
My $3.3M Mistake (2009) - Toyentrepreneur
https://sivers.org/mistake
======
nullc
Unless there are some major details missing here it sounds like the author got
terrible legal advice.

One cannot cause another party to onw their own business through essentially a
clerical error. Contracts are created out of a meeting of minds, without a
shared understanding there could be no agreement. It might have been a gnarly
account / tax mess to clean up, but that should have been the extent of it.

~~~
mehrdadn
Was this really a clerical error? He sold 90% of the shares to his dad and
signed it without reading. If he forgot to sign it or signed the incorrect
form, I'd call that a clerical error, but does not reading what you're signing
also fall in that category?

~~~
dmurray
The clerical error is in treating the money deposited in CD Baby's account as
belonging to CD Baby. It's completely normal that one business has funds in
its bank account which are actually owed to another entity, and that's the way
that it could have been treated here. With some technicalities of law (does
this mean CD Baby was running an unlicensed money transmitter?) that fall
under the category of "gnarly account / tax mess to clean up".

------
gjmacd
```Yes, it turns out that one of those pieces of paper I signed without
question had sold 90% of the shares of Hit Media Inc to his company.```

Not buying this...

His father should have told him that he was taking ownership of his company
for the loan. The fact is, the guy loaned him $20K, had him sign "paperwork"
and didn't tell him is the issue here -- pretty sure right there what he
signed was a loan and sales of 90% of the company.

I've read Siver's stories over the years. Entertaining and certainly one of
the Ruby guys to listen too... but this is just a bit of a stretch to say "I'm
not mad at my Dad." \-- he should have been furious unless he knew and this is
just another one of Derek's "stories".

Dad sounds like he wasn't forthcoming with what Derek was signing -- or maybe
Derek knew and needed a good blog post?

~~~
tehlike
Maybe his dad taught him a valuable lesson!

------
lukego
This problem with the IRS seems to have influenced his life direction quite a
bit judging from his blog. Transferred assets to a charity; acquired foreign
citizenship; renounced US citizenship; moved to a country where foreign-
sourced income is tax exempt. Guess it really stung!

~~~
javert
Where are you reading that he renounced US citizenship? I could not find that.
I would like to read about his thinking on that.

~~~
S_A_P
Check sivers.org. He has blogged about this pretty extensively. I want to say
it was 2010-2011 when he posted it, but my memory is failing. I came away from
reading the blog thinking something was going on that he wasn’t mentioning in
his blog. He generally posts in a positive tone but some of his choices seemed
at odds with the tone of his blog. Namely, sell the business and put the money
into a charitable trust, renounce citizenship and move abroad. I also seem to
remember that the folks left holding the bag at cd baby weren’t exactly
thrilled with his management style.

Not here to throw shade at the dude and I think he definitely has some gems in
his blog, but it’s also showing the best self and not necessarily the real
self.

------
paulsutter
To everyone arguing against his story: the trail of paperwork for CD Baby
showed that it’s just an alias for Hit Media, so it would be hard for him to
argue otherwise to the IRS or any other interested party. If you really did
want to operate two separate businesses out of one bank account yes it’s
possible but would be problematic without really clear and detailed records,
starting with a separate set of books and tax returns.

As far as the story indicates, the separation between CD Baby and Hit Media
was just in the author’s head. There’s nothing wrong with that, and I believe
him, but the IRS would not. There would be too much incentive for people to
generate complex recollections. Not to mention the trouble with business
partners whether or not they are family.

~~~
permatech
Sounds like the whole “set up a company and let us buy shares” was a tax dodge
and this kid’s ignorance got him burned

~~~
gjmacd
Not sure about the tax dodge, but more about the Dad loaning him $20K and
getting something from the investment. I think a lot of people just do "DBA's"
and think "I'll just cash that as an alias DBA..." \-- there's implications to
that. But if the money is not a lot, under $10K, it's not worth worrying about

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55555
This story is missing some absolutely huge details.

------
dang
Discussed at the time:
[https://news.ycombinator.com/item?id=628335](https://news.ycombinator.com/item?id=628335)

~~~
ajb
This comment from before
[https://news.ycombinator.com/item?id=628624](https://news.ycombinator.com/item?id=628624)
states that a bunch of Europeans got UK limited companies because doing so was
easier than their native ones. That might catch some out if there's a 'hard
brexit' (although it sounds like it's just admin to fix - get an Irish company
and transfer ownership of everything)

------
1123581321
Does anyone know the whole story? I thought the IRS just treated the delta
between the sale and market value as gift/estate tax.

~~~
jjeaff
Yes, I'm not sure what he's talking about here. The IRS can't dictate how much
you sell something for.

They can, however, impute market value. So yes, they could make you pay gift
tax. But he says he paid back the $20k loan. Either the $20k was a loan or it
was used to purchase shares. It can't be both.

