Piercing The Corporate Veil
Yet another MBA Monday topic comes from the comments of last week’s post. This series is turning into a conversation which makes me very pleased.
Mr Shawn Yeager said:
As a recovering lawyer, and a serial entrepreneur, I constantly have associates, friends, and family coming to me for advice on formation issues (amongst other things). I think your high level overview leaves out something that always comes as a surprise to these people: the concept of “Piercing the Corporate Veil” of liability protection.
As you know there are certain rules, forms and procedures which must be followed as a liability shielded entity, be it S Corp, LLC, C Corp (or even as a limited partner). To not follow these forms strips the liability protection away from the company and exposes the person to personal liability as if they were a sole proprietor. For some reason, people are always surprised by this. Situations arise where records are not kept, annual meetings are not held, control is exerted, or personal funds are co-mingled with the business. When the company is involved in litigation, the owners find themselves on the hook. Depending upon the jurisdiction, any of a laundry list of things could wind up stripping the protection away.
I said last week that forming a company is the best way to “putting a buffer between you and the business.” But as Shawn and others point out in last week’s comment thread, you can’t just pretend to be a business, you have to be a business.
“Being a business” means separating your personal and business records, separating your personal and business bank accounts, treating the business as a real entity, having board meetings, taking board minutes, doing major activities via board resolutions, following “due process.”
If you don’t behave as a real business, you could find yourself in a situation where someone, most commonly someone who is suing your business, can come after you (and your business partners) personally. And then you are going to say “but what about the liability limitation the business provides?” It may not be there for you.
That’s called “piercing the corporate veil”. And you should take that threat seriously. So once you create a company, treat it seriously, follow the rules, and do it right. Once again, if you have a good lawyer, he or she will lay this all out for you and even give you many of the tools to do this stuff right.
Comments (Archived):
damn boss this is already a pretty paranoid post….wtf am i supposed to do for monday night koonomics?!?!?!?for newer comment readers, monday night koonomics (MNK) is where i take fred’s original post in MBA mondays and interpret it through a conspiratorial, paranoid, and distrustful lens (see the comments sections of previous MBA mondays posts). in this particular instance fred beat me to it, so i fear there is nothing i can add, aside from the boringness of agreeing.would appreciate it if you don’t steal my thunder next time boss.
than just do piercing kid. forget the corporate 😀
LOL
You should be a lawyer. Paranoia is the ideal personality trait for that profession
plus i like to argue and jump into beefs that have nothing to do with me. damn i definitely should be a lawyer! 😀
And I enjoy vicariously reading those comments.
Absolutely Fred. Indeed, I think my #1 job as a corporate lawyer is to watch my client’s back — and to do so effectively I have to be paranoid and constantly be thinking about what could go wrong (particularly in a complex transaction). On the “piercing the corporate veil” issue, your advice is sound; however, it is still relatively uncommon and a difficult hurdle if basic formalities have been followed. Cheers, Scott
Kookonomics has been disrupted, by Fred no less. Time to contact your attorney Kid
will need to license your patents on communication and cognitive processes first (as well as aviah’s patent on lawsuits)
Anything for a fellow Fredlander
lol, that’s the spirit! spoken like a true patriot!!!
Very important stuff. So easy to forget, it’s always in the chores department, the bunch of papers under the bottom tray which you always tend to delay for next week. It’s like the anti-fire equipment. You will rarely notice it, but if fire starts – you DO want everything working and in place.Here is another idea in the Monday MBA startup ideas section: a simple corporate liabilities and procedures tracker, with email reminders, document archive, and online ready made templates to fill.
“Company in a box” I bet there is web software out there that does this
I don’t know. Legal Zoom, for instance, doesn’t even let you customize/pre-populate docs online.I understand the legal concerns about crossing the line between offering a useful tool and giving advice (that’s something I’ve had to deal with on my own sites), so I wouldn’t be surprised if fear of litigation has stymied the development of the “company in a box” web software you envision. That would be too bad though. I’d be pleasantly surprised if someone has developed this.
Actually I never understood this either. There are lots of documents you could just pre-assemble and have people populate at will for all sorts of matters…It would make life so easy.
