The Small Business Revolution

The Small Business Revolution is coming to America. 

President Trump's proposal to cut the small business tax to 15% could be the most consequential legislation in a generation. Tax relief for small business will finally allow American entrepreneurs to compete against Corporate America on a level playing field. It will unleash an army of brilliant, talented, motivated entrepreneurs, itching to make their mark on the world. It will strike a blow against cronyism and put a stake in the heart of Too Big To Fail. Nobody epitomizes crony-capitalism more than Goldman Sachs. Perhaps that is why Goldman is attacking Trump's tax plan for being too generous to American small business

I am a small businessman. After toiling for seven years at a major New York law firm, I started my own practice in 2010 and soon became an advocate for getting the hell out of Big Law and setting up your own shop. Since that time, I have been privileged to advise extraordinarily talented entrepreneurs and early-stage companies in technology, finance, law, real estate, and many other fields. I have co-founded two start-up tech companies and served as Chief Strategy Office for a third. I labor in the vineyards of American entrepreneurism. Every day, I see the guts, genius, courage, determination and ruthlessness of America's entrepreneurs. It is the most exciting arena in the world.

If I could have one wish for my country, it would be for millions and millions of Americans to feel the satisfaction and liberation that comes with creating a business. Those who forsake a secure paycheck to bet on themselves are making a profound statement of human dignity. Starting a business is a declaration of personal independence, a defiant assertion that you (not your employer) own your time and talent. When you muster the backbone finally to refuse your corporate overlord’s unquenchable demand for 70% of the fruits of your labor, it is an act of insurrection in our nation’s finest tradition.

The last decade was rough on small business. In most of the U.S., more small businesses closed than opened. America was built by entrepreneurs and self-starters, but in recent years, the business environment has kept talented people on the sidelines. We have a massive, pent-up entrepreneurial energy across America, including within the ranks of Corporate America.

This proposed tax cut will unleash that pent-up energy. Here is how it breaks down: under current law, if you start your own business, your business income is “passed through” to you personally. So, if your company makes $1 million in net income that is attributed to you personally, you pay personal federal income tax on that amount. For a single individual, you’ll pay about $350,000 in federal tax on $1 million – or about 35%. If you count state and local taxes, you're looking at nearly a 50% tax on small business. Big companies play by a completely different set of rules. Under current law, the tax rate for corporations is 35%, but, of course, big companies lobby for tax shelters and loopholes so that in reality, profitable companies pay only about 13% in federal tax. Our current tax law functions as a small business penalty tax. Under the new proposal, all businesses (small and large) pay a flat 15%. Bottom line: by eliminating the small business penalty, your $1 million small business can keep an extra $200,000 to invest in R&D, make capital expenditures, or hire more workers.

It’s hard to exaggerate how huge that is. It means that during the critical early years of a company, you will be able to reinvest an extra 20% of your profits into your business, rather than throwing it into the black hole that is government. It also means that you will qualify for better credit terms because you will have more after-tax income to support the loan. You can raise money on better terms because your business is automatically 20% more profitable. The biggest impediment for small businesses is access to capital. By allowing a small business to reinvest more of its own profits, you will see a great number of $1-5 million per year businesses become $10-50 million businesses. Imagine sprinkling thousands of these stories across the American economy. That’s the start of a major boom.

The proposed tax cuts will prompt an exodus of Corporate America’s top performers. A bit of economic theory is required to explain why that is so. Economists have shown that about half of a company’s productivity is created by the square root of the total number of employees. This rule of thumb holds true across a wide variety of industries and endeavors. It means that in a company of 9 employees, about 3 employees (33%) will be responsible for half of the production; but in a company of 10,000 employees, about 100 (1%) will account for half of the company’s productivity. Inefficiency grows exponentially as a company grows larger. 

Take the banking industry as an example. The 25 largest banks in America employ about 1.2 million workers. But half of the productivity is created by fewer than 5,000 individuals. These are the individuals who control the important business relationships, bring in most of the money, and whose decisions will determine the future of banking.

Some of those 5,000 rainmakers are my clients. I talk to them all the time about starting their own businesses. If they are given the choice between (A) giving 70% of their revenue to the big bank, plus paying 35% in taxes on what remains; or (B) keeping all the revenue and paying 15% in taxes, it's a no brainer. Even for the most risk-averse people, the tax incentive to start a company will be hard to refuse. 

When a significant percentage of high producers stop giving the big banks most of their revenue and start their own competing firms, Too Big To Fail will collapse under its own inefficiency. Out of the ashes will emerge a new banking industry, composed of hundreds of reasonably-sized banks eager to serve the rising tide of small and medium-size businesses. The result will be a trend toward smaller, more service-focused banking. If you've dealt with banks in the last 6 or 7 years, that will be a welcome change. This story is not limited to banking, but will repeat itself in one industry after another.

