Good entrepreneurs deserve good investors

Shyster 1(1)Recently two people came to see me and talk about their business.  They are in the food business.  I have found that each entrepreneur is different and that many people in the food space are not particularly strong when it comes to the business end even though their product may be off the charts.  This is one of the reasons that incubators like to see co-founders who are not necessarily even in equity but each play different roles where strength is needed.

I won’t share the name of the company but it is a type of retail store.  Their product is over the top amazing.  When they opened a line was formed and honestly never stopped.  They had stumbled on to something unique and delicious.  Possible investors started calling and knocking on their door.  They didn’t take those calls but kept their head down putting out a delicious daily product.

Fast forward, for whatever reason, timing more than likely, they decided to take on an investor.  A pair of investors who came together who would help them create a holding company, put money in the business and allow them to roll out their concept into different locations with the idea that eventually they could just continue opening up multiple shops across the country on their own or they could go down the franchise path.  It all sounded good but it wasn’t.

These investors were shysters.  For those who do know this yiddish word, a shyster is word for someone who acts in a disreputable, unethical, or unscrupulous way, especially in the practice of law, politics or business.   They put 1/3 of the money that they had agreed on in the holding company, they took 40% of their business, they told them that if they needed more cash that they would charge them 4% interest, they wanted to take a salary for themselves, they began to sign contracts for the business to expand in locations without the entrepreneurs knowledge, they put up a website that they had no idea about and all of a sudden got angry phone calls from people who had filled out the catering and delivering of the product daily and they’d show up at the stores and hang out behind the counter.

Granted the entrepreneurs made some seriously bad decisions in getting into bed with these investors but I also hold their lawyers accountable in allowing them to sign up for this.  One of the entrepreneurs just wanted to hold his nose and move forward but to me the writing is on the wall that these investors just want to bleed them dry because they have zero concept on how to build a franchise brand.  The other entrepreneur was besides herself.

I recommended they speak to a smart lawyer and one who had the ability to really see the holes in the contract.  I gave them a bunch of other advice but the whole meeting left me so angry.  Being able to build something from scratch, with sweat, tears, no sleep and a vision is one that should be applauded with an investor that supports not abuses.  If I ever saw those investors I’d have a hard time not going off on their abysmal display of taking advantage of people who worked hard to build something unique.  In the end, if they can’t get these shysters out the whole thing will crumble.  There is no doubt that the entrepreneurs fucked up too but it is a disgusting display of people with pockets of cash taking advantage of creative people who didn’t get the right advice, didn’t have the right lawyer and obviously didn’t know what the hell they were doing on the business end.

If you aren’t sure, ask questions.  If it doesn’t smell good, it usually stinks.

Comments (Archived):

  1. Lisa Abeyta

    Some money is far, far too expensive to take – no matter how badly it is needed.

  2. Dan Wick

    Very very sage advice.

  3. bonjourposte

    Where can we read more about this? For those who will be talking to investors soon, how do we figure out what’s a good deal and what’s not?

    1. Gotham Gal

      Do your diligence

  4. William Mougayar

    That’s an awful story. Is there something that you’re suggesting to them which they can do, to get out of this quagmire? I don’t know the details, but could the entrepreneur/baker close this business, and re-open differently without these shysters?

    1. Gotham Gal

      We will see

  5. Rohan

    Ouch. that’s really bad. Hope they get it sorted.

  6. LE

    I recommended they speak to a smart lawyer and one who had the ability to really see the holes in the contract.I don’t see this as much as a legal play but as a strategy play. Hard to say of course without knowing the full details. But attorneys even “smart” ones are attorneys. They usually aren’t good matches for shysters. There tools are legal tools. And they typically see everything through a legal lens. And most are not particularly good negotiators or deal makers for that matter. Obviously some are. And generally not very creative either. Exceptions, sure.Years ago (and this is really only one example by the way) my dad had a situation where someone was able to tie up a building that he owned (with his brother) based on only a signature on a envelope where my dad stated he would sell the building for $x. His brother (who was his partner) didn’t agree to the sale (actually he was fine with it but he didn’t sign the envelope). Every lawyer in the world told them that’s not a contact and that my dad as only part owner had no authority to sell the property and all the lawyers laughed at the whole thing. Technically of course they were correct. But technically doesn’t mean much when you have a determined party that is a gambler and is putting a great deal of thought into beating you at “the game”.Anyway the person who wanted the building was able to hold up the sale for 2 years based on that envelope signature! They claimed that my father had complete authority to sell and that they could prove that my uncle agreed with the sale and that he didn’t make any business decisions my dad made all of them. Was enough of a leg to stand on to tie up the property. Once again, only 1 story of many.