There’s a terrible MLM ponzi scheme called Business in a Box. I wrote up a squidoo lense on “entremaneur” in late 2008
Is that the one where they sell you a logo and a business idea?
I believe so, I read the description and thought to myself, who would buy this product?
Business (thats put you) in a Box
“Company in a box” will get you only so far. Each company has its own unique DNA that should absolutely require a discussion (probably a deep one and ideally including a qualified attorney). Decisions you make could affect you for years (as we’ve seen regarding the requirements of S-Corp’s and not following the rules, as an example).A rule of thumb we used when starting our company – we (of course) thought we were going to conquer the world and have customers paying tens of thousands of dollars for our product and services – so we allocated 1% of anticipated sales for administrative legal efforts. It turns out that wasn’t enough, but having the mindset that we were going to pay money up front put things in the right perspective. It also gave us incentive to do it and finish it, since we were spending hard dollars.There’s no way you do this right without a qualified lawyer and LOTS of discussion between the partners – and even then you’ll make mistakes. You also better have somebody (founder or otherwise) who is uber-organized and will make a priority of taking care of the fiduciary responsibilities – they are boring, nobody is putting a gun to your head to get them done, but they will kill you later on if you don’t do them. Many entrepreneurs react best under pressure of a deadline, but that isn’t the case here – so organization and planning are a skill you need at your startup.
Partnerships are fragile relationships. Even corporations which are closely held by a bunch of co-founders operate like partnerships.You need an “operating agreement” — in addition to a partnership agreement — which spells out the roles of the partners and the relative contributions of the partners. One partner may be wealthy (I certainly hope so, LOL) and one partner may contribute sweat equity. This is a “talking” document not a legal document.Know what everybody is contributing and how hard everybody is willing to work and for how long. Sometimes a guy just wants a 10% carried interest, who really knows unless you talk about it.Revisit this document once a year on the anniversay of the founding of the company.I worked for 13 years with a single partner without a single untoward word. All because we visited a couple of times per year to discuss what we each wanted to do. When we went to the pay window, I got a disproportionate amount of the profits because I had contributed more and we both knew it. Because we had talked about it for years.I am convinced that people are reasonable if you can just keep the conversation going through the years until you are an “overnight” success.
Keep all your corporate records in a single binder with the charter, bylaws, annual meeting notices/agenda/minutes, board meeting notices/agenda/minutes, business plan and audit.Keep a copy at the corp HQ, one at the CFO’s home and one w/ your attorney.It is really very, very simple but it requires just a bit of discipline.I have over 50 wholly owned corporate subsidiaries and it is as easy as pie, if you set it up right from the start.
You really can’t emphasize strongly enough about getting a good attorney. And not just someone from a big firm, but rather someone who understands the start-up world. Generally their fees are somewhat lower than big firms but also their expertise in doing the things that Fred mentions (like Board activities) to make sure you keep the corporate veil as strong as possible. And god forbid, if you run into cash flow problems, that you make payroll and pay your taxes.
Couldn’t agree more on this Rob. Having an lawyer as an advisor early on under the right structure is a huge stride forward.
Right on.Your relationship with your attorney should not end when you’ve been organized– a good one will stay in touch and make sure that you’re maintaining proper corporate form and organization. This is often much more difficult for start-ups, small, and family business than it is for long-standing corporations because of how casual and hands-on things seem. But, if you want to maintain your buffer you have go through the steps. A firm/attorney that spends a lot of time with your kind of business will be able to provide this service better than a white shoe attorney.
@MattMireles & @Cdixon just posted on this not too long ago. I’d share their posts but I’m cut and paste impaired on the mobile suck-form. Who would have thought cut and paste flawless and simple would be the killer app of mobile
In the relationship with your attorney, I strongly suggest that you probe for a good intellectual fit and a bit of wisdom. Don’t go w/ the young wizard sharp transaction attorney who “knows everything” and can get it all done in a week.Find an experienced guy who has seen a few deals go into the toilet, who has had to unwind failed businesses and who can provide wise counsel. An attorney must be a counselor as well as a transaction dervish.Talk WITH your attorney and don’t talk TO your attorney. Get an education in the process.
