Personal Guarentee

[akira]

Hi there,

I just wanted some advice on some things regarding a personal guarentee.

I went into business with a friend because he had an opportunity. We looked for finance and we had a few parties interested. He wanted to go with his parents money because he wanted to make them money in the business. In return they wanted us to take a personal guarentee for their money.

In return they get unlimited monthly payouts and 6% equity of the business. The persoanl guarentee gets wiped away once we pay half the loan from sales recieved.

The issue with it is that the other member has another directly competing brand. I knew about this but didn't how how much it would affect us. He has yet to tell the other shareholder in the other brand that he is doing this brand with me and his parents.

I am a bit worried now because

1) he would be technically in breach of his fiducial duties I am guessing. My interests are this business and looking after the investment, whilst my partner has two interests. This and the other competing brand.

2) Financially I could lose a lot because of this

I have yet to sign anything (personal guarentee form and shareholder agreement etc) and I wanted some advice on this.

I didn't need to take on this business or was forced. I did it because it seemed like a great opportunity and it still is. However a lot of things are out of my control and this puts me in a position of helplessness. everything in the business is in my name (bank etc) because the other partner had debt problems in the past.

I would be interested in hearing how people with experience would approach this. We have pretty much spent the capital on what we need so are getting to market fairly soon.

I just want to make sure I protect myself as things seem to be getting deeper and deeper and it's burning me out. I did speak to the other partner in an email explaining that if things with his other business were to cross the line with this one I had to make sure I am putting this business as a priority and as a director of this company I need to act in order to protect it. He came back and pretty much said I was blaming him. We have a generally good relationship but still I am kind of concerned.

What would be your view and approach to this?

Thanks,

Akira

[MyITGuy]

Personally, I would likely walk away from this deal and find a way to recover any investment that has made.

First - You have an officer of the company who has an interest in a competing brand that his existing partners are not aware of. There may be non-competes and etc that forbid him from doing any work, and once discovered could put your companies income at risk.

Second - Your partner is seeking a loan from his parents and they are requesting a personal guarantee...while smart on the person who is loaning the funds, it does make me suspicious that maybe the parents know something you don't...or may be working with their son to pull a fast one over on you.

Third - You went to your partners parents for a loan that you are going to be repaying over time (with interest I'm assuming), but then they also end up with 6% of ownership in the company? Sorry, but I'd say this is either a loan, or them buying into the company...but don't make it both.

[Harold Mansfield]

If I read this correctly, you're going into business with someone who owns another business that is in direct competition.
I can see this making sense if it was a bar or restaurant owner buying another one, but not much else about this makes sense.

On top of that you're in debt to your partner's parents for both a loan and a percentage of the business.
I agree that this also makes no sense. Is half the money a loan and the other half buying into the business?

I don't like this deal.

[Freelancier]

In return they get unlimited monthly payouts and 6% equity of the business.
That doesn't sound like a loan, it sounds like dividends that are required every month, which may not be in the best interest of the business.

There's not enough data here. What kind of business is this? Could your partner get sued for participating in a competing business (non-compete, breach of fiduciary duty, or even breach of confidentiality agreements come into play in some businesses)? What's the split of ownership of this company you're trying to get off the ground? Why should you give a fig that his parents make money on your venture... what's your motivation on that?

[akira]

That doesn't sound like a loan, it sounds like dividends that are required every month, which may not be in the best interest of the business.

There's not enough data here. What kind of business is this? Could your partner get sued for participating in a competing business (non-compete, breach of fiduciary duty, or even breach of confidentiality agreements come into play in some businesses)? What's the split of ownership of this company you're trying to get off the ground? Why should you give a fig that his parents make money on your venture... what's your motivation on that?


It is an amazon business -

Could he get sued - yes possibly. It makes it more difficult that in his other business - there are three shareholders and all of them have seperate amazon businesses.

the split equity is equal so 47% each with parents taking 6%.

We initially had a few investors but he was talking to them. They all pulled out so and the parents were the ones who wanted in. They had spare money so it made sense for them. This was kind of a fast turn around situation to get the right products to market so we took it, knowing that if we turned over a decent amount of money then this would be no problem.

I am well aware that the business is the most important aspect and do my best to protect it. I am not entirely sure what to think on this. I still have half the money in the account with it due to be paid out over the next few weeks. But if things did hit the fan my confusion with all of this makes it I want to know what I have got myself into.