  7. LE

    but I also hold their lawyers accountable in allowing them to sign up for this.Lawyers may not have known enough to evaluate the value of the deal most likely.I just did a lease with a large physician practice and because the attorney delayed so many months I ended up getting 30% more rent than in the initial lease that was proposed. Not only that but I also managed to slip in that the tenant pays all maintenance and that I am not responsible for fixing anything at all that breaks (and some other things as well) And the attorney was a “good attorney”. I don’t feel that this qualifies me as a “shyster” either. In fact it’s the opposite the office manager of the surgeon (and the attorney) actually tried to play the games which led to the situation where I ended up with more rent. They drew first blood (as a result of greed). I was actually ok with the initial lease. (All done without an attorney I might add..) It’s actually pretty funny that the office manager thought she was playing me. (Shows how it pays to dress down and wear t-shirts..)Not saying this is what happened with the business you are describing but there are always two sides to each story obviously. That said of course there are shysters.

  8. Kenny Fraser

    Excellent article. Even when investors are honest and straight they may not be the right fit for the entrepreneur. This is a partnership and I always advise founders to choose investors they can build a relationship with not just grab the money. Finding the right investors is also one of the big risks of equity crowdfunding.I do think your view of lawyers is slightly wrong. The job of a lawyer is to advise not to identify all risks for you. I find people use lawyers too much and rely on them for too much. Use your judgement and find a mentor who can guide you rather than rely on professionals who are best used for a defined purpose eg reviewing the shareholder agreements.

    1. Gotham Gal

      Agree with you on lawyers. They are only to advise. This lawyer should have advised them not to sign a deal when the funding did not come thru based on what was represented. He should have also questioned the amount of their business they were giving up.Lawyers see a lot come across their desk. The best ones give you options and advice while letting you know what’s way out of line

      1. Jerome Gentolia

        Agree on lawyers as well. Also make sure you hire a reputable and knowledgeable lawyer that specialize on startups or business you are in. Last thing you want is hiring a lawyer that wear too many hats. Too many hats is a bad signal.

        1. pointsnfigures


  9. awaldstein

    Horror story but at least in my experience, this is an extreme corner case.Must say that the food business is really challenging in ways the tech business is not as having perishable goods changes everything.

  10. Niko Hrdy

    Hi Joanne, thank you for your post. It would be helpful if you named the investors so that others could save time during the diligence process.

    1. pointsnfigures

      She might not be able to out of slander or liable fear. Usually shylocks are really sensitive and try to appear prim and proper.

    2. Gotham Gal

      That would not be happening

  11. pointsnfigures

    With you. I have run into this. My advice for entrepreneurs is to engage with a lawyer from the beginning that understands VC. Don’t skimp and use Mom and Pop lawyer just to get docs drafted. Most of the shylocks have lawyers from the firm Dewey, Cheatum and Howe that will work on contingency just to get a cut of the cash.There is a guy I spent a year trying to do a deal with in Chicago. He is married to a famous person that gets him in all kinds of nice situations. To make a tragic story short: At the end(when I finally got F*&^% legal docs), my lawyer figured out that he was trying to swindle me for $350k, and he wound up bankrupting three companies.Where there is money there are sharks. Where there are trusting people, there are shysters. That’s one positive for lawyers….