A great opportunity to test your social skills: work hard to become friends with your attorney (in a genuine way). Do them favors. Send them business.The more they know and care about you, the more they can help. And the “lighter pen” they might use in tracking their time on you. A smart lawyer with a light pen is a very good thing.
Creating an entity to protect yourself and to follow “due process” is but one aspect for incorporating a business. How else would you conduct any significant sales, raise any financing (venture or otherwise), and / or be treated with any credibility as a business if you didn’t incorporate?I can’t imagine any self-respecting corporation, banker, venture capitalist, supplier or even individuals who would do business with you if you were not incorporated, even if you had a credible history with them.So I think MBA Mondays is a great series Fred, but frankly and respectfully aren’t we simply re-stating common business sense in this post? But I guess that’s the intent…
It is not the initial corporate organization which is the challenge, it is the continuing maintenance of corporate formalities which is where the mischief lies.
You just deal with it, don’t you? A smart entrepreneur may however hire someone to delegate these tasks to, so that he / she can focus more on making money – the whole point of the exercise.
I espouse 360 degree business knowledge. Unfortunately, the days of being finely product focused and “buying” the seemingly complementary skills are gone.We all must become expert on running a business, producing a product within that framework, corporate governance, management, finance, negotiation, marketing (including social media), regulation, performance measurement, HR and taxes.One doesn’t have to become expert but one does have to become knowledgeable. The good news is that you can.
This stuff is so important.And yet in business school my classmates (and somewhat myself included) viewed Legal Studies with near-total disdain — right up there with Group Dynamics and Marketing classes. Basically, a prime opportunity to play B-School Bingo, or get a jump-start on the Finance problem set.For kids gearing up to get regular jobs, “piercing the veil” is totally esoteric.And like the “I’m so bad at math” realtor who overnight is able to calculate her sales commission down to the penny at a stop light, those of us who have or will definitely will deal with this are totally engaged.Which leads me to wonder: should Business Schools more intentionally and explicitly bifurcate their students and curricula into “Job Seekers” and “Job Creators”?Would raise the level of discussion for everyone.
“Which leads me to wonder: should Business Schools more intentionally and explicitly bifurcate their students and curricula into “Job Seekers” and “Job Creators”?”It seems like they already do, for the most part: I went to a presentation once by a professor of entrepreneurship at Columbia’s business school, and he estimated that less than 5% of that school’s graduates started their own companies when they graduated. There are some exceptions — I know there are a few schools that supposedly focus on entrepreneurship — but the main point of a top tier MBA seems to be to get a salary + bonus job in finance or consulting (or perhaps even industrial companies these days). Of course, to the extent that a newly-minted, top-tier MBA can get a high-paying gig out of the gate (perhaps less so today), this represents an opportunity cost for starting his own business.For non-top tier MBA students, the high-paying job in finance or consulting seems to be more of an unfulfilled promise. I’ve had an idea for a few years of how non-top tier MBA programs could be converted from factories that produce a credential of dubious value to fountains of entrepreneurship, but that one is filed in my “grandiose ideas” file for now.
That’s probably true.But then — are startups not getting “the best and brightest”? (however defined)Should they?Does it matter?
Isn’t “the best and brightest” specific to the situation?Maybe the best entrepreneur for the unique situation will come from the most (seemingly) unlikely source? With the most unlikely (seemingly) background?
Indeed. Which is why I put it in quotes!
Those questions lead to other questions re the best allocation of talent in our economy. E.g., are we better off when our best & brightest are figuring out ways for Greece to fudge its economic stats, or when they are working at innovative start-ups? If they work at start-ups, are we better off if they are working on social media apps or on medical robotics? And so on.As tempting as it is to make invidious distinctions between different ventures, it’s worth remembering the dark history of centrally-planned economies. That said, I think some sort of industrial policy for the U.S. probably makes sense. But I’ll nip my digression in the bud here.
