Have you had a wonderful idea but no money to get it launched? Did you accept money from a relative or friend and lived to regret it? There is no need for any “contract” because this is between people who trust one another, right? No! It is not right and the reason you are reading this is probably because you now have a real problem with your partner. More often than not, this silent partner or investor is anxious about the money if your idea is not immediately successful.

The hidden problem of doing business with relatives and friends: what if the project fails?

It is often the case that projects that start around the kitchen table or over lunch simply are not well thought out. It sometimes takes years for a great idea to become successful or worse, it never becomes successful and the project fails. If this event becomes your worst nightmare, it is probably because you did not have a good contract with your friend or relative. Worse than that, you might not have ANY contract with your friend or relative. If this is the case, you probably need a lawyer to assist you in unwinding your business relationship. Many investors get very angry when they lose all of their investment in your project. In fact, most investors consult their own lawyer when they realize that their money is gone. They start to look around at who to blame. That “someone” to blame will be you.

What can an angry investor possibly do to you?

That is a good question and you will not like the answer. In fact, you probably have your own money and substantial time invested into your project that did not go anywhere. Your time and money was your own and the project was a bitter failure so of course you don’t blame yourself. There are a million reasons why your project failed. Bad market timing, the need for more cash, no interested buyers, unexpected and high cost supply issues, or any number of reasons. However, an investor that loses their investment simply believes that you lied and cheated them or otherwise, why wouldn’t this fantastic project be out there making tons of money? The blame game is the start of a massive problem for you. Once this angry partner seeks out legal counsel, you might get a “demand letter” demanding a return of the invested money by a specific date. The demand will specify the issues that your former friend or angry relative believes happened; i.e., he or she was lied to and the funds were misused by you.

What to do now?

Well, if you are smart, you realize that this can get much worse. In fact, if certain issues have not been done by you BEFORE you accepted the funds, you could be looking at the sale of unexempt, unregistered securities. This is a terrible legal position to be in and could subject you to criminal prosecution or at the least, regulatory prosecution by the Texas Securities Board, or worse, the U.S. Securities & Exchange Commission if your friend or relative lives out of Texas. This situation can render your defenses moot since the securities laws hold the seller (the one with the business plan) to strict liability of statutory compliance. That means that a failure to comply with such renders an attempt to be fair and honest in your relationship fairly meaningless. Simply put, the failure to comply with the mandates of securities laws means that the business relationship you set into place will probably fall through and you will be liable to your “silent” partner for damages. Most of the time, that means the return of their full investment, their attorneys’ fees and statutory interest.

Just file bankruptcy?

Think again. This may not be a way out of this mess for you. Often, securities fraud is not dischargeable in bankruptcy. My advice to you? Call me, Bonnie Spencer, at 713-961-7770. I have 42 years of working with angry investors or unhappy “silent” business partners.