Business model, is this legal?

[Janeway]

I have been told this is perfectly legal but..here goes..person sets up business. Person is broke due to recent bad investments. Person sets up business plans and gets investors. Business gets going, it grows. Person never put any money in to business. Five years later, business is doing so well, it is sold off and person receives tens of millions of dollars. (however, person then has a stroke, shortly after, so not like you can ask them questions or details). 

 

Was it legit for that person to keep more than 50% of the earnings from the sale of the business, when that person never put any capital in initially? I have been told yes. Even though he put no capital in, on paper, he owned more than 50% of the business, because he did the paperwork and he made it that way, so he was entitled to it. The person who tells me this is the one who inherited the money. The money he took from it was in the area of tens of millions, but I do not know how much.

[MaeFlowers]

Why wouldn't it be legal?

 

The investors and the owner set terms before any money exchanged hands. The owner did all the work. The investors provided the capital. Everyone made money. Win-win.

[snowbeltmom]

Yes, this is perfectly legal and how many small businesses get started and grow.  Investors put in X amount of dollars for a percentage of the business.  The investors usually aren't involved in the day to day work of growing the business.

[Laura Corin]

Why wouldn't it be legal?

 

The investors and the owner set terms before any money exchanged hands. The owner did all the work. The investors provided the capital. Everyone made money. Win-win.

 

Yes.  The founder had the idea and put in the sweat equity (we assume).

[gardenmom5]

investors dont' put money in unless they expect a return on their investment.   did the investors get their cut of the profits?  or are you suggesting the business owner has "arranged" bad business investments to take as a loss so he doens't have to pay the investors?

 

someone who starts a business is a "visionary".  they have a 'vision', a plan, they have a product to sell - they are contributing a huge amount, even if they have no capital in which to fund the business.  that's why there are investors (re: venture captialists.  there are securities laws that require accredited investors only.  for that, they have a minimum income  $250k? as well as net worth.)  who will put up the money in hopes of getting a piece of the profits.

 

so - as long as the investors  got their percentage according to what agreements were made up front - yes, it's legal for the business owner to keep most of the profits.  it was his vision, he ran the business, he grew the business, he made it worth something.

 

 

[Guest]

Absolutely legal. Seed money, investors, venture capital - totally fine.

 

In previous centuries this person was called a patron.

[Farrar]

That's pretty much the definition of how a successful business works.

 

The only way it wouldn't be legal is if they didn't fulfill the terms of the initial investment.

 

Look at it this way, if you wanted to start a lemonade stand and I wanted to help you and gave you $50 to get it going but with the deal that you would pay me back plus $10 for every day you operated with a cap of $100, then after I get my $100, why should I get more money from you? You were the one with the idea, who did the work, who made the smart choices to put your lemonade stand on just the right corner, etc. And then if Minute Maid comes and gives you a bunch of money to take over your stand several years later, then our relationship is done. Why should I see any of that?

[Guest]

The only way I could see this being illegal is if the business or contracts were structured with a different compensation or ownership scheme than what this individual walked away with, and it wasn't voted on legally by all stock holders or board members.

[bettyandbob]

Why not? The person invested intellectual capital and did the actual work to get it going.

[SparklyUnicorn]

I'd assume that's how a lot of businesses start.  Sure some may plunk down some of their own money, but it's often relatively very little or it's borrowed money.  They often do need loans and investors. 

[SparklyUnicorn]

Have you ever watched Shark Tank?  Basically people go there to try to get money invested into their business.  Different sharks (AKA investors) have different approaches to this, but in several cases they offer very little to the business other than money.  They ultimately want to take the risk to make money (the payoff can be huge compared with other types of investments), but they don't necessarily want to run a business or have much to do with the business.  So when the business makes money either through profits or being sold, they get a cut based on the terms they agreed to up front.  This doesn't mean the original business owner gets nothing just because initially they invested very little or none of their own money.  They had the idea and were able to convince people to invest in it. 

[poppy]

It grows and profits only because the creator entrepreneur.   Of course that person keeps a portion of those profits.

[Word Nerd]

We have no way of knowing when the investors were paid back or what the terms were, but there's no reason to suspect they weren't paid back. Why should they be legally entitled to more than that just because Person built a successful business and sold it? He undoubtedly invested at least a portion of the earnings back into the business over the years so it would grow, so I doubt your claim that "he never put any money into the business."

[LucyStoner]

So long as he made good on his various obligations to his investors.  If investors owned 40% and he sold it for 10 million but didn't give the investors their 4 million, that's theft and I know people have gone to prison for it.  If he owes his investors a 2 million dollar loan but he skipped out and never paid them, that's bad debt and I assume they would come after him if he had the 2 million.  

 

Otherwise, that's how business works.  He's smart to have still owned more than 1/2 when he sold.  

 

Why on earth would you think this illegal?  