Yeah, I’m just posing the questions (I’m such a poser).TRUST ME — central planned economies = not my style. My parents drilled that into me. Their families each lost big businesses that they’d built up. One grandpa was forced to work as a clerk in the produce brokerage firm he had built from scratch. The other grandpa was a surgeon who built and ran a surgical center and hospital. It was all taken away. They built great businesses and created jobs for many people, and they each died basically poor.For US industrial policy, I’d probably keep it at the level of encouraging companies that create jobs, and end the involvement there. Wouldn’t steer between categories of startup. Let the market speak.
I think US industrial policy ought to be for there to be more industry here.Tereza, when you have a chance, can you drop me a line through here? TIA.
Problem is some folks never know which they are until they are “out there” and many are both during their careers.In many ways — many good ways — business school is just a big buffet at which you get to sample all kinds of tasty morsels which prepares you to decide what the main course is really going to be.The great thing is that you can do 4-6 different things before you are done.
JLM you always speak truth and I don’t disagree.And it is highly possible that my view of b-school is dated.But I’m active in events now and have been frankly disappointed at how formulaic the students I meet can be.As someone who entered a Top 5 school with killer entrepreneurial chops (we had launched the first commercial TV network ever in Eastern Europe and the most successful launch of all time…but alas I was not a principal), the combo of a mountain of debt and an anti- entrepreneurial culture and lucrative corporate opportunities was that I postponed my dreams for a dozen years.But hey, I’m not bitter! :-)Now back to our regularly scheduled programming on Piercing Veils…
Here’s the thing — you were already in a great B school before you arrived at Sodom on the Schuykill (moi aussi) in that you had the experience of a business environment which was so raw and new that it had not yet been written down and translated into the text books. You were the laboratory before you got into the classroom. That is an invaluable and world class opportunity.Likely one of the most quickly developing such opportunities in that the —ism was controlling the market opportunity. In some measure this is what is happening w/ China. Commun—ism is giving way to capital—ism at the speed of light.LOL, already the Chinese are better capitalists than we are. There is a very pointed article released today about a Chinese general who has written a book and who says that the Chinese will be, if not already are, a better and more pure capitalist country than the USA. A freakin’ Communist General!You think the government allowed this General to write this book on their time? For nothing?As to living your dreams, they never really stop — they just get more attainable and a bit bigger.Everything is preparation for the next thing. Whe you are ready, the world will be ready.Make no mistake the Captain of a rowboat and the Captain of the QE II are both Captains. Entrepreneurs are just the same.
JLM — may I call you “Captain” JLM? Fredland has a Boss and a Kid. Need a Captain. And “Sodom on Schuykill”? Priceless.I totally agree on the -isms. Navigating and surviving a godawful system like communism made a lot of people very, very TOUGH. Very facile with juggling multiple (and at times opposing) agendas. Lots of complexity, ability to navigate gray.And yes, there was that little ethics thing-y. I found that lots of people were naturally (or ‘nurturally’) highly ethical. Others would never get there (just like in the US). But, for sure, the manifestations of unsavoriness were quite a bit wilder and bordering on inexplicable.I knew someone who was shot and killed over debts. I was threatened to not get paid for a job I was promised unless I performed sexual favors on the head honcho on a recurring basis. What a creep. I walked out and spent a month eating just frozen spinach and noodles because that’s all I could afford. A reporter buddy of mine walked into a factory, for fun, to see if he could buy Semtex (plastic explosive). They said yes and he had to do fast thinking on his feet to gracefully back off the request (“uhh…just kidding! I really don’t need any right now! It’s OK — You can keep it!” trying to avoid touching the crumpled paper bag). Totally crazy sh*t was happening every day.No chance in hell was I going to go back to my dad with my tail between my legs. Absolutely no way. His fondest dream was to have his daughter work for IBM.And oh, by the way, some of the least ethical people doing business there were Westerners, and yes, Americans too.I didn’t even include these things in my b-school application years ago. Didn’t think anyone would believe me.You tell good stories, Captain, so I hope you enjoyed this one.
