
Karma-Duped: A Cautionary Tale About the Murky World of Venture Lending - ascertain
http://www.huffingtonpost.com/greg-selkoe/karmaduped-a-cautionary-t_b_9860368.html
======
MichaelGG
I'm not quite sure I understand. The owner signed a deal giving the lender the
power to place people in the company, and prevent any recourse.

> A bank can legally make you sign a release of any wrongdoing the bank may
> ever undertake in the future (!!) as a condition of their loan. Crazy?

Not to rub salt in, but I think the "make you" wording is telling here. No one
made anyone take this loan. This is not crazy; it makes sense that one party
might want to protect themselves from lawsuits. What's "crazy" is accepting
such a deal, giving them access to the company.

In essence, the owner put himself at complete odds with the lender. Indeed, it
sounds like the lender had a huge incentive: loan X, if default, gain 2X. No
one should have accepted it, but that doesn't mean it should be illegal. I
suppose it's assumed that as a business owner, you'll have a lawyer or be
careful when signing things, unlike payday loans and such.

On a personal level though, it does suck and it is really terrible when you
have to work with someone that's trying to undermine you. It's incredibly
frustrating.

~~~
ChuckMcM
And he mentions that in the article, he was very naive.

The sad truth is that this stuff doesn't get taught well (or conversely its
the only good reason for getting an executive MBA where you learn from other
executives). One of the random events that can make you a better entrepreneur
is to interact with someone who is sociopathic early in your career. To
experience the feeling that this person is totally on your side and then
experience them ripping you to pieces for their own gain really helps add
perspective to your future dealings.

~~~
MichaelGG
More generally though: read everything you sign. Expect it to all be used. If
you can never see a clause being needed, then remove it. If the other side
insists then you need to figure out the real motives why.

~~~
ChuckMcM
If anyone comes away from this discussion with one thing to remember, remember
Michael's words. If it is in the contract, it can happen.

This is a true story, but I've changed the names to protect the parties, they
read HN so they can out themselves if they want to :-) There was a really
egregious clause added to the BigCorp Employee contract and one of the new
employees objected to it explaining how it could be used. That kicked off a
really interesting conversation with HR at the employee intake session which
went like this ..

"Oh we would never do that!", said HR.

So He said, "Well fine, lets remove it."

And then HR said, "Well we really can't change it."

"Why not? If it isn't what you meant, why did you say it?", responded this
employee.

"Oh it is just boilerplate." HR said.

"Then remove it if you don't care one way or another.", employee responds.

"But that would take so long to get done." HR said.

"Not a problem! I _retyped_ it in and changed it and printed it out again we
can use this one." said the employee.

"Oh but we have to have legal review all of it to make sure nothing else
changed." says HR.

"Great, let them review it, I'm happy to wait.", they said.

"But we can't let you work if you don't have the signed paperwork." says HR.

"Ok, how long will legal take, a week? two weeks? Lets just move my start date
back to then." offered the employee.

"We'll go see how long it will take." says the HR person, "In the mean time
can you wait in the lobby?"

"Sure" says the employee.

The HR person returns, "I'm sorry, we've decided that you aren't a good fit
for BigCorp. You can go now."

Security escorts our now non-employee to the door and watches them leave
silently.

Every line in a contract has a reason for existing, who ever wrote the
contract will have a number of them in there which can be used against who
ever is signing the contract. A judicious person will identify those lines and
have them removed, or develop strategies that will nullify them later. But you
really do have to put yourself into the frame of mind that the other person is
out to get you, or you might miss them.

~~~
r00fus
What's to keep this non-hire from logging into Glassdoor and warning everyone
else (and existing employees) about the offensive contract verbiage?

