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Roger
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Category: Business Law
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Made an investment into a startup company with a friend. I

Customer Question

Made an investment into a startup company with a friend. I received 10% for being the company's exclusive funder; however, according to the business model, which had been taken from another successful company, the return would more than compensate for only receiving 10% ownership. Long story short the business upon which the model was based turned out to be a fraudulent company and was subsequently shut down. There was now no business model and the individuals that presented the model to me were now trying to figure out a new model. Nothing has ever come of it. They have all but shut down operations. There are some commissions that are due to start paying out in a few months (the company is a health insurance brokerage). Since the company no longer is functioning and has no overhead, those commissions will be distributed. However, they are going to distribute them based on ownership percentages. There are four partners. Three of them, that contributed no startup capital, yet they will each get 30% of the distribution, and giving me 10%. That does not seem right? Any recourse for me?
Submitted: 4 years ago.
Category: Business Law
Expert:  Roger replied 4 years ago.

Your situation completely depends on what the operating agreement says. This is a contract issue, and your rights are embodied in that contract.

 

If the agreement says that you get your capital investment before any distributions are made to owners, then you're in business. However, if it doesn't say anything about repaying you first - or at all - you're probably stuck with the 10% that you've legally got - and nothing more.

 

You should have an attorney review the agreement and tell you what you've agreed to - knowingly or unknowingly.

 

My suspicion is that the contract is written in a manner that only requires you to receive 10% and not an amount equal to your investment (but, had the business been successful, you would likely have made more under this setup). Also, you can expect the other owners to claim that they didn't put up cash, but they have equaled your investment with their time they invested.

 

You're going to need a lawyer to fight with them, and you should retain one asap.

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