As the Small Business Revolution reshapes the American economy, it will reshape cultural attitudes toward capitalism and self-reliance as well. A recent survey found that only 42% of young Americans have faith in capitalism. That is the legacy of the 2008 financial crisis that taught a generation of Americans that capitalism means bailouts for bankers and misery for everyone else.

The Small Business Revolution will change hearts and minds. When the economy starts roaring and entrepreneurs are allowed to grow, you're going to start to see a lot of successful businesses and a lot of happy entrepreneurs who came by their success honestly. If your friend starts a business, it is more likely that you will start a business. When young people see that small business is not about oppression, but liberation, they will embrace it. When young people hear they can make more money and never dread going to work, they will embrace it.  When young people understand that good, efficient small businesses can beat the hell of out of the big, corrupt, inefficient players, young people will embrace the Small Business Revolution. That is how you capture imaginations and change the culture.

We are a nation in turmoil. The next few months will shape America for the next 50 years. We have a once-in-a-generation opportunity to revitalize our economy and create a more energetic, self-reliant, innovative culture. Now we need the political will to carry forward the Small Business Revolution.

2017 Grads: Start Your Own Business!

This graduation season got me to thinking:  what advice would I give a young person just starting out today?  To me, the answer is obvious:  Start your own business.

I graduated from college in 1999, a generation ago. The world was far less troubled. I graduated into a world that was mostly peaceful. The US economy was roaring at 5% growth; the stock market was breaking records. People generally trusted our civic institutions and believed most of what they read in the paper. Our national debt was "only" $5 trillion and we had budget surpluses. People actually discussed paying off the debt in full. College graduates had wonderful career choices with large, successful companies, especially on Wall Street. The post-communist world still loved America; people were optimistic; the future looked bright. The book Dow 36,000 predicted the stock market would triple in value in the next few years. People took it seriously.

Today’s college graduates, born in 1995 or 1996, remember none of the 1990s good times. The past two decades have seen a litany of failures by our political, financial, and media elite.  When the country needed unity, Bush v. Gore revealed the Supreme Court to be a nakedly partisan institution.  A year was wasted on Bill Clinton’s sex life while Osama Bin Laden plotted the 9/11 terrorist attacks that changed America forever and for the worse. The disastrous Iraq War followed, adding $3 trillion to the debt in a debacle that continues to haunt us. Reckless regulatory and banking practices led to the 2008 financial crisis, which saw the banks receive huge bailouts while everyone else suffered through nearly a decade of anemic economic recovery. Disgracefully, at least 34 members of Congress cashed in by trading on insider information just days before the crash. Today’s graduates are painfully aware that the last two decades have seen vast increases in college tuition, which is often spent unwisely. Instead of buying a first home and starting a family, debt-strapped grads carry six-figure student loans and move home after college.

Liberals distrust big business and conservatives distrust big government. Two decades of experience have taught me this truth: they're both right.

Don’t trust any of them.

Trust yourself, invest in yourself, depend on yourself.  As a technology lawyer and entrepreneur, I am privileged to work with smart young people striving to make their mark on the world.  My advice?  Commit yourself to starting your own business by the age of 35. Millions have done it and so can you.

Why Start Your Own Business?

What would you say was the most important invention of the last 150 years? 

Whatever your answer, chances are good that an American entrepreneur invented it.  We invented electricity, the automobile, the assembly line, radio, television, carbon dating, the microwave oven, the assembly line, GPS, chemotherapy, the polio vaccine, cell phones, email, the internet, the zipper, chocolate chip cookies and rock & roll.

America’s story is a story of a creative and practical self-starters finding ingenious ways to improve the lives of their fellow man. The average American leads a longer, healthier, more comfortable life than royalty a century ago. That is the legacy of generation after generation of American entrepreneurs. It is a noble and honorable legacy.

Becoming an entrepreneur creates a healthy and productive mentality. The entrepreneur earns his daily bread by creating value for others, which leads the entrepreneur to wake up every morning asking: how can I be most helpful to others? That mindset fosters good mental routines, which lead to good habits, which in turn lead to success and satisfaction. Entrepreneurs tend to become good citizens who are invested in their communities and have the resources and personal qualities to be community leaders.