  12. Pranay Srinivasan

    Am very thankful for you, and investors who have ensured we never saw this side of things.Yesterday a friend came to meet me in NY, and she had a similar thing to say. She has built an amazing business in apparel ecosystem management here in NY – creating jobs, training designers and training workers and has run it so far with private / public partnership, grants and now she is raising some equity.I just gave her some simple advice about structuring her round and the right things to do, and she was so grateful and happy because all she has met so far are some variant of the shysters you mention.Thankfully she has not signed anything yet.Thanks,Pranay

    1. Gotham Gal

      the start of your business is so hard. having people who can help you navigate is a huge help.

  13. Riki Franco

    Sometimes when you are young and new to entrepreneurship you want to make it happen so bad that you disregard your gut feeling and instincts, you are just so excited somebody wants to help make your dream come true. It happened to me a few months ago, it wasn’t catastrophic and I didn’t lose me business just money but it still hearts to put your trust in someone and get disappointed, makes you question other people too and you start doubting yourself, it’s not how you want to start but I guess that’s part of the journey, and besides getting a good lawyer, how can you really know someone’s intentions?

    1. Gotham Gal

      Ask around to the other companies they have invested in

      1. Riki Franco

        Yes, you are right due diligence is very important, in my case they were advisers in user acquisition and they had the right qualifications and experience, they just tried to squeeze 6 months worth of fees and drag the execution as much as they could… we ended as soon as we realized nothing was happening. We really wanted it to work and are now looking for the right people to help us scale

  14. Matt Kruza

    I think a major issue with these type of situations is due to slander / libel issues no one roots out the bad investors. And ironically that not only does not make them look bad, but rather makes those bad investors look even better! I know a few examples of one of the more powerful / prominent investors in Ohio (see even I won’t get more specific.. sigh.. it sucks) who ended up getting to take credit for multiple businesses that he/she invested in on “dodgy” terms. Nothing explicitly illegal, but basically negotiating with first time entrepreneurs who got taken to the cleaners. As a result that investor not only doesn’t broadly get a bad reputation, but actually looks EVEN better for what they accomplished. Its a frustrating phenomenon. You always need legal documents, but my rule of thumb is if I wouldn’t do a deal without a legal contract, I won’t do a deal with a legal contract with you (obviously certain times you may be totally bent over a barrel and have to take the deal.. but its an important concept). Is libel and slander the main reason you can’t or won’t reveal the investors here… or is it more to protect the privacy of the founders who got stuck in a bad deal?

    1. Gotham Gal

      everyone must be protected. i do believe that many things go unsaid which is unfortunate.

      1. Matt Kruza

        At what point does the investor no longer deserve protection? Perhaps the breaking point is when an actual lawsuit for breach of contract is passed? If someone was sued in a court of law some sort of breach of ethics / contract I assume you would not have an issue mentioning that. Be sure I am not condemning your approach (I made a similar lack of specification in my post), but genuinely curious if there is any other line short of lawsuit that you would cross of think is appropriate. I am lucky I learned passively so even tho pretty young I am pretty shrewd… but still frustrates me and am searching for clear lines so as my power / position rises in the future I can have a hunch on when the dirty laundry should come out (and perhaps “never” is an acceptable answer).

        1. Gotham Gal

          I’d never sue. What’s the point. You can’t get blood from a stone. That’s what social media is for.

          1. Matt Kruza

            I mainly agree (suing is rarely not effective or make a lot of sense). But I guess what I meant is if you won’t (or someone else hasn’t sued), then at what point would you “out” someone on social media. You were unable to here (which probably makes 100% sense), but I guess I mean when would you actually mention someone, if ever? The reason I mentioned lawsuit was say the entrepreneurs you mentioned had sued then you wouldn’t have to wrry about privacy or libel / slander

          2. Gotham Gal

            If I was directly involved I’d out them. If I knew something about an investor that was looking at a company that I was talking to I would tell them. I wouldn’t out someone if I was not involved but would certainly keep it in my back pocket so that nobody that I am involved with ever becomes involved with those investors. I have done that over the years.

          3. Matt Kruza

            Thanks for the numerous replies. I think that delineation of being directly involved is probably the right defining line in most cases! Very wise answer indeed