“Once bitten twice shy!”. At least that’s how the saying is meant to go. In my case, about twelve years after Rent Rort 1, I naively fell for the same trick again.
The circumstances with empty Vessel were virtually the same as Rent Rort 1, which very sadly, shows crooked patterns in investors not one off random events. The same line was given, “we have lots of free space, just use some of the empty desks”. But this time I was more confident about the free offer for two reasons. The space we are talking about was one of the most expensive office buildings in the middle of Melbourne’s most expensive commercial strip, Collins Street. To put into context, it was the same building as the Melbourne head office of KMPG. It would be totally unreasonable for a start-up only just registered and with 2 staff to expect to pay A grade commercial leases. Secondly, this time I was relying on a personal relationship of over a decade. In reality, this is a pretty weak excuse on my part, in fact that was even more reason to be cautious.
For over a year rent was never mentioned, no payments, no outgoings etc. The moment the company generated revenue, the invoices starting rolling in. And this time the amount was enormous. Full commercial fees, plus outgoings backdated to the date the business commenced. We were even charged part of Empty Vessels office staff salaries. If that wasn’t cheap enough, Empty Vessel even calculated the percentage our staff would have used for tea and biscuits. When we argued the point, that this was never agreed to, and not in good faith given we were told we could use empty space that was available as a start-up, the coy response “Of course we were always going to charge rent, what made you think otherwise”.
In fact this was never agreed to up front, because no reasonable thinking start-up, would agree to pay from inception, some of the most expensive real estate in the city. It would be not only excessive, but irresponsible to do so. The only benefit would be to the landlord, or in the case of Empty Vessel, in their personal interest, to the detriment of the company.
If this wasn’t miserly enough, the icing on the cake, was that we were a social enterprise that supported a philanthropic foundation that I had founded. There was a small space used which was in essence, a storage space, behind the office printers. It was used by the charity as temporary space for part time volunteers. The charity was charged tens of thousands of dollars for the use of this space. To date the only shareholder that personally charged fees and obtained a financial gain, from a charity seeking to use its money in the poorest parts of the world, was Empty Vessel.
Although the experience left us with a bad taste in our mouths, and led to the decision to lease and fit-out our own office space (which cost for a whole city floor less than what we were being charged charged for some shared space), the big issue at hand, is the misalignment that can occur between directors personal interests and the companies interests.
Alignment is one of the most important attributes for success. Misalignment can be disastrous. “good luck to you, so long as your interests don’t conflict with mine” (Marlon Brando, The Godfather).
If a person is both a landlord of a property, and a director of your start-up. If they are determining the terms and price of the space, they are by definition, in a conflicted position. They can either do the best thing possible for them personally as a property owner, ie charge the highest amount of rent possible on the most favourable terms, to the expense of the company. Or they can prioritise the company, giving them free or advantageous rates, at the detriment of the property ownership. The most important lesson here, – NEVER create a situation where someone has to chose between self-interest OR your companies interests. It’s a bad position for them, and in my experience, you’re the one most likely to lose out.
Can this be managed effectively. Yes of course, you can have a lease in writing agreed to in advance to ensure all commercial terms are clear and documented. To avoid conflict, Empty Vessel should have had an independent estate agent, establish fair rates, if charges were in fact even agreed to at all. However, the best case is to simply remove any chance of conflict, and deal with arms length service providers at all times. If you’re ever in a situation, where an investor decides on the price of a service they have an interest in, beware, you have a Red Flag situation.
KEY LESSONS:
- Misalignment of interests is a recipe for disaster. Avoid putting yourself in a situation where a director or shareholder is also a service provider.
- Always document any services. The assumption is you don’t need to document something that isn’t been charged for. However there is no cost, and no downside in putting it to writing, “please confirm that (services) will be made available at no cost to the company for a period of (time)”.
I didn’t adhere to the proverb, “once bitten twice shy”, but I’m certain now to be, “twice bitten, forever shy”.