Damn good stories!I have always wondered what would have happened if Paula Jones had had a digital camera or had come running out of that suite at the Ambassador Hotel in Little Rock w/ Bill Clinton’s boxers? Guys are just so dopey when it comes to those type of things.Of course, I must admit in the spirit of full disclosure that my greatest regret in life is having been born after the age of dueling. I could have saved considerable sums on litigation if I could have simply settled things at 10 paces! I am a very good shot.
i don’t think your view of b-school is dated. in fact, i bet it has gotten worse. school is stupid and a waste of time, i encourage everyone to drop out. not to mention the price tag on these places…..lol. especially now that the wall street glory days are coming to an end and will never return; today’s b-school grads can’t even dream of having a high paying meaningless job pushing paper around like yesterday’s b-school grads did.
At one point does it make sense to separate corporate liability (and perform due diligence beauracratic details)? Before revenues? I had happily put off any of these details until I hooked some traction, or accepted seed funding.I haven’t even done my taxes yet.
If you would allow me to ask some polite questions and by way of them make a couple of observations…How would you accept seed funding if you didn’t have a company. Will the investor write you a personal check, and make you sign an IOU for shares in your eventual company that you will incorporate at some point of time in the future?Also, what would you define as traction? I would think that means when it starts generating revenue and / or make profits…in this context I am guessing it can’t be defined anyway else – otherwise it would not be a business.Following from that, how would any customer impart any significant / recurring money to you if you didn’t have a company? Don’t they need to take care of their potential payment and tax liability risks?
As far as I have researched, incorporation before revenue or outside funding is premature. An LLC is a good idea, but if I set up vesting for myself and cofounder before investors I may have to rework the terms to their satisfaction and if the corporation is created in a way that’s untenable it may be disregarded and a new entity formed.Traction will be 10 users who are fanatic about the idea and begin harping on their closest friends to join, or develop apps for a public interface we create. Traction would be one or two popular sites that decide to display our personalized ad widget and compare it to banner revenue for a few days, a week or a month (which is usually very small anyhow).Traction would be me convincing you in this micro exchange that the concept of social expression is a form of intent that web services can leverage to make their services better. I’m the one that’s going to convince a significant fraction of the web that doing so benefits both users and businesses by personalizing content to each visitor in a way that users are comfortable with and have direct control over.
Great distinction and clarification. There are not too many court cases (or IRS rulings, for that matter) that will ever favor form over substance–which is sadly misunderstood by a lot of people.
It really is substance over form — though the “form” has to be there to begin with (i.e., you can’t claim after the fact that you meant to set up an LLC), Courts will overlook tons and tons of documentary missteps so long as it seems that, in the big picture, you were genuinely running a business rather than raising a liability shield.
Agreed. That’s what I was outlining–that courts are always looking for substance over form.
Having just spent over $400,000 defending our corporate structure (multi-state, multi-unit highly regulated and licensed operating business) against a “piercing” attack from a southern state Department of Revenue and Licensing, I can assure you that following corporate formalities is very, very, very important.The main benefit of a corporation is the protection afforded its shareholders from the liabilities of the corporation.To obtain this protection, the corporation must really BE a corporation and must conduct its business AS a corporation.A corporation must be properly formed, have a charter, bylaws, officers, directors, annual meetings of shareholders, board meetings, minutes and a business plan.The danger signs are failing to follow and document corporate formalities, undercapitalization (remember a big insurance policy is evidence of capitalization), an alter ego who controls the corporation’s fortunes, the commingling of personal and corporate assets, non-functioning officers/directors and the way the corporation presents itself in the marketplace.If you are not scared enough also consider that while there has historically been a presumption that corporations do exist for the purposes intended and the burden of proof has been high recent cases have lowered the bar significantly — courts have allowed creditors to go after persons or entities who “control” the enterprise’s fate (that might be a VC) even when not employees, officers or directors and have lowered teh threshold of proof to to a “preponderance of the evidence” rather than “clear and convincing evidence”.It is a hard cruel world out there, so buckle up your corporation and follow the rules.
So even with the right legal shielding startups can still be bled dry by legal fees. Terrible.
In defense of the legal field, this is really a little bit now or a lot later situation. Go through a proper organization with an experienced attorney and then get a checklist of things you need to do regularly to maintain form. After that your attorney shouldn’t have to do a thing but maybe give you a call every couple of months to make sure you’re keeping up with the list.Or, skip the first two steps and pay 5 associate’s salaries.
