS or any other interested party. If you really did want to operate two separate businesses out of one bank account yes it’s possible but would be problematic without really clear and detailed records, starting with a separate set of books and tax returns.
As far as the story indicates, the separation between CD Baby and Hit Media was just in the author’s head. There’s nothing wrong with that, and I believe him, but the IRS would not. There would be too much incentive for people to generate complex recollections. Not to mention the trouble with business partners whether or not they are family.
Not sure about the tax dodge, but more about the Dad loaning him $20K and getting something from the investment. I think a lot of people just do "DBA's" and think "I'll just cash that as an alias DBA..." -- there's implications to that. But if the money is not a lot, under $10K, it's not worth worrying about
This comment from before https://news.ycombinator.com/item?id=628624 states that a bunch of Europeans got UK limited companies because doing so was easier than their native ones. That might catch some out if there's a 'hard brexit' (although it sounds like it's just admin to fix - get an Irish company and transfer ownership of everything)
Yes, I'm not sure what he's talking about here. The IRS can't dictate how much you sell something for.
They can, however, impute market value. So yes, they could make you pay gift tax. But he says he paid back the $20k loan. Either the $20k was a loan or it was used to purchase shares. It can't be both.
Also, merely depositing money into a specific bank account has no bearing on who or what entity owns the company. You could simply account for the CD Baby funds separately and file separately. Just like lots of small businesses will use their personal bank account for both personal and business funds. Not a good idea from a bookkeeping perspective. But legally and IRS-wise, there is no problem as long as you keep track of things.
There could be a lot of reason's he would have this issue of not being the primary owner of CDBaby. But none of the reasons given are valid ones. Perhaps daddy money bags wanted his cut but instructed his accountants to make up a reason why he had to get $3.3 million without letting the son know that he really just wants a return on his investment.
Reason could be fiduciary duties owed by directors of the dad’s company. As a director you can’t give away company assets at below market value, without shareholder consent. If there were shareholders in the company other than the dad, then those shareholders could have sued the dad for breaching the duties he owes to the company. So if the other shareholders refused to give informed consent to a below market value deal, the only way for it to happen was to do a deal that made those shareholders happy.
Of course, they just shouldn't have included CD Baby as being owned by the other corporation. But, assuming there was some unspoken reason that had to happen, The other shareholders would have needed to be involved in the initial purchase/loan as well.
People shouldn't engage in non-trivial financial actions until they understand them.
The author was taking all sorts of steps that are far beyond what's done in the average person's financial sphere. Pleading ignorance is.... well, ignorant.
Well when your parents have you signing papers you never read from a young age. The lack of responsibility reminds me of another trustifarian; one in the White House
I really wish you hadn't brought politics into the discussion.
But if you insist, let's review a few of Donald Trump's accomplishments:
- Won the Ellis Island Award for contributions to minority communities
- Has a star on the Hollywood Walk of Fame
- Has written (ok, has his name as author) best selling books
- Built (and destroyed, and rebuilt) massive enterprises that employ tens of thousands
- Sawed through the Republican party establishment, then defeated the Democratic nominee in spite of massive disadvantages and polls.
- Was elected US President as the first political office sought
- Has presided over a booming economy that brings record low unemployment to African-Americans and Hispanics, accompanied by rising wages and a roaring stock market
It is certainly true that Donald Trump was born with a silver spoon in his mouth and many huge advantages. The same is true of many other politicians of both parties, but few (are there truly any?) can match the breadth and depth of accomplishments listed above.
You can dislike Donald Trump, and/or his politics as much as you want. But you can't deny he has accomplished a lot, even for someone born to wealth.
But it wasn’t shady. His dad loaned him cash for recording equipment and took equity in the recording studio for collateral. Admittedly it should’ve been returned when the debt was paid off.
This seems unreal, like how could it really fly by that you only owned 10% of a company that you founded, anything even remotely mentioning any sort of contract/shares/business jargon would typically raise ears... not buying this story sorry.
Well, the story doesn't tell what the dad was thinking when he was buying the shares. Maybe his idea was to support his son and sell the shares back to Sivers when he has made enough money, for modest profit. And maybe he considered any profit scenario unlikely^1. But then he forgot about it and maybe Derek forgot about it as well. However might be weird that Derek didn't know that he was selling shares of his company. After all company shares/stocks are a concept that even 10-year olds understand at some level.
[1] In my experience people consider starting entrepreneurs likely to fail. So it might be as well that FFF round is considered a gift from the investor.
How so? There's a lot of details missing obviously. But it could be the family business employs many people in the family, and generations to come. It could be they were scraping by and took a big gamble in buying said shares. Regardless, it sounds like the author wouldn't have been able to take off without help, that the family provided. If they saw it like any other investment, and got huge returns, why are they obligated to give it all back? Sure, I probably would as a father, but I don't see it as assholish not to, factors depending.
This is actually a valid reminder that there is now a generation of people working in the online industry who have grown up without ever purchasing or using a CD, and do not know about the story of CD-Baby. We predicted it would happen back then - it is the reality now.
Sad, because a large part of the early history of the internet is wrapped up in stories about people like Derek Sivers and his company. Perhaps it is a pre-requisite for most startup courses to have a history lesson around those days?
There are many reddit bots that automatically repost old posts for karma. It's conceivable that a similar thing could be done on HN. The fact that Toyentrepreneur has no comments doesn't inspire confidence, but examining Toyentrepreneur's submissions doesn't seem to indicate a bot.
One cannot cause another party to onw their own business through essentially a clerical error. Contracts are created out of a meeting of minds, without a shared understanding there could be no agreement. It might have been a gnarly account / tax mess to clean up, but that should have been the extent of it.