Entrepreneurs tend to socialize with other entrepreneurs. If you have dinner with a bunch of W-2 employees, the conversation gravitates toward complaints about work (I’m not paid enough; my boss is an idiot; my job is pointless, etc.). It can be a toxic mindset. However, if you have dinner with a group of entrepreneurs, the discussion ends with “how can we work together to create even more value?” I know this to be true because, every month or so, I host an event for my entrepreneur clients. I’ve seen it happen over and over. If you want to get the best out of yourself, adopt the entrepreneur mindset and become friends with entrepreneurs. It is said, “tell me who your friends are, and I will tell you who you are.” You will not find a better, more honest, more industrious segment of America than its innovators and entrepreneurs.

If you can successfully start your own business, you will gain self-confidence that will supercharge your career. Think about it. An employee lives in fear of being fired, passed over or demoted. As an employee, your livelihood depends on factors outside of your control. You are always vulnerable, and so long as you’re an employee, you toil in service of your boss's dream, not your own. By contrast, if you know how to compete in the free market, you quickly develop a sense that if you lost everything, you could get it all back in 2 years. That self-confidence creates a willingness to take risks, which is the only way to succeed. Bet on yourself once and you’ll probably do it again.

Running your own business will force you to become vastly better at your craft, whatever that is. When you start out, you’ll do jobs that are too small for more established businesses. Over time, happy customers will give you more and better business. You will be able to hire a few employees. With hard work, your cash flow will become more reliable. By the age of 35, you will have gained mastery of your craft.  Even in competitive markets, there is plenty of money for those who get the job done right, on time, and on budget. Ask anyone who has ever hired a building contractor or a car mechanic.

Lastly, being an entrepreneur gives you the means and opportunity to pursue non-profit endeavors. A thriving business is a natural platform for other pursuits, and it is a great way to learn to relate to customers from all walks of life. As your business matures, you will gain a clearer understanding of how the world works in reality (not just in theory). You can’t change the world without understanding it. A thriving business is a wonderful platform for charitable or activist projects.

How to Start Your Own Business

If someone told me in 1999 to go start a business, I would have had no clue where to begin. You might as well have told me to build a rocket ship. Unless you have a technology that absolutely cannot wait, I don't suggest starting a business right out of college. It will probably fail and you will get discouraged. 

Instead, I advise that college graduates spend a decade preparing themselves and their skills. That sounds like an eternity. It’s not. What follows is not a goal but a system - a 10-13 year blueprint for a prosperous and satisfying life.

1)  Get a job doing something.

No matter what degree you earned, your first job is likely to involve fetching coffee. Be proud to fetch coffee. Remember, when you’re rich and prosperous, you will wear your lowly beginnings as a badge of honor. It will also help you empathize with your employees when you are the boss.

Remember, 17% of Americans aged 16-29 are neither employed nor in school. Before political correctness took hold, we called these people bums. Don’t be a bum. Your first step is to gain employment. If you have to flip burgers, flip burgers. Everybody starts somewhere.

2)  Get business cards, thank you cards, and stamps.

Invest a little bit of money in business cards and thank you cards. Keep the thank you cards on your desk. Whenever someone does something nice for you, make a point to send a personalized thank you note. It takes 5 minutes, and it engenders more goodwill than you would imagine. Put a dozen business cards in your wallet or bag. Start acting like an entrepreneur.

3)  Collect mentors.

About 15 million Americans are self-employed. Successful entrepreneurs are everywhere. Start meeting them. Ask them to lunch. Here’s a secret: successful entrepreneurs love to tell war stories and share advice. What if you don't know any entrepreneurs? That's okay - go online, find owners of local businesses, and email them.  Attach this essay, tell them you're pursuing the American Dream of starting your own business, and ask if they would let you buy them lunch. They will say yes and probably insist on paying.

For a year, make a goal of having lunch or drinks with one entrepreneur a week. Just one a week. That’s 52 lunches in a year. That’s 52 potential mentors. Keep doing it for 10 years, and you will have a network of 520 potential referral sources. Empires have been built on less.

4)  Share your dream.

If you have committed to starting your own business by 35, tell everyone. There is power in the mere act of saying, "I am going to start a business." If you say it enough, you will start to believe it. Others will believe it. People will then expect it from you, and there are few human urges more powerful than the desire not to disappoint others.

If you create the expectation that you will start a business at 35 among your family and friends, it will be hard to chicken out. At the same time, people will start to think of you when they read articles about entrepreneurism. People will root for you. People will help you.

5)  Keep your overhead low.

If you want to start a business, you will need to save your money. When you finally quit your job and start your business, you’re going to want as long a “runway” as possible. I always recommend enough money so that you can go without revenue for 6 months, covering startup costs, your personal monthly expenses, and business fixed costs.  This is dollars and cents; do some math:  

War Chest = ((M + B) x 6) + S

M = your monthly living expenses; S = your business startup cost; B = your monthly business burn rate.

If your business costs $40,000 to start and $7,000 per month to operate, and your monthly living expense is $3,000 per month, you need $100,000 minimum. You can save that in a decade if you are focused and disciplined.

Suppose you get a job paying $60,000 per year.  If you can put away $500 per month at 4% interest, it will take you 13 years to fill your $100,000 war chest.  However, if you can cut your expenses (or increase your earnings) and save $1,000 per month, your war chest will be full in just 7 years. Think of it. Saving an extra $20 per day buys you freedom six years early.

The lower your personal overhead, the more you can save.  The more you save, the sooner you can stop being an employee and start building your business. 

6)  Marry the right person.

When deciding who to marry, understand that not every potential spouse is going to be comfortable with the risks inherent in being an entrepreneur.  Nor is every spouse willing to accept the hardships that come with running your own business.

This is a hard fact of life, but if you marry someone who does not have the personality to deal with the entrepreneur’s life, you will probably never be an entrepreneur.  If you’re really committed, you’ll do what I did and marry a fellow small business owner!

7)  Move where the action is.

Over time, you will gain a clearer sense of what kind of business you want to start. When you do, you must get into the middle of the action. If you want to start a tech company, you better go to Silicon Valley, New York, Boston, or Seattle.  If you want to make movies, move to Hollywood.  If you want to be in commercial fishing, move to Alaska.  If you want to drill for oil, move to Texas.

Some of these places are very expensive. Be prepared to live like a dog for a while. Pick your favorite flavor of Top Ramen and go to Sam's Club. Remember, these sacrifices are future war stories. Most successful entrepreneurs live on noodles at one point or another. It’s a badge of honor. Find friends who are doing the same thing and it won’t seem so bad.

8)  Educate yourself on business basics.

You probably graduated from college knowing nothing about how to run a business. You can fix that. Spend time mastering Quickbooks. Make a dummy account and start playing with it.  Take a class on bookkeeping. Learn the difference between a balance sheet and a profit and loss statement. Learn what estimated taxes are. Learn the difference between GAAP accounting and tax accounting. Learn the difference between cash basis and accrual basis. Learn the difference between debt and equity. Learn what a SEP IRA is.

9)  Make professional allies.

Before you launch your business, you want some key allies who you can call upon for help. You are going to need a bookkeeper, an accountant, a lawyer, and a banker. Depending on the business, you will need other service providers.

If you know a lawyer who just started her own law firm, or an accountant, or a banker – make friends with her. Do as many favors as you can. I have seen businesses fail because the owner was too cheap to hire a lawyer. Remember, hiring a lawyer to draft documents is cheap. Hiring me to defend a lawsuit because you screwed up your formation documents is very expensive. If you have lawyer friends who you can call upon for help, it can make all the difference.

10)  Keep the faith.

If you pursue the entrepreneur’s life, there will be times you want to quit. You will imagine how nice it must be to just show up to work, leave at 5pm, and never worry about making payroll.  Your friends at big companies may make a lot more money for a while. They will drive expensive cars, and you might be driving a $3,000 used Ford Escort (my first car).

Remind yourself of the price tag.  To get that BMW, your friends, in a very real sense, have forfeited the American Dream and consigned themselves to the employee mindset. Being an entrepreneur means delaying gratification.

Your most productive years will be between the ages of 40 and 60. That's when you get rich. Until then, make career decisions based on what you can learn and who you will meet – not how much you make. Your goal is not a posh apartment. Your goal is not short-term income maximization. Rather, your goal is to have a war chest by age 35 so you can start your business.

11)  Be open to opportunities.

If you are an entrepreneurial recent college grad, don’t get too hung up on exactly what business you will start in 10 or 15 years. The world is changing quickly.  It is entirely possible that the business you will eventually start does not exist yet as an industry. A friend and client of mine, Amit Khera, runs Oak Digital Agency, a great digital marketing firm.  Eighteen years ago, that industry didn't exist. The point is, keep an open mind. Remember, when technology opens a new market, nobody knows anything. That is a great opportunity.

I have personally started four businesses – two technology companies, a real estate company, and a law firm. One of my companies began because I wanted to learn to play guitar. I began studying guitar with Matthew Grossman, who is a genius in addition to being a world-class musician. Now, together, we own a technology company that uses artificial intelligence to analyze speech patterns. Five years ago, I could not have dreamed that I would start such a business.

Remember, you’re not learning how to start a specific business – you’re developing habits and systems that will allow you to thrive in any business you want to pursue. Once you're in the entrepreneur mindset, you start seeing opportunities everywhere.  And then it becomes fun.