Edited March 25, 2017 by LucyStoner

[Lady Florida.]

I can't see any reason why it wouldn't be legal. There doesn't seem to be any question.

[Catwoman]

Okay, inquiring minds want to know...

 

Why are you asking this? There must be a story! :)

[Anne in CA]

This is why I don't get investors to add a micro brew to the restaurant. Because we would do ALL the work, and people would question our share. It would probably make serious bank, but I am not going to be in a position to justify making money for others and MYSELF off my own hard work. Because the person who does the work should make a lot if they are giving other people a good return on their money.

[Mergath]

Was it legit for that person to keep more than 50% of the earnings from the sale of the business, when that person never put any capital in initially? I have been told yes. Even though he put no capital in, on paper, he owned more than 50% of the business, because he did the paperwork and he made it that way, so he was entitled to it. The person who tells me this is the one who inherited the money. The money he took from it was in the area of tens of millions, but I do not know how much.

 

If he owned more than fifty percent of the business, it makes sense that he'd walk away with more than fifty percent of the profits. I don't understand why this wouldn't be legal. Was he supposed to put in years of work, sell the business, and then walk away with nothing?  Do you think only people who have a lot of money to start with should be able to start a business?

[katilac]

Perfectly legit. 

[abba12]

You think the work that went into making the business succeed and grow doesn't mean anything? That's how a business works, he has generated an earned profit through hard work. As long as the investors got any money which was promised to them, if the remaining money is still more than 50% then that just means this person, with no resources of their own, did an amazing job creating something out of nothing and earned the value they created. The investors did not create value, they put a designated value in, in return for a designated value out. Regardless of whether the person put monetary capital in, every action which created the surplus value was theirs, and they earned it. There would be no surplus value without their work. The investors didn't do the work, he did.

 

This is kinda how businesses work... I'm not sure I understand the question or how anyone would deem it unfair for someone to earn the value they created. 

Edited March 26, 2017 by abba12

[Monica_in_Switzerland]

Agreeing with everyone else.  

 

Were the initial investors paid back according to a mutually-agreed-upon contract?  Yes?  Okey-dokey then.  

 

The entrepreneur makes money because of their own creative idea and hard work.  They can either invest their own money or they can find investors and make contracts with them.  

 

It's called... capitalism.

[Carrie12345]

I'm trying to think what you might expect the alternatives to be.  If 4 investors purchased 10% of the initial business each, do you think they should have each received more than 10% of the final sale, even though that's not what they agreed to?  Assuming they were seasoned investors, they chipped in their money with a decent grip on both current (at the time) and future value.  If they had wanted a greater percentage, they could have negotiated for one. If they didn't find the agreement fair, they could have refused to participate.  If the business had bombed instead of grown, they could have lost their money all together, and that's legal, too.

 

 

 

 

[LuvToRead]

I'm trying to think what you might expect the alternatives to be.  If 4 investors purchased 10% of the initial business each, do you think they should have each received more than 10% of the final sale, even though that's not what they agreed to?  Assuming they were seasoned investors, they chipped in their money with a decent grip on both current (at the time) and future value.  If they had wanted a greater percentage, they could have negotiated for one. If they didn't find the agreement fair, they could have refused to participate.  If the business had bombed instead of grown, they could have lost their money all together, and that's legal, too.

:iagree:

When you invest in a company you buy a certain percent. That percent does not change.  It makes total sense that the one who started the company would retain a more than 50% share.  The person doing the day to day needs to have more than 50% so they can make all the decisions. 

[LuvToRead]

I have been told this is perfectly legal but..here goes..person sets up business. Person is broke due to recent bad investments. Person sets up business plans and gets investors. Business gets going, it grows. Person never put any money in to business. Five years later, business is doing so well, it is sold off and person receives tens of millions of dollars. (however, person then has a stroke, shortly after, so not like you can ask them questions or details). 

 

Was it legit for that person to keep more than 50% of the earnings from the sale of the business, when that person never put any capital in initially? I have been told yes. Even though he put no capital in, on paper, he owned more than 50% of the business, because he did the paperwork and he made it that way, so he was entitled to it. The person who tells me this is the one who inherited the money. The money he took from it was in the area of tens of millions, but I do not know how much.

Why does it matter who did the paperwork?  Do you think he was fraudulent somehow?  If an investor signed a paper that states they bought a less than 50% ownership in a company, I am not sure why it matters who actually wrote the contract.

[Lanny]

I think that's probably quite normal.  Venture Capital firms invest money in many Startup firms.  Possibly the originator has the funds to get it off the ground, but to really expand, they need much more capital and look for outside investors. Sometimes the Outside Investors contact the owner.   I do not see anything illegal in what was described in Post #1.  The percentage the originator would receive would depend upon the legal documents.

 

ETA: The investors were like stockholders. The stockholders are part owners. The stockholders are not involved in day-to-day operations of the company. He did the work and they received their share of the reward.

