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Business Litigation Alert: "Know the Terms of the Investment Deal Before You Sign"

Getting all the information upfront is critical

A recent article in The New York Times reveals a story that could happen to any business person.  Chip Tate, the owner of the Balcones distillery, was experiencing rapid success with his artisanal distillery. However, he needed cash to expand, so he went shopping for investors.

He found Gregory Allen, a businessman from Virginia willing to invest in the growing business. Mr. Tate thought he had found an ideal (and passive) investor to help him take his business to the next level.  Unfortunately, Mr. Allen had different ideas about the level of his involvement.  The deal documents gave Mr. Allen a majority share in Balcones and control over the company’s board.  Soon disputes, lawsuits, and countersuits began, resulting in Mr. Tate being bought out. He was then fired as an employee and forced to agree to a fifteen month non-compete provision.

While the article focuses on a craft distillery, the problems described are not limited to any one industry alone.  Indeed, as the article notes, this is “an all-too-common pattern” that can be found across the business spectrum.  It can, however, be avoided with proactive work on the front end of any transaction.

  1. Set Clear Terms and Understand Them – Make sure they are in writing, protect your interests long-term, and that you understand what the terms of the deal are.
  2. Know Who You’re in Business With – Properly vet any investor and ensure that you are on the same page in terms of goals for the organization as well as your management style.
  3. Utilize Legal Expertise – Your legal team is there to protect your interests.  Tap into their expertise and experience to build protections into the deal from all angles.  While you may bristle at the initial expense, the old saying about “an ounce of prevention” applies here.

Mr. Tate ultimately lost the business he fought so hard to build due to deal terms that he apparently misunderstood, ultimately leading him to be fired from his own company.  This story makes it very clear how important it is to get the terms of the deal clearly outlined at the start in order to avoid ending up with disputes and litigation down the road.

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