We have been meditating in these posts (here, here and here) on some of the problems that arise when two or more people start and run a new venture. Many of the issues that arise are common to all businesses, but when it comes to fashion—especially fashion good enough and fresh enough to build a brand from scratch—the question of talent moves to the forefront. Whatever else the business might do, if it is going to succeed, someone involved with it right from the start is going to have to be either very talented or very lucky. (You will soon know if it was just the latter because, as things move along, talent tends to repeat itself and luck does not.) In its simplest form, whether in design, execution or just in knowing how to buy, talent is what you see when inspiration finds a means of expression.
Luckily, like a roast lamb with a robust Bordeaux and a fish salad with a chilled Riesling Spätlese from lovely parts of the Pfalz (just beyond where I own a turnip field with a unique terroir), talent in fashion pairs well with talent in business. It is a paradox of American life that, in a country obsessed with prospering in business, managers are not considered “talent.” But that is exactly what they are. If being able to run a business were not a question of talent, and if it did not require a truly deft intelligence and plenty of self-confidence, artists, philosophers and humanities professors would be running the Fortune 500.
Whether starting up or expanding is the question, however, no one is of greater importance, at least at that moment, than the person known in show business as “the money.” Seed capital can come from the venturers’ pockets (if deep enough), friends and family, crowd funding, banks and others, but as dramatized for effect on television in programs such as Shark Tank, money comes at a price—often one that appears disproportionate to the commitment made. You may well bristle at the thought of surrendering a healthy portion of the equity in your business to someone whose contribution is little more than writing a check, but that person knows all too well that without him or her, your dream enterprise will remain just that. (And think about it for a minute: do you really want that person providing guidance for your fall/winter collection? Maybe it is better if your investor is the strong, silent type.)
So sometimes, when it comes to handing out equity, you have to give until it hurts. On the other hand, mathematics tells us that equity interests can never total more than one hundred percent, so if you shell out ownership percentages in exchange for cash, advice, goods or services, keep in mind that your control ends when more than half the equity belongs to other people.
Whatever you do, always understand this: all divisions of that magic one hundred percent must be carefully documented. You have heard the expression “Don’t try this at home.” That applies double for anything commercial or financial, such as equity participation that has a legal effect. In our experience, few things have been more painful to read than important documents with binding legal effect that were written by non-lawyers who deceived themselves into thinking that they could save the money and do it themselves.
Life is too short to prove to yourself why you decided not to practice law: when legal issues come into play—as they will from day one—it is always best, for the calm and confidence of all, to bring your lawyer into the process. If you are a designer, think of it this way: would you let your lawyer design your wardrobe for you? Turn that around, and now you know why he or she does not want to see you writing your own contracts.
Credit: Alan Behr
As we noted in an earlier post, one of the most familiar teams in fashion is the designer and his business manager, such as Yves Saint Laurent and Pierre Bergé. There are also design teams such as Domenico Dolce and Stefano Gabanna. (Taking the role of the “suit” in that family business is CEO Alfonso Dolce, who is Domenico’s brother.) If it is essentially just two of you at first, little, if anything, may end up in writing, but as your business expands, that kind of relaxed approach will become impossible to maintain. If roles and, just as important, compensation, are not formalized, misunderstandings and disputes are likely to arