This is another case that perfectly illustrates the hazards of cocktail talk, those loose conversations that turn into a serious intent to execute on a general plan. The more people involved in the discussions, the more likely there will be misunderstandings among those involved in the planning.
Situation
Five people came together to discuss a new business idea. They had a vision of promoting and selling a newly invented safety device that would prove to have wide appeal in the automobile and transportation industry. Those involved included two married couples and an investor. Before starting any venture, the participants need to define, agree to and put in writing numerous issues. Some of these issues included following:
- What kind of limited liability entity should be created to run the business? This is a critical tax driven decision affecting each individual’s personal situation.
- What kind of agreement should be prepared for the parties to sign?
- How will the investors’ interest be reflected (loan/debt or equity?)
- How will ownership and management be allocated?
- Will there be a lease or will a location be purchased?
- How will the company access start-up funding?
- What will we name the business?
- How will we brand the business (logo, website, social media and security)?
Then there are other start-up challenges that also need to be addressed such as:
- What needs to be done and who is responsible for each task?
- When are the various actions to be taken to get the business open?
- What happens if things are not done on time or at all?
Unfortunately, two parties assumed they were speaking for the group. Without getting agreement from the others, they took some premature actions of consequence. Subsequent discussions revealed there were serious disagreements within the group.
When it became clear my representation was untenable (I could represent the entity provided the individuals had separate counsel to review documents and actions), I resigned as prospective counsel to the venture.
Moral of the Story
Although it was a good product and a solid business idea that proved successful elsewhere, the parties involved were not the right people to take this venture to fruition. The parties needed to agree on a Letter of Intent as a prelude to a fully fleshed out definitive agreement that addressed all key issues.