12)  Your last job is learning your craft from the best.

Once you know the business you want to start, your next and last job should be with the biggest, most successful company in your industry. If you want to open a restaurant, you should find a job at a five-star restaurant. If you want to open an accounting firm, work at the best accounting firm in your town.

In addition to honing your skills, working at the industry-leading company will teach you what the best customers expect in terms of service. On the other hand, every big company has waste, inefficiency and bloat. You will start to identify ways to run the business more efficiently on a smaller scale. Write those insights down. They are gold.

Pro tip:  before you sign the employment agreement for your last job, make sure your lawyer reviews it. Many employers like to include covenants not to compete. Since your objective is to leave and compete, you need be very careful what you sign.

13)  To partner or not to partner.  

Once your war chest is full and you understand your craft, your industry, and the fundamentals of business, you are ready to go out on your own. Decide if you're going it alone or taking on a partner. It may seem counter-intuitive, but starting with a partner is usually a mistake.

The point of a partner is not to keep you company, to commiserate with you, or to mind the store while you sleep (that's what friends, spouses, and employees are for). Rather, a partner should excel at aspects of the business where you have proven deficient.

When you are starting out, you won't really know what parts of the business will prove most challenging. If you try to guess, you will probably guess wrong. I recommend waiting 6 months or a year and figuring out where your "pain points" are. Then, you can decide whether the solution is to improve your skills, or perhaps you should hire someone to handle that function for you.

Take for example my law firm. Initially, I did everything - marketing, client relations, bookkeeping, banking and, when time permitted, actual lawyering. The part of the job I hated was bookkeeping. So I hired a bookkeeper. The part of the job I was worst at involved drafting settlement agreements, which is tedious and requires patience that I do not possess. So I partnered with Tom Sima, the smartest corporate lawyer I've ever met. 

14)  Plan your launch carefully.

Starting a business takes time. Before you actually quit your job, you should go into overdrive with pre-marketing. Have lunch with everyone in your industry. Work on your mailing list. Buy the software you will need and master it. Do everything you can before actually opening your doors. Once you launch, it is all a blur. 

15)  Mentor others.

Entrepreneurs are the economic engine of our country and the glue that holds together civil society. We invest in our communities and employ a third of the US workforce. We have the hard-earned privilege of forging our own destiny and pursuing goals and objectives that we choose. It is a blessing I wish every American enjoyed. Now more than ever, we need entrepreneurs and risk takers.

If you follow steps 1-14 faithfully, you will succeed. When you do, make sure you pass on your wisdom to the next generation of entrepreneurs. Few things provide as much satisfaction as helping a young person realize the American Dream.

Conclusion

We live in tumultuous times. And yet, through our country's history, when we have run into trouble, the American innovator has always been a big part of the solution. So it is today. To the Class of 2017, we desperately need your energy, your ambition, your creativity and your courage. The American Dream is alive and well. We are living in a technology renaissance. There is no better place on Earth to start a business, and no better time in history to succeed. You can do it!

Snyder Obtains Dismissal of $71 Million Lawsuit Against Actuary

John H. Snyder PLLC won a complete victory on behalf of client Actuarial Risk Consultants LLC (ARC), a New Jersey actuarial firm.

In early 2015, ARC was sued by Leading Insurance Group (LIG), a financially troubled insurance company.  LIG asserted claims against ARC for professional malpractice and unjust enrichment, both claims arising from LIG's contention that ARC failed to detect problems with LIG's own internal actuarial work.  ARC denied all wrongdoing and asserted that LIG, in bringing this lawsuit, was seeking to shift the blame for its own mismanagement.

On March 7, 2016, New York Supreme Court Justice Saliann Scarpulla dismissed all claims against ARC, holding that LIG had failed to allege a viable cause of action.  While ARC is disappointed that LIG chose to assert this meritless action, ARC is pleased to have received complete vindication in the New York courts.

Yippy Launches Into Space With Globalstar Deal

Data technology company Yippy, Inc. (YIPI:OTC) has entered the global data space race by entering into a long-term agreement with Globalstar, Inc. (GSAT).

Historically, satellite internet and data service has been limited by slow download speeds. Yippy, which holds a perpetual license to IBM Watson Explorer technology, has developed its EASE 360 software solution that dramatically increases satellite data performance. In order to leverage this unique capability, Yippy has entered into a 20-year agreement with Globalstar, a leading provider of low earth orbit satellite voice and data communications.