If that's not legally actionable, then what's the ethics / negotiation
cost/ben of that same non-hire implying at the beginning that this would be
the eventual recourse if (s)he wasn't hired?

~~~
slgeorge

        What's to keep this non-hire from logging into Glassdoor
        and warning everyone else (and existing employees) about
        the offensive contract verbiage?
    

Nothing. As long as they remained factual. It's unlikely existing employees
would have much response though, they already work at the company and will
have accepted those contract terms. Different types of people (ie risk/reward
and people coming from different cultures tend to take a different view over
contract terms.

    
    
      If that's not legally actionable, then what's the ethics /
      negotiation cost/ben of that same non-hire implying at the
      beginning that this would be the eventual recourse if 
      (s)he wasn't hired?
    

I don't think that would have much impact, and in the context of hiring
someone it would probably look pretty bad.

An assumption in the underlying story is that the contract terms the company
wanted _were_ unreasonable.

If it's in a company handbook then it's a standard term, so the organisation
thinks it's reasonable - it's probably best to try and understand _why_ they
want that situation. Assuming right from the get-go that it's something
invidious and offering a threat that 'if I don't get my way I'll go public'
isn't likely to get a sympathetic hearing in most situations (I think). While
it's possible that someone is trying to screw you over, it's generally best to
just assume their mistaken and to try and clarify why it's a problem.

------
seibelj
As a Boston native, I have spoken with multiple people who worked for / knew
people who worked for karma loop. It (was?) a company that grew in spite of
its culture / founder. Lots of drinking, open drug use, sex in the office,
etc. Apparently the parties were wild, though!

~~~
mouzogu
You've just slandered an entire company based on third party information.
Unless you witnessed it yourself.

~~~
seibelj
It's also described in various articles about the company, if you want to read
more. I post with an account linked to my real life persona and I stand by
what I say.

~~~
mouzogu
I'm not questioning the veracity of the claim but rather the generalisation
made of an entire company.

For what it's worth an online article is still a third party source just like
the friends you mentioned.

Surprised that I got voted down so much. All I am saying is that sweeping
generalisations based on information one has not witnessed is wrong. Is that
so bad?

~~~
powera
You did accuse someone of "slander" for saying something which has been
repeatedly reported. Also, [http://smbc-
comics.com/index.php?id=4105](http://smbc-comics.com/index.php?id=4105)

~~~
mouzogu
Sorry, I tried to change the word "slander" as I didn't realise it was
offensive. There does not seem to be a way to edit comments.

In any case my intention was not to be insulting or accusatory. It is just
that from my previous work experiences when hearsay is passed around they
become almost impossible to dispel - the onus of proof falls on the accused as
opposed to the accuser(s).

------
joshuaheard
That was more like a rant than a "cautionary tale". Without any details, it
was hard to make anything of that article, other than the author was angry and
bitter at banks.

As a business litigator, I learned there are 3 sides to every story: one side,
the other side, and what really happened.

~~~
ChemicalWarfare
From what I've seen in the news, it was just a chain of poor business
decisions made by the company when they decided to expand and dumped a bunch
of cash into side projects that had to essentially be written off eventually.

------
rdtsc
> I had literally liquidated everything (down to my wife’s engagement ring and
> all my savings, 401k, etc.) and (foolishly) put every penny I could find
> back into Karmaloop to try to save it - yet they came after me anyway. [...]
> A bank can legally make you sign a release of any wrongdoing the bank may
> ever undertake in the future (!!) as a condition of their loan. Crazy?

Not sure about they details but they could have come after him to make sure he
doesn't have resources to come after them, even though he already signed the
contract. But perhaps the contract was signed as the CEO of the company but
not as him personally?

------
a_small_island
Interesting article. I'm interested in the financial schemes (of the venture
lenders) in the upcoming series of articles or any anecdotes from HN members.
This article was more introductory than informing...

~~~
brudgers
The financial model is pretty much straight out of real estate development and
private equity. The best up side for the lender is often being able to call
the loan and take control of the asset. My anecdotal observations imply that
this is pretty common outside Silicon Valley because it's the model the local
yokel investors know through experience. The popularization of "startup" as a
synonymous with "new business" and the common idea among founders that raising
money and pitching investors and getting mentored is the first priority make
happy hunting grounds for this type of investor.