Cheers,

Akira

[Freelancier]

Do these other online businesses sell the same things or offer the same things you're looking to sell with your online business?

[akira]

Do these other online businesses sell the same things or offer the same things you're looking to sell with your online business?

So let me see how I can word this to make it easy for you. Apologies there is a lot to it when writing it down.

So lets say I sell in beauty as a category. We are planning on selling 5 products.

The other competitor company also sells in beauty. But not identical products. However, we are selling one product that the other company are going to do in a different version later on this year. So i.e. we do one type of material and they do another. I am guessing that that could come down to similar rather than the same (if there is any difference with that). I already spoke to him about this but he said that he told me that they would be doing the same later on if they got capital for their company (they had a cashflow problem). Now they have capital after we started our business, they are doing that product and going to be a few months behind. He said that it was his idea in the first place. If the other company wanted to take action my understanding is that they would take it against the director rather than the company as being negligent in his position?

Regarding the question

there are 3 directors in that beauty business. 2 are selling in beauty (including ours) and the other one in a separate category. The one selling in a separate category owns most of the competitor company (51%).

Does that make sense. It is wordy but trying to make my point across without confusing you.

Everything is getting deeper involved and this is naturally making me concerned. I don't know the legalities of this but obviously I want to protect the business. I don't have any split loyalties before you ask. My sole priority is this business.


Akira.

[Freelancier]

If the other company wanted to take action my understanding is that they would take it against the director rather than the company as being negligent in his position?
They can also take it against you as being the recipient of a breach of confidentiality concerning their future plans and force you to get out of the market altogether.

I'd get out of the situation as fast as I could.

[akira]

They can also take it against you as being the recipient of a breach of confidentiality concerning their future plans and force you to get out of the market altogether.

I'd get out of the situation as fast as I could.


If they take it against me, would that also be against the parents?

Also if my partner was to speak to him and get in writing it was fine, would that negate any possible action towards the company?

At the moment he wasn't planning on telling him until after we got to market. But now I am concerned that I have to basically give him an uncoditional offer.

Also the parents would need to know. This was why I was wondering about the PG? If my hand is forced because of potential legal action on myself what options to I have with that. I havent signed anything - I know it sounds bad and I hate going against my word but I cannot afford to pay this.

I know it sounds bad asking what you would do, because naturally people who have experiences wouldn't find themselves in this situation but, what would steps would you take to mitigate risk on yourself?

Thanks for your quick replies and understanding. Really appreciate it.

Akira

[MyITGuy]

the split equity is equal so 47% each with parents taking 6%.

This is just another concern to me...technically the split isn't equal (And ideally should never be equal...someone has to make the decisions otherwise you could end up in a stale mate), your partner would control 53% of any votes (How likely would you think his parents would vote/go against their son?)

[akira]

This is just another concern to me...technically the split isn't equal (And ideally should never be equal...someone has to make the decisions otherwise you could end up in a stale mate), your partner would control 53% of any votes (How likely would you think his parents would vote/go against their son?)

What would that mean controlling 53%? What could they vote on so to speak?

Cheers

[akira]

Also I am kind of interested in this whole personal guarentee thing.

The problems happened when his other company which had cashflow issues got money and one director became major shareholder a few weeks ago. Obviously he put a lot of his own money in. My partner was not going to tell him about this because it would jeopardize that.

Now it is aparent that it is an issue. Basically I am also getting legal advice to see if I would get sued. (if anyone is experienced in this matter would also help massively so I can build a prima facie case)

I have also got evidence in writing that I was concerned about doing this at the start and that I was wary of stepping on the other company's toes. Which he said it would be fine as the category is so big.

If I am at risk, I will have to leave or get him to talk to other brand to see what could potentially happen. We are still a few months away from getting to market so I have time to sort this out.

If I do leave - do I void my PG as I left because of things out of my control. I was under unjust pressure because of this.

I am interested in that because I can limit my liability. Obviously I would like an amicable solution to this and feel totally sick but I will just have to make sure I cover my back as much as I can.

[Freelancier]

If they take it against me, would that also be against the parents?

Also if my partner was to speak to him and get in writing it was fine, would that negate any possible action towards the company?
Yes, they could indeed take action against any investor who might have invested based on their knowledge of confidential information. If the other company put something in writing that they had no problem with this partner starting a competing business... well, that'd make them fools, but that would indeed mitigate the risk you now face.