The agreement enables Yippy to bring its customers industry leading satellite internet service, in addition to giving Yippy exclusive rights to sell Yippy’s EASE 360 Platform to Globalstar’s nearly 700,000 subscribers. Yippy also receives colocation rights with respect to 20% of Globalstar’s 26 ground stations worldwide. Yippy will utilize its access to the Globalstar network to provide affordable broadband-like internet access to locations not served by terrestrial internet - which includes more than 4 billion people around the world.

Yippy was advised in this transaction by Thomas C. Sima and John H. Snyder.   We congratulate Rich Granville, John Macartney, and everyone at Yippy on this remarkable deal.  

Snyder Sworn Into the U.S. Supreme Court Bar

It was my privilege to be sworn into the bar of the United States Supreme Court on June 15, 2015.

Together with several of my fellow Harvard Law alumni, we had the opportunity to watch the Court issue three decisions and, later in the morning, visit with Chief Justice John Roberts and Justice Ruth Bader Ginsburg.

As a trial attorney, being sworn into the bar of the U.S. Supreme Court before the full panel of Justices was a profoundly special and memorable experience (and produced child-like excitement rarely felt after age 10).  I thank Chuck Sims and Abaigeal Van Deerlin for graciously sponsoring my admission, and Pete Mumma of the Harvard Law School Alumni Relations Office for organizing this wonderful event.

 

 

Snyder Advises Yippy on Deal With Globalstar

John H. Snyder PLLC client Yippy, Inc. has reached an agreement with Globalstar, Inc. to build out a global ubiquitous network utilizing the Yippy EASE 360 platform. This network will allow Globalstar customers to access online information as well as corporate data silos with enhanced download and upload speeds with a focus on primary content. The EASE 360 platform significantly enhances the customer experience such that web pages and content downloads/uploads are materially faster while maintaining a secure connection.

Based in Fort Myers, Florida, Yippy, Inc. (www.yippyinc.com) is a technology company that specializes in the development of search-based applications, data normalization and aggregation through enterprise application (app) service environments (EASE) for consumer and enterprise markets. Yippy's proprietary appliance based product suites are deployed over a private cloud architecture and provide secure, redundant and maintained data services for individuals, businesses and education markets. The Company also operates several online web properties and educational reference portals. Investors can find current financial disclosure for the Company at http://www.otcmarkets.com/stock/YIPI/filings.

John H. Snyder PLLC advised Yippy in connection with this transaction.  See full press release here.

Appellate Court sides with Snyder client Wear First, enforcing arbitration agreements against factoring agent.

On May 26, 2015, a New York appellate court sided with Wear First Sportswear, Inc. in a dispute with a third-party factoring agent that claimed Wear First owed one of its clients money under a factoring agreement.

Wear First sought dismissal of the case, brought by Plaintiff DS-Concept Trade Invest LLC, on the basis that all of the agreements on which DS-Concept was relying contained broad arbitration clauses requiring the matter to be arbitrated in China.

In response, DS-Concept contended that a 1984 decision of the New York appellate court created a special rule that factoring agents do not have to comply with arbitration clauses contained in contracts that have been assigned to the factoring agent.

The New York Supreme Court, First Department Appellate Division, confirmed the long-standing rule in New York that when a party is assigned a contract, the assignee merely steps into the shoes of the assignor (and gains no greater or different rights). In the case of DS-Concept v. Wear First, the appellate court reversed the lower court, holding that an assignee (DS-Concept) must abide by an arbitration agreement contained in a contract that was allegedly assigned. In so holding, the appellate court rejected its decision from three decades earlier, Rosenthal v. Kunstadt, 106 A.D.2d 277 (1st Dep't 1984)) which previously had been construed as creating a different rule for factoring agents.

Wear First was represented by John H. Snyder and Abaigeal Van Deerlin.

Read the decision here.

Investor Beware: Nine Tips to Avoid Getting Scammed

The world is full of ambitious people with big ideas. Unfortunately, often the big idea is to separate you from your money. Don't get scammed.

If you're considering making a significant investment in a start-up or early stage company, follow these nine tips to avoid becoming a victim:

1.    Understand the business plan.  

You need to understand the business you are investing in. If you don't understand it, don't invest in it.

Before you think about writing a check, ask:

  • What is the company going to do with your money?
  • Does the company have enough money to do what it says it's going to do?
  • What does the company sell?
  • Who is going to buy?
  • Who is competing in this market?
  • How does the company make money?
  • When do you get to see some profits?
  • If the company succeeds, when do you get to sell your equity?

The business plan should make sense to you. If it doesn't make sense, don't assume that you're not smart enough to "get it." Here's a secret - most business plans don't really make sense when you dig into them. That's why most new business ventures fail.

Again, if you don't understand it, don't invest in it. 

