
Guiding a Venture-Backed Startup to a Felony - sigacts
https://www.linkedin.com/pulse/guiding-venture-backed-startup-felony-sean-maday
======
jessaustin
Calling this a "venture-backed startup" is a stretch. It was really just a
con. One couldn't reasonably expect a single author who wrote five westerns
all by herself to net $250k for her efforts. They didn't really expect to be
able to pay back the investor after buying all those goodies for themselves,
even if they could have gotten a single book written.

~~~
35bge57dtjku
I'd think a web portal that fits the bill could be constructed for about 10k,
maybe 20k. So I wonder if the rest could have actually paid for the 5 novels.

> One couldn't reasonably expect a single author who wrote five westerns all
> by herself to net $250k for her efforts.

Why not, that's too low for any author? I would have thought they could find
someone somewhere who'd agree to make 5 mediocre, somewhat short novels for
150k total, maybe someone just starting out.

Wouldn't that have at least been a real effort and protected them from being
charged with fraud? That'd leave them with 80k in profit. They'd still have to
get around the part where they agree money won't be used for their salaries,
but they'd at least have fulfilled the letter of the agreement. And 80k for a
few weeks of work is pretty good, imo.

~~~
DanBC
> Why not, that's too low for any author?

It feels like a bit of a gamble to write a series of books and throw a huge
marketing budget at them. That's what publishers have been doing, and it
doesn't work for most of their books.

Average earnings for published authors in UK is £11k pa.

[https://www.theguardian.com/books/2015/apr/20/earnings-
autho...](https://www.theguardian.com/books/2015/apr/20/earnings-authors-
below-minimum-wage)

> The top 10% of professional authors, those who make £60,000 or more a year
> from their writing, earned 58% of all the money made by professional authors
> in 2013, and the top 5%, those making more than £100,000, earned 42.3% of
> that money. The top 1%, who make mean average earnings of more than
> £450,000, take 22.7% of all earnings, said the Authors’ Licensing &
> Collecting Society, which commissioned the UK-based survey.

> The picture for lower-earning writers was much bleaker. The bottom 50% of
> authors were those who earned less than £10,500 in 2013, and accounted for
> just 7% of the amount earned by all writers put together. And 17% of all
> writers did not earn anything at all during 2013, said the ALCS, adding that
> 98% of those authors had published a work every year from 2010 to 2013.

I dunno, does this make it sound like the scam / system described in the
submission is worth a punt?

~~~
TheOtherHobbes
Most publishers throw little or no marketing budget at books, which is one
reason most books do so badly.

Promoting book sales via a specialist niche community site isn't a bad idea.

In fact niche marketing was more or less how 50 Shades got started. It was a
crappy novel marketed brilliantly by a professional marketer, who went from
persuading a small community to praise the book, to leveraging that praise to
get interest from other online communities, to leveraging _that_ interest into
a mainstream publishing contract with formal marketing support.

Of course, for that to work you need a marketable demo.

Outdoorsmen who read erotic fiction in between heroic fishing exploits are
possibly not the world's biggest niche book market.

------
dmix
> Share a Worst Case Scenario - The prospectus for the Scoundrel deal showed a
> conservative, most likely and optimistic scenario. The conservative scenario
> showed that Mr. Brandenburg would receive all of his investment back in just
> two years. In fact, Mr. Brandenburg never saw any dividend or repayment on
> his $250,000 investment. Don’t gloss over risks.

This is an interesting piece of advice. I never thought to plan the negative
scenarios when doing high-level planning. You always discuss possible risks
and keep them at the back of your mind but adding a failure scenario to your
plans among low, medium, high outcome scenarios is a really good idea.

You don't hear much about risk management/planning for startups. If you're not
monitoring your risks along with your positive KPI's (or factoring them in
your KPI analysis) it's easy to gloss over them or delude yourself that they
don't exist.

Although, otherwise I question the value of taking much lessons out of this
'startup' failure. It's not very analogous to anything like the standard HN
web startup. Just some outsider non-techies who wanted to make a 'web portal'
and wasted a bunch of money frivolously (ie: 100k went to the author for
licensing upfront). Even ignoring their lack of technical industry experience,
their business plan heavily centered around building a community with a target
market they didn't already have any traction or influence in - which is always
the hardest part in any community-centric product. The tech is (usually) the
easy part.