That's not to say there aren't vultures on Sand Hill Road, but the standard
model there tends to have greater alignment of interests between founders and
investors.

~~~
karmakarma1
I saw this a lot first hand doing commercial small business real estate. Hard
money lenders give someone a loan to start a restaurant, and if it fails to
meet the obligations of the loan, they can foreclose on the restaurant and
other property or assets the person has signed as collateral.

Taking money as a loan with a personal guarantee is always a very high risk
situation and should be avoided unless you absolutely have to.

------
powera
I really want to hear the other side of the story here. There's so much
unfocused resentment in this article that I think something else is going on.
(specifically, the asides about how the Venture firm flies private jets and
hates minorities).

The whole point of venture debt is that if there is a bankruptcy, they get the
whole company. Whether there was tortuous interference (I think that's the
right term) or simply weren't willing to lose more money on this company, I
don't know.

My basic take on the article is really just "man's company fails, he blames
the last person to put in money".

~~~
mst
I'm not sure that interpretation flies if the company never missed a payment.

~~~
powera
Not missing a payment because the CEO is taking on personal debt to invest in
the company is not really sustainable, and almost certainly a red flag to
investors.

Based on the other article I link to, they seem to have been behind on their
payments to everyone else as well. And were doing "deep discounts" to keep
cash flow high. Clearly a bubble situation in my mind.

------
subpixel
Weird coincidence, I was just reading about this story earlier in the week.

I'm interested in the scuttlebutt but at the end of the day I think this is a
story of an entrepreneur who was fundamentally unprepared for massive success
and then made a series of very expensive mistakes (including poor choices
w/r/t executives and advisors) that proved deadly to his business.

------
JackFr
c.f [http://www.complex.com/style/the-rise-and-fall-of-
karmaloop](http://www.complex.com/style/the-rise-and-fall-of-karmaloop)

------
JumpCrisscross
Breaking down this story as someone naïve to the company and coming from the
equity side.

> _Comvest blocked other capital sources, jacked up fees, interfered wherever
> possible (among other things, they inserted an incredibly destructive and
> incompetent full-time advisor, and they simply delayed and dragged when time
> was of the essence)._

Lenders are not shareholders. Unless you violated your indenture, they
shouldn't have been given the right to "jack up fees" (interest?). They
shouldn't have been given veto rights over corporation actions (again, unless
Karmaloop was in violation of its indenture).

> _Comvest came after me personally for $5+ million [guaranty]. Comvest knew I
> didn 't have any money - I had literally liquidated everything_

Never personally guarantee company loans. (Curious to hear who Karmaloop and
the author's counsel were when this was signed.) If you do, maintain (a)
insurance _or_ (b) savings to cover the liability. Either way, this could make
Comvest's claim a consumer loan, thereby qualifying for regulatory action,
_e.g._ from the Consumer Financial Protection Bureau (CFPB) and/or the
author's state banking regulator(s).

> _A bank can legally make you sign a release of any wrongdoing the bank may
> ever undertake in the future (!!) as a condition of their loan_

If you signed under duress ( _e.g._ without counsel representing you), or
believe Comvest did something illegal, you can terminate "for Cause". There
are lots of ways to sue or arbitrate around this kind of language. If, on the
other hand, you broke your indenture - that's why you hire counsel _before_
signing.

In summary, venture debt isn't inherently evil. It _is_ debt, however -
lenders should be seen as being separate and distinct from shareholders.
Throwing in warrants can increase the pain a lender is willing to take before
they drop the axe.

That said, this doesn't sound like predatory lending. (Or venture debt; more
like private equity). It sounds like Comvest got tired of management barely
making payments while threatening Karmaloop's future ability to pay, found
Karmaloop in violation of its indenture (or some consulting contract Comvest
and Karmaloop may have signed for the "fees"), and decided to see if they
could salvage the investment.

~~~
jrochkind1
What's "barely making payments" \-- either you make your loan payments (and on
time), or you don't, no?

~~~
powera
I assume it's some version of him saying to the lender "I'm mortgaging my
house, selling my wedding ring to put money into this company, is there any
way you can let us get by with lower payments" and the bank saying "No. We
have a contract, and we're willing to put you into bankruptcy if you can't pay
us."