2.    Don’t get stampeded into investing before you're ready.  

Show me a guy who is insisting that you've got to invest RIGHT NOW, and I'll show you a scam. Promoters of legitimate ventures will encourage you to take your time, consult your lawyer, and ask questions. They should want to have savvy, sophisticated investors as part of their circle. If a business wants your investment today, it will probably want it in two weeks.

It's your money. Invest it when you're ready and not a moment before.

3.    Talk to other investors.  

Ask the promoter to put you in touch with other investors. Pick up the phone and have a conversation. Here are a few questions to get you started:

  • How do you know the promoter?
  • Can you tell me about the business?
  • When did you invest?
  • Do you have common stock (or membership units)?  Preferred?  If preferred, what are the differences between common and preferred?
  • What about this company convinced you to invest?

If the promoter won't let you talk to other investors, or if the other investors seem sketchy, run away!

4.    Talk with the Company's lawyer.  

If an emerging company is taking money from investors, it should have a lawyer. Ask for the name of the lawyer, and ask permission to call him or her. Then, really call. The purpose is to find out some valuable information:

  • Does the lawyer really exist?
  • Is the lawyer a bona fide experienced attorney with a deep background in business?
  • Do you get a good vibe from the attorney?

Nothing can kill a start-up faster than incompetent legal advice. Even if all of the other fundamentals are good, a company with poorly drafted corporate documents and agreements is a disaster waiting to happen. If the company does not have capable and reputable legal counsel that is a big red flag.

5.    Ask common-sense questions.  

When a promoter tells you about the fabulous returns his venture is going to earn, ask some common-sense questions:

  • Why haven't 100 other companies rushed into this market?
  • Why haven't the big private equity firms snapped up this deal?
  • Why doesn't the promoter simply borrow the needed funds from a bank, so that he only has to pay interest and can keep the fantastic profits for himself?

Scammers tell stories that you want to believe. Sometimes the best question is: "why do I deserve this generosity?"

6.  Don't get shamed into investing.

The scam artist's best trick is often to make you feel insecure. If you ask an uncomfortable question, the scammer will make you feel naive and foolish for asking such a "silly" question. It is human nature to crave the admiration and approval of others. No one wants to be thought a rube. Scam artists prey upon basic human nature. 

Always remember, when someone wants your money, you get to ask any questions you want. If you get the sense that the promoter is trying to make you feel stupid for asking questions, you're probably about to get scammed.

7.  Resist "Fear of Missing Out."

We've all heard the stories (many apocryphal) of the guy who passed on an opportunity to be an early investor with Warren Buffett. Or Sam Walton. Or Bill Gates. And yes, sometimes that probably happens.

Scammers prey upon this fear. They’ll convince you that this is a “once in a lifetime” chance to get rich. They want to create a sense of psychological urgency - that sense of: "Oh my God, this will change my life!" Before long, in your fantasy, you're already spending the profits. 

When you start to feel that sensation in the depths of your soul, CHECK YOURSELF! Most scams, in retrospect, are painfully obvious. (That Nigerian prince who just needed $10,000 to unlock $100 million? Yeah, I guess that did seem a little fishy.) Scams work because they cause your brain to shut off for just long enough to write a check. 

Resist the fear of missing out and you'll probably avoid getting scammed.

8.    Meet the promoter in person.  

For God's sake, don't invest based on a phone call, or worse, an email. Meet the promoter in person. Have lunch or a drink. Talk to him and find out what his story is. Have him tell you about himself. Does the story make sense? Does he know the kinds of things that a person with his background ought to know? Do you get a good vibe? Do you trust him?

This is not 100% fool proof because scammers are quite persuasive. However, in my experience, if you use a meeting to tease out a lot of biographical information, it will put you in a position to go back, do some more diligence, and see if the guy checks out.

9.    Engage a smart business lawyer to kick the tires.

If you're going to invest a meaningful amount of money, paying for a few hours of a lawyer's time can save you from a very expensive mistake. You want a lawyer who has seen a lot of deals, who has the capability to investigate the promoter and make inquiries into his background and reputation, and who knows how to spot a scam. It's amazing the number of successful people who invest without legal counsel. 

Don't be one of them. Follow the above steps and chances are good you can avoid getting taken by a charlatan peddling fools gold.

 

If you're considering making an investment in a private company and want to enlist experienced counsel to help you kick the tires (or if you're worried you've already gotten scammed), call John H. Snyder (212-856-7280) or Thomas C. Sima (212-796-6661).

Five Tips for Avoiding Partnership Disputes

I represent clients involved in highly contentious disputes with their business partners. Partnership disputes are personal, expensive, and terrible for business. They are to be avoided if at all possible. In the hope of helping entrepreneurs avoid partnership disputes, I offer these five tips.