As for personal guarantee... you have to personally guarantee the money, but your partner and his parents control a majority stake in the company that is the recipient of this money... hello? What's wrong with this picture?

Don't take the money. Stop now until your partner gets something in writing that eliminates the risk to the company and to everyone involved. If you can't get it, walk away. Consider any time/effort you put into it a "sunk cost", you can't get it back, so you can't worry about it.

[MyITGuy]

What would that mean controlling 53%? What could they vote on so to speak?

Cheers

Anything and everything when it comes to any major decisions. Below are just a few quick items that come into mind:
-You want to buy new inventory, but your partner doesn't...he tells parents to vote his way
-Your partner wants to buy new equipment, but you don't....he tells parents to vote his way
-Your partner wants to dissolve the business, but you don't...he tells parents to vote his way (You're still on the hook for any personal guarantee)

[MyITGuy]

Also I am kind of interested in this whole personal guarentee thing.

Then I would highly suggest you speak to your attorney/accountant to see what your risks are.


If I do leave - do I void my PG as I left because of things out of my control. I was under unjust pressure because of this.
No - Thats the point of a personal guarantee. You are personally liable for these funds/amounts regardless of the state of your company or your status (past/current/future) with the company.

[akira]

Then I would highly suggest you speak to your attorney/accountant to see what your risks are.


No - Thats the point of a personal guarantee. You are personally liable for these funds/amounts regardless of the state of your company or your status (past/current/future) with the company.

Can a personal guarentee be used for equity?

I transferred the parents with 6% of company with shares equalling their total amount.

No loan has been discussed apart from verbally..


Just wondering about that.

[Freelancier]

Can a personal guarentee be used for equity?Equity is a portion of ownership of a corporation. There's nothing "personal" in that.

[akira]

Can a personal guarentee be used for equity?

I transferred the parents with 6% of company with shares equalling their total amount.

No loan has been discussed apart from verbally..


Just wondering about that.

To add to that actually. They didnt specifiy how much they were giving for equity or the "loan". Noting has been discussed so techincally no deal has been reached as of yet?

I sent the SH01 alottment form to him so he can give to parents as he is link. Myself and the parents havnet spoken.

[akira]

Equity is a portion of ownership of a corporation. There's nothing "personal" in that.

So what does that mean regarding a "personal guarentee"? and in particular my case?

[Freelancier]

So if you sent them the equity without an agreement, you just gave them the equity with no strings attached.

YOU NEED AN ATTORNEY. You're messing this up trying to do it on the cheap.

A "personal guarantee" ensures that they get the money back from you personally regardless of what happens to the company. A better example is if you went to go rent office space, the owner of the space may not want to do the deal with your company, but is willing to do the deal with you personally, because he wants the guarantee that he gets his rent even if your company goes out of business. Same thing.

[Paul Elliott]

Personally, I would likely walk away from this deal and find a way to recover any investment that has made.

I fully agree with MyITGuy! This deal has already gotten too squirrely. You will likely mess up your creditworthiness in the process.

Find something else with fewer landmines!

My best in your quest.

Paul

[akira]

I fully agree with MyITGuy! This deal has already gotten too squirrely. You will likely mess up your creditworthiness in the process.

Find something else with fewer landmines!

My best in your quest.

Paul

OK thanks guys for all the help. Appreciate it.

[akira]

So if you sent them the equity without an agreement, you just gave them the equity with no strings attached.

YOU NEED AN ATTORNEY. You're messing this up trying to do it on the cheap.

A "personal guarantee" ensures that they get the money back from you personally regardless of what happens to the company. A better example is if you went to go rent office space, the owner of the space may not want to do the deal with your company, but is willing to do the deal with you personally, because he wants the guarantee that he gets his rent even if your company goes out of business. Same thing.

They have already transferred the money. They wanted the 6% and monthly payments (which as you have stated doesn't seem to work well)

They asked for their shares so I transferred them to them with my accountant. But I didn't know how much to put down for each share so I split the total up and divided amongst their shares.

They never asked for a certain portion to go as a loan or equity so at the tme I thought I was doing that right. I guess this shows why an agreement was needed at the start.

Thanks anyway for your help, been useful!