The investor, lets call him Weiner, was questionable from the outset. Ironically, I was warned about his improper conduct. But a few things made me ignore the clear warnings I was given. Firstly, I had just founded my first education company early in my career. We like most start-up’s were desperate for seed investment, and desperation is never a good position for negotiation finances. Secondly, I was a trained lawyer, and thought, if I have my eyes open and clear investment contracts, that detail rights and obligations, I could contain any malefance. I was overly optimistic!
Rent Rort #1
As soon as an investment amount was agreed to, we were told, “don’t waste money on rent, we have spare space in my office”. For an early stage company, any cost saving is compelling, more funds to go to product development, marketing etc. Easy decision right?
We moved in without any further discussion, and worked hard in the same space for about a year. We never talked or emailed any rental details, no leases etc. Until that is, the company started to generate revenues. We then received an invoice for the past years back rent at full commercial rates. This was clearly a shock, unfair and clearly a ploy for Weiner to get his hands on revenues the company was now bringing in. The rent amount, would have constituted a significant portion of the whole seed investment, so in fact Weiner was in large getting his shares in the company just by providing some unused space.
The emotional reaction is to simply tell Weiner tough, we have no lease, no email, no evidence at all that the company is liable to pay rent. But here is where Weiner holds the trump cards.
- They are effectively the landlord, so if we refused to pay, they could theoretically refuse entry, and greatly disrupt the business
- The business is operational, stationary, fit-out, phone lines, IT. To relocate would be a massive distraction to the business
- Weiner is still a shareholder in the business. A dispute about rent, can effect the ability of the company to function effectively.
- Most relevant, there are bigger fish to fry. Weiner knows, as a mere investor, while the rest of the team are working 12 hour days, 7 days a week, that he can just sit back demanding rent and not be overly bothered. Conversely, the team has much bigger fish to fry. Like getting the next platform release out on time, big client proposals we are very keen to win etc. What Weiner knows, is that in the scheme of things, arguing about rent is less important than building the business.
KEY LESSONS OF THE RENTY RORT:
- Don’t take a favour at face value, get it in writing.
Get a formal lease stating a rent free period. Or at the very least, confirmation in writing that the business will have access to X metres of space at zero cost. Clarify if there are any charges for outgoings, IT etc.
- Intentions speak louder than words
The bigger question is whether there was intentionally a rort to get money, or a genuine misunderstanding. Loose comments like, “don’t worry about rent”, may be open to interpretation. On the other hand, clear statements like “we have empty space, don’t waste money on rent”, only to be charged rent when the dollars start coming in, is, unfortunately, a rent rort.
- Red Flags should be seen as a red hot iron
If you have been prey to a rort like this, it is NEVER an isolated incident. It is a red flag that should be seen as important enough, that you dissolve the relationship. Is this completely exaggerated over simply a dispute about rent? No. The reason being, it is tempting to try to isolate an issue to the matter at hand and move on. And that is what I tried to do, but working with a number of investors for almost 20 years tells me an undeniable truth. People fall into one of two camps, they are either ethical in their dealings, and this will giovern their actions in fairness and reasonableness at all times. Conversely, where there is unethical, greedy, self interested behaviour, this is something that equally will govern all future interactions.
EXPENSE RORT
Once you have identified that your dealing with a greedy and crooked investor, check expenses very closely. Remember we were co-located. I went to pick up a box of printed materials once from a printers, which I hadn’t done before, and the girl who worked there said, are you the business owner. I said that I was, she knew Weiner, and somehow knew of his dodgy dealings, enough to be disgusted by them. She said, sorry to tell you but he does printing for his other businesses and tells us to put the bills onto my companies account. This was another shock, and something I just never even contemplated, so I thgen started to look much more closely into any expenses and invoices where there were shared services and suppliers. Unsurprisingly at this stage, a number of improper activities were identified, costing the business significant amounts of money.