Also, merely depositing money into a specific bank account has no bearing on
who or what entity owns the company. You could simply account for the CD Baby
funds separately and file separately. Just like lots of small businesses will
use their personal bank account for both personal and business funds. Not a
good idea from a bookkeeping perspective. But legally and IRS-wise, there is
no problem as long as you keep track of things.

There could be a lot of reason's he would have this issue of not being the
primary owner of CDBaby. But none of the reasons given are valid ones. Perhaps
daddy money bags wanted his cut but instructed his accountants to make up a
reason why he had to get $3.3 million without letting the son know that he
really just wants a return on his investment.

~~~
carfacts
Reason could be fiduciary duties owed by directors of the dad’s company. As a
director you can’t give away company assets at below market value, without
shareholder consent. If there were shareholders in the company other than the
dad, then those shareholders could have sued the dad for breaching the duties
he owes to the company. So if the other shareholders refused to give informed
consent to a below market value deal, the only way for it to happen was to do
a deal that made those shareholders happy.

~~~
jjeaff
Of course, they just shouldn't have included CD Baby as being owned by the
other corporation. But, assuming there was some unspoken reason that had to
happen, The other shareholders would have needed to be involved in the initial
purchase/loan as well.

------
RickJWagner
People shouldn't engage in non-trivial financial actions until they understand
them.

The author was taking all sorts of steps that are far beyond what's done in
the average person's financial sphere. Pleading ignorance is.... well,
ignorant.

~~~
permatech
Well when your parents have you signing papers you never read from a young
age. The lack of responsibility reminds me of another trustifarian; one in the
White House

~~~
RickJWagner
I really wish you hadn't brought politics into the discussion.

But if you insist, let's review a few of Donald Trump's accomplishments:

\- Won the Ellis Island Award for contributions to minority communities

\- Has a star on the Hollywood Walk of Fame

\- Has written (ok, has his name as author) best selling books

\- Built (and destroyed, and rebuilt) massive enterprises that employ tens of
thousands

\- Sawed through the Republican party establishment, then defeated the
Democratic nominee in spite of massive disadvantages and polls.

\- Was elected US President _as the first political office sought_

\- Has presided over a booming economy that brings record low unemployment to
African-Americans and Hispanics, accompanied by rising wages and a roaring
stock market

It is certainly true that Donald Trump was born with a silver spoon in his
mouth and many huge advantages. The same is true of many other politicians of
both parties, but few (are there truly any?) can match the breadth and depth
of accomplishments listed above.

You can dislike Donald Trump, and/or his politics as much as you want. But you
can't deny he has accomplished a lot, even for someone born to wealth.

~~~
permatech
Kids in cages and tariffs...

------
ForHackernews
> I couldn’t be mad at my dad.

Really...because it sounds like your dad's shady schemes cost you a huge
amount of money?

~~~
pinewurst
But it wasn’t shady. His dad loaned him cash for recording equipment and took
equity in the recording studio for collateral. Admittedly it should’ve been
returned when the debt was paid off.

~~~
permatech
His dad specifically told him he’d rather have his (offshore?) company buy
shares than loan money. Tax dodge for sure

------
cmauniada
This seems unreal, like how could it really fly by that you only owned 10% of
a company that you founded, anything even remotely mentioning any sort of
contract/shares/business jargon would typically raise ears... not buying this
story sorry.

------
mempko
Wow, that dad was an asshole.

~~~
repomies691
Well, the story doesn't tell what the dad was thinking when he was buying the
shares. Maybe his idea was to support his son and sell the shares back to
Sivers when he has made enough money, for modest profit. And maybe he
considered any profit scenario unlikely^1. But then he forgot about it and
maybe Derek forgot about it as well. However might be weird that Derek didn't
know that he was selling shares of his company. After all company
shares/stocks are a concept that even 10-year olds understand at some level.

[1] In my experience people consider starting entrepreneurs likely to fail. So
it might be as well that FFF round is considered a gift from the investor.

------
throw03172019
Why not spin CD Baby off into its own entity as an asset sale for $X amount.

------
amelius
The company was valued $3.3M, but how much money was extracted eventually?

------
KangLi
He got screwed. May be his dad is just a greedy rich man lol

------
sbr464
Odd, feels like spam. Apologies if not.

~~~
cyberferret
This is actually a valid reminder that there is now a generation of people
working in the online industry who have grown up without ever purchasing or
using a CD, and do not know about the story of CD-Baby. We predicted it would
happen back then - it is the reality now.

Sad, because a large part of the early history of the internet is wrapped up
in stories about people like Derek Sivers and his company. Perhaps it is a
pre-requisite for most startup courses to have a history lesson around those
days?

~~~
quickthrower2
Purchased many a CD, Cassette and played vinyls, but no never heard of CD-
Baby.