Got it, good habits now over paying for it later
Ahh, yes, I have paid off many the mortgage of a legal professional.Of course, I have also avoided the noose on many, many ocassions by following their good advice.Take your attorney to lunch before your pants are on fire.
Fawk.JLM your showers of reality always bring the convo to the next level.Like.
showers of reality. I like that. Though this case seems to me like a pool, maybe a little lake 😀
A tsunami. And it really messed up my hair. Sheesh!
BTW, we won. The cost of losing would have been in the several millions. Sorry.
And all so “value adding”!Well, you know what they say: “Little kids, little problems. Big kids, big problems.”
When things go wrong and they involve money, all the dominoes start falling or are pushed.We all have to get into the mode of 360 degree learning and competence. While I have full tuition for many of life’s lessons, I can honestly say that they are not really all that complex. The problem is we all blow them off when they are cheap and often have to pay for them when the fix is expensive.Be careful with whom you do business.Obey all corporate formalities.Never litigate, arbitrate.Use sunscreen!
BE CAREFUL WITH WHOM YOU DO BUSINESS!
damn JLM this post was filled with so much reality-based bad news i had to do a double take to make sure i didn’t write it! 😀 thanks for dropping the knowledge.
Yeah Kid — I’d take JLM’s ‘reality-based bad news’ over people’s conceptually-based bad news any day of the week.
JLM, I’d like to talk to you more offline. You can contact me at messel at victusmedia dot com or gmail dot com.
Bottom line: You aren’t the “owner”….you’re a “shareholder”. Behave as if you have 1000 shareholders from the beginning, and let your shareholder self hold your CEO-self to the highest standards of transparency.
That captures a straightforward perspective, that was Swantastic
Prudence. We prefer to call it prudence. :)Having been on both sides of the fence (business owner, now lawyer) I view my job as identifying as many ways as possible that things can go wrong–not to dissuade or discourage, but to protect my clients. A lawyer who does not help you see (and mitigate) the downside is a bad lawyer. But I think the different between a good lawyer and a great lawyer (and this isn’t mine, but I can’t remember the attribution…) is that a good lawyer spots all the problems–a great lawyer offers solutions to them.
I violently agree.Well said, dgulbran.
How do family held companies work in all of this? I mean a five year old isn’t really involved in a company (yet, but it’s a family business)Where does the veil begin and end when it is a family business (always been curious about this one…)
Family businesses are a beast unto themselves.They still have to (or should) incorporate. They can be incredibly messy.The five-year-old may or may not own a piece of the business. If they do, their piece is administered by a designated guardian or trustee until they reach majority or a designated age.One complicated part of family businesses is succession planning. It often fails.Incidentally, divorces in family businesses are highly complicated, whether or not there are children involved. What had been used as personal assets are often embedded inside the company and thereby protected from the divorce. I’ve seen women unable to exit highly abusive relationships because they’d end up with absolutely zero and lose their kids too. There is almost no paper trail on what to them were functionally “personal” assets.Especially if they are cash-based businesses like restaurants. There may be a lot of taxes which haven’t been paid in the past and therefore Fort Knox-like resistance to revealing the guts of the business. Lots of legal posturing, and they can drag it on forever.At age 20 I was a romantic. At almost 40 and having seem some friends have their asses handed to them on a platter. I wouldn’t marry into a family business without a serious pre-nup.Lucky for me and my husband, we had no assets to start with — not an issue! 🙂
Note to self: as anti-feminist as this seems, hand down when I am oldhard assets. Seems much easier in a situation like this…
Family operating businesses are a nightmare agreed.Having said that, a well crafted family limited partnership is the greatest tax planning vehicle left to pass along assets from the parents to the children when the assets are real estate, operating businesses (property formed) and other illiquid assets but ones which can be liquidated and converted into cash. You just need a bit of time to increase the next generation’s ownership of new assets and reduce the former generation’s ownership of old assets while bridging the gap with low priced debt.The other wonderful remaining planning mechanism is the plain old fashioned “like kind exchange” — 1032?