1. Choose your partners wisely.

The worst mistake an entrepreneur can make is choosing a bad business partner. Having a dishonest, disloyal, or unreliable business partner is sheer misery. Getting rid of a bad partner is expensive and often requires litigation.  The best advice: don't partner with someone you don't know.

The best way to avoid partnership disputes is to avoid doing business with a bad partner.

Many clients profess to have an innate ability to size up a person's character. I am skeptical. In my experience, people who make judgments on "gut instinct" often see what they want to see. The decision of who to partner with is far too important to wing it.

I recommend that clients engage counsel to conduct an investigation of a potential business partner before signing the partnership agreement. Does your prospective partner have a criminal record? Has he been sued? What is his background? What do his former business associates say about him?

You can avoid a great deal of heartburn by avoiding the wrong partner.

2. Get your partnership agreement right.

Business partners should enter into a written agreement governing their venture. Depending on the structure, this might be an LLC operating agreement, a partnership agreement, a joint venture agreement or a shareholder's agreement.  

Sit down with your prospective partner and make sure your partnership agreement fully states the terms of your agreement.

Too often, entrepreneurs approach partnership agreements as a mere formality. "Just give me a standard partnership agreement," I am sometimes asked. There is no such thing as a "standard" agreement. Poorly drafted partnership agreements frequently lead to disputes among business partners. Before signing a partnership agreement, it is wise to have a frank discussion with your partner about the terms of your agreement. Make sure you and your partner are truly on the same page. This can be an uncomfortable conversation. However, if you and your prospective partner are not truly in agreement, far better to know before you go into business.  

3. Observe business formalities.

Business partners who are working well together will often adopt a relaxed, informal way of dealing with one another. While natural, this is a dangerous way to do business. 

Partnership disputes often result from partners failing to adhere to standard business formalities.

Partners sometimes conduct business according to informal, ad hoc "understandings" that are not reflected in the partnership agreement. Business partners might get away with this for a while. However, when things become contentious, informal arrangements lead to litigation.

Similarly, managing partners often become somewhat casual about providing minority partners with financial information. The perception that management is withholding information often sows the seeds of future conflict. Many partnership disputes can be avoided by scrupulously observing business formalities.

4. Share the credit.

Partnerships can be ruined when one partner refuses to acknowledge the contributions of the other partner.

Sharing credit with your partners will help to avoid resentments that often lead to bigger problems.

Few things strain a partnership more than when one partner insists on hogging the credit for the company's accomplishments. I have seen successful companies go through destructive litigation all because one partner insisted on diminishing the other partner's role in the company.

As a company grows, a majority owner can avoid many problems by making a habit of saying "we did this" instead of "I did this." On the other hand, if a partner feels slighted, the rift can quickly turn into open hostility. Always remember, partnership litigation is very expensive; a few generous words are free, and they can go a long way toward maintaining good partnership relations.

5. Beware success.

Ironically, it is success - not failure - that leads to many partnership disputes.

Partners can avoid the perils of success by anticipating and openly addressing the anxieties that come with prosperity.

As a company becomes larger and more successful, the need to establish clear lines of authority can bring to the surface disagreements regarding ultimate decision-making authority. Likewise, if the venture is making a lot of money, there are incentives for a majority owner to squeeze out the minority owners.

When a venture achieves a degree of success, the stakes go up. Minority partners become anxious that the majority is plotting to squeeze them out. There may be accusations of self-dealing. The majority owner may then react by withholding information or firing employees who are not "his" people. These conditions frequently lead to litigation.

Partners can avoid many problems by recognizing the anxieties that come with success and taking proactive steps to avoid creating suspicion and misunderstandings.

We Can Help.

If every entrepreneur were to follow these five tips, there would be a lot fewer partnership disputes. If you need a lawyer to help you follow this advice, Thomas C. Sima should be your lawyer. If you're reading this and you're already in a dispute, give me a call and we can figure out a strategy.

John H. Snyder Named "Top 40 Under 40" Litigators in New York

John H. Snyder PLLC is proud to announce that John H. Snyder has been named to the the American Society for Legal Advocates' list of "Top 40 Under 40" litigators in New York state.

Selection for this honor is based upon educational accomplishments, involvement and leadership in bar associations and professional organizations, activities within their community, and demonstrated legal achievement, and membership in the ASLA is limited to the top 1.5% of lawyers nationwide.  John has also been named a SuperLawyer "Rising Star" for commercial litigation in the New York Metro area for 2013, 2014 and 2015.

Snyder appreciates the recognition and looks forward to serving his clients with passion and determination for the next 40 years.