~~~
cookiecaper
The truth is that if you present a document to your investors that says "Worst
Case Scenario: Total Loss", it's not going to go well. Your investors will
likely believe that you're presenting that as a minimum acceptable outcome. It
may make a jury feel you were trying to be honest, but you probably won't get
any investment to start with if you take that approach.

~~~
morgante
Eh? Almost any sane investment prospectus out there will state that it is
possible for your investment to lose money and, in the worst case, to be lost
entirely. Any prospectus which _doesn 't_ say that is almost ipso fact a
fraud.

~~~
cookiecaper
Correct, there is boilerplate language that states investment is a risk which
is found on almost every investment instrument, including small print on
commercials that pitch investment products and on the footer of every online
stock brokerage. IMO that's different than inserting a projection that reads
"TOTAL LOSS". I suppose the article doesn't specify whether the boilerplate
language was included or not; I was assuming the author meant additional
attention should've been drawn to the risk beyond the boilerplate.

------
jondubois
The only thing I learned from this article is that even the most idiotic ideas
can appeal to some investors if you search hard enough.

~~~
Kequc
In my experience securing investment is like pulling teeth. The amount of
assurances and background checks involved alone, is enough to make one's head
spin and that doesn't nearly get you to the end of it.

How was an outcome of "we burned all of the money and didn't deliver a single
thing" not in the final draft of at least three different contracts? I spent a
year searching for venture funding and it was painful. There was no oversight,
or staggered milestone based deliveries? Someone just handed over $250,000? In
my dreams.

------
wtvanhest
IMNAL but...

> Keep personal expenses out of your company books.

Is likely the most important advice in this piece. If you only take the
compensation you agree with your investors/board to take, and you never pass
unrelated expenses back to your entity, you will at least appear to be acting
morally.

The second you start commingling funds, is the second you enter a period of
extreme risk. Never commingle investor funds with personal funds and avoid
spending on things that you 'justify' as a business expense if they benefit
you personally in anyway.

I have a feeling we are about to read about more cases like this one. America
is in full startup fever right now and people will act immorally when they
realize that success is out of their grasp.

------
nstj
Without being sarcastic, I think the best part of this article was discovering
that Tom Selleck starred in a 1990 Western set in Australia called "Quigley
Down Under"[0].

And I tend to agree with the general sentiment of other comments here, it
seems that given there seemingly was no real intent to create a real company
from the funds invested, the title of the article could just as easily be "How
Not to Run a Fake Startup Investment Scam".

[0]:
[https://en.m.wikipedia.org/wiki/Quigley_Down_Under](https://en.m.wikipedia.org/wiki/Quigley_Down_Under)

~~~
tootie
It was a major Hollywood production with a ton of marketing behind it. I
remember seeing commercials for it. I think I rented it on VHS. It wasn't
great.

~~~
mcguire
Eh, it had its moments, Roy.

------
Pitarou
If you need these six "lessons for entrepreneurs" explaining to you, you're
not fit to take investors' money. Period. It's a story of ignorance,
incompetence and irresponsibility from start to finish.

~~~
cookiecaper
I think the article's points are expected to be received more as reminders to
keep your nose clean than actually communicating new information to readers.

------
realworldview
If it sounds too good to be true, it is too good to be true. There is no
magic. Where there is money, there is deceit and opportunistic theft. Don't
believe anyone who tells you they will do a job without staging and proof.

Unless you bought those venture-backed rose-tinted glasses for those
passionate about whatever the next fad is.

Open your eyes, people... Oh and this just reeks of con.

------
api
The international bureau of you can't make this stuff up delivers yet again.

------
gerby
How did they expect to build the web portal, if no one on the operating team
had any knowledge of how to do so?

------
Waterluvian
What kind of punishment could be handed out for this?

~~~
greenyoda
The article mentions that the defendant was convicted of securities fraud, a
"Class Three Felony" in Colorado. According to this web site[1]:

 _" Class three felonies, such as vehicular homicide while under the
influence, are punishable by four to 12 years behind bars and five years of
parole."_

[1] [http://www.mbslawco.com/blogs/2015/october/understanding-
man...](http://www.mbslawco.com/blogs/2015/october/understanding-manslaughter-
laws.aspx)

~~~
sigacts
Yep. We talked to the judge after the case and he said that the punishment
could range from probation to 12 years in state prison. The defendant has no
criminal history, so I would imagine the sentence will be relatively light.

~~~
sovietmudkipz
With a felony on your record, no sentence is a light sentence. He'll be
haunted by his conviction until he dies, can get records sealed (depending on
his state), or receives a presidential pardon.