Corporate structure and Paranoia . . .Paranoia issues (pro/con, you/me, whatever) notwithstanding, the issue ultimately falls in the place this kind of issue MUST fall, by definition: Do your homework.If you believe their propaganda, there has never once been a piercing of the veil in the State of Nevada “except in the instance of fraud”. Presumably, this means that NV is “the place to be”, supplanting old standby Delaware.Of course, that still leaves the question of when the fraud occurred, on whose behalf, and how that was decided . . . and by what (type of) court in what jurisdiction. And from reading the opinions of lawyers both in this stream and elsewhere it ALL still sounds like a crapshoot. Except the part about due diligence.Oh wait . . . that’s business, every day . . .Jeff YablonPresident & CEOAnswer Guy and Virtual VIP Business Change Coaching and Virtual Assistant ServicesAnswer Guy and Virtual VIP on Twitter
Two words about the corporate veil:Richard Scusci – Heath SouthAnd – WorldCom
Richard M Scrushy — garden variety crook who successfully gamed the system and was blindsided by an earlier less complex fraud. In prison as we speak.Should have been publicly beheaded on the steps of the NYSE.Always short any company who builds an elaborate new headquarters and names the street after its CEO.
I’m suspicious if I see a bunch of brand new cars in the start-up’s parking lot just after the first round of funding comes in. Too many new cars, too much new office furniture, . . . more ego than attention to business . . .
Of 20 persons on the Obama administration car committee — the wizards who were supposed to put the Humpty Dumpty General Motors back together again — 18 drove foreign cars, one had an old pick up truck and the other did not drive.Hmmm, I wonder how they had such a hard time making GM work? Hmmmm!
No one from Detroit? No one who had a family member who worked on an assembly line? Or in a little job shop down the way from the factory who relied on prototyping work? No one who knew what a CDL was?(I’m just guessing, of course.)
Good rule — never, ever drive a nicer car than the guys providing the money! It just pisses them off.
There are also some states that allow the veil to be pierced in certain legal areas. I had a friend who founded a VC backed startup that failed around 2001. As they were growing, they inadvertently had employees sign an employment contract which was meant for executives, and contained generous severance benefits. When the business failed, my friend learned that labor disputes can pierce the veil in some cases in the state of Washington. Some ex-employees sued the founders. Ultimately, they lost personal assets in the settlement. That shocked me (and him). It was the kind of legal error that can happen pretty easily when you are focused on growing a company, and not on issues that appear to be secondary (‘we just need an employment contract, find one on the internet if you don’t hear back from the lawyer by Wednesday’). But it had very serious consequences down the road.
An employment agreement is a dangerous document and should only be used for a CEO or CFO.The best arrangement is an “at will” employment relationship with a “basis of employment” document outlining the unilateral expectations of the employer including the safeguarding of trade secrets and proprietary information.If you are going to solicit a non-compete, then you must provide independent compensation — such as additional schooling, continuing education — for the non-compete. You cannot obtain an enforceable non-compete by just paying someone their salary.The best thing is to treat your employees well. Always contemplate how bad things could get if you lost a specific individual and then play defense before the problems arrive.
i hate employment contracts and avoid them like the plague. however, i do believe employment contracts for a hired CEO are appropriate. i still hate them.
I hate going to the doctor for my twice a year physical. It has ruined a perfectly good trout fishing friendship as it is difficult to be friends with a guy who puts his fingers in such private places while talking about fly fishing. Nonetheless, it is good for me — the physical! I hate it but I do it religiously.A good CEO contract gets the CEO’s fingerprints on the murder weapon and ensures commitment to the company. It also spells out the departure mechanism when the CEO is canned or otherwise leaves. Not a bad idea.The greatest failing I have ever detected from a Board is an unwillingness to appraise the performance of the CEO on a regular and personal basis. The fact of the matter is everybody wants to be graded and most folks know what they are doing well and poorly.I cannot tell you the number of folks I have seen get better by a bit of careful focused attention.