Edited March 26, 2017 by Lanny

[lavender's green]

Is someone coming after him for money or something? Otherwise I don't get why this is a question. That's how businesses work. If he made good on his obligations to everyone involved, it doesn't matter who did the paperwork or what the terms were. Do you think he was doing something sneaky by doing the paperwork so he owned more than 50%? Because the investors presumably read it thoroughly and understood the terms before they signed the agreement.

 

Anyway, it sounds like he put in a lot of sweat. Money doesn't just magically bloom every time you start a business.

[gardenmom5]

OP - why do you care?  what is it to you?  have you ever started a business?  do  you know what is involved with starting a business?

 

and seriously - sometimes the entrepreneur NEEDS to have a 50.1% stake to keep control to make sure someone else doesn't come along and screw things up!  bill gates didn't go below 50% until MS was well established.

 

dh has been intimately involved with three start ups.  (well, four if you include  his own small business). 

two of those totally failed. one ceo was investigated by the fbi for fraud.  to prove fraud you must prove *intent* to commit fraud.  stupidity and greed aren't illegal. 

two of them required tremendous upfront investments because of the upfront costs involved in the product they sold/are-selling. (including one of those that failed.) 

we're currently with one where they are legally required to only have accredited investors.  theoretically, they'll be more savvy and less greedy . . . (do you know the difference between a vulture and a venture capitalist?  a vulture waits until you're dead.)   they have legal agreements about how they will be paid off if the business works.  it could be a percent of the business (which is what stock is) or it could be a flat repayment of a "loan" with interest.  (which is what banks will do with small business loans.)

[xixstar]

This is why I don't get investors to add a micro brew to the restaurant. Because we would do ALL the work, and people would question our share. It would probably make serious bank, but I am not going to be in a position to justify making money for others and MYSELF off my own hard work. Because the person who does the work should make a lot if they are giving other people a good return on their money.

This confuses me as well. If there is a contract in place, why would anyone question your portion?

[Anne in CA]

This confuses me as well. If there is a contract in place, why would anyone question your portion?

Because when people get in the middle of dividing money they can get greedy. I have seen people go into business and it go really well but people get angry about not getting more even when things were spelled out. I know someone who spent 2 1/2 years of their youth starting the first microbrew in Albuquerque. They had a contract that they would own 40% of the business but it made so much money that the initial investors didn't want to share and the whole thing was a huge legal mess. After court fees he got roughly 6% of the business and everyone agreed that he did the work, just the initial investors saw how much there was to be made once the money came in and got upset he was getting so much. Even ordinary people can get super greedy when so much money is involved.  

[gardenmom5]

Because when people get in the middle of dividing money they can get greedy. I have seen people go into business and it go really well but people get angry about not getting more even when things were spelled out. I know someone who spent 2 1/2 years of their youth starting the first microbrew in Albuquerque. They had a contract that they would own 40% of the business but it made so much money that the initial investors didn't want to share and the whole thing was a huge legal mess. After court fees he got roughly 6% of the business and everyone agreed that he did the work, just the initial investors saw how much there was to be made once the money came in and got upset he was getting so much. Even ordinary people can get super greedy when so much money is involved.  

 

it sounds like it was poorly structured contractually upfront.  that they were trying to do a mom-and-pop with investors putting up the bulk of the money.

 

you can't just say ___ owns 40%.  there need to be legal documents that this is an actual recognized company.  that you have "shares" (they can be privately held and not be traded), and how much each person has.  it does become more complex as it has to be filed with the feds.   but that brings in new requirements.  dh is doing this now in his role in the current start-up with which he is involved.   and patents have been filed . . .

[goldberry]

 

Were the initial investors paid back according to a mutually-agreed-upon contract?  Yes?  Okey-dokey then.  

 

 

 

This.  It's not always easy to get investors in the first place. This person had to convince the investors to believe they would make money from his business and his idea. He did so. 

 

You can start up a business with your own money and keep all of it.  Or, if you don't have the money you convince investors to put up their money, and in exchange you give them an agreed upon return.  That's the price you pay for not having the start up money yourself.  It's still your business.  If you're smart enough to get other people to put start up money in, good on ya.

 

If the investors get back what they agreed upon, perfectly legal as well as ethical.  

[Bootsie]

 

Was it legit for that person to keep more than 50% of the earnings from the sale of the business, when that person never put any capital in initially? I have been told yes. Even though he put no capital in, on paper, he owned more than 50% of the business, because he did the paperwork and he made it that way, so he was entitled to it. The person who tells me this is the one who inherited the money. The money he took from it was in the area of tens of millions, but I do not know how much.

 

Although he did the paperwork, the investors would know what was in the paperwork and would have to agree to the terms when they became investors.  After they became investors, he could not simply draw up paperwork with whatever terms he wanted.