Just to provide some clear, focused attention about why I ‘liked’ this comment:1. the wind up paragraph was so out of left field I almost dropped my phone on the sidewalk laughing2. the murder weapon reference was deliciously diabolical.3. you stuck the landing with two pieces of strong advice.Score: 9.8Two tenths of a point shaved off for a disruptive transition between paragraphs 1 and 2.
We are rating comments like figure skating now! I love it
Yes. Technical Execution and Artistic Interpretation are both critical to the total reader experience.
Hardest part of my job. But you are so right
What a great post, I think this is a real relevant issue for budding entrepreneurs. I experienced it myself when my business partners and I started our fist business back in 2005.We did not totally understand that there had to be a difference between talking while hanging out and an actual business meeting. The concept of simply taking minutes did not even sink in yet. Even though we did the right thing right off the bat and incorporated but we really did not know what how to separate our business activities from who friendship activates.Lesson learned.@RedMavenVC Fund Managerwww.moneyisjustanidea.com
There are some other liability concerns that people sometimes forget in thinking that a company shields them from liability. First of all, there are some activities that can get you sued, or even prosecuted, personally, even with a properly maintained corporate entity. Examples include environmental activities and corrupt activities in the US or abroad. In addition, board members may be personally liable for their conduct on the Board, which is why many corporate charters require the Board to indemnify the directors and officer, or to purchase appropriate insurance. As a matter of public policy charter provisions and insurance will not protect a board member in cases of self dealing or criminal activity. In addition various states have specific statutes that can lead to liability — for example New York has a law (BCL Section 630) which holds the ten largest shareholders of a corporation personally responsible for employee salaries. Finally, limited liability companies, which have become so popular, can have a lurking risk to investors if not carefully drafted. If an LLC member has a negative capital account at the time of dissolution, he may be required to compensate the other members by bringing his capital account to zero. Careful drafting can avoid this risk, but off the shelf LLC forms often don’t do it. These comments don’t mean limited liability is not a worthwhile goal; rather, they mean that one should not think the armor is impervious.
Of course, the ultimate protection is to make money — a whole lot of money.The saddest thing is that anybody with a $25 filing fee can sue anybody they want.
So true. And some types of people don’t need even the slightest excuse to stir up trouble.
In fact — some of those are actually looking for it — they thrive on it.
By what you say, I know you have first-hand experience. You’ll make a better CEO because you know this.
Ah yes, oh so very painful.Could be a topic for Kid’s Kookonomics: “How to run a business when someone involved is deranged and responds non-rationally to data and stimuli”
If only we could relegate the topic to “Kookonomics.” Unfortunately the stats show that approximately 4% of the population thrives on chaos, is ego-driven, and may not even be corralled by the usual motivators such as greed or social pressure to “do the right thing.”If I ran a b-school, I’d require that every MBA candidate take a class in Abnormal Psychology. The REALLY dangerous ones don’t look crazy at all — until you find out too late!Yet another reason to be absolutely diligent about protecting your corporate veil.
JLM, the key in your post is communication. The fact that you and your partner had an agreement and visited it regularly prevented the majority of issues that come up in a startup. Congratulations on that! Regardless of the situation, founders/executives/partners should always be communicating at a very high level.
I knew I should have read the syllabus, five post into the MBA program and we’re into legal wranglings – Ugh. Is it too late to drop this class and transfer?
Haha Chip
Hire a reliable accountant who you respect. Hire someone you won’t brush off and ignore when they tell you to file paperwork.
Also keep in mind that no matter what you do to protect yourself – a good lawyer and sympathetic court can always prove you wrong. Make sure you have the insurance in place to deal with these issues. A little costly now – but could save your business in the long-run (talk about ROI should you ever need it).
Hey Fred, gave the column some thinking. Perhaps you could write about corporate structure (i.e., board v. management) and how they usually interact/overlap in startup and VC situations. It could be a really good segue from piercing the veil (extremely important to maintaining limited liability), a logical next step in understanding the business, and a little less “legalish” (boo hisss) so that we don’t have any dropouts.
separate blogs too.
If you are experienced in running a corporation, then choosing to use a cheap online service make sense in many cases. If this is your first venture into the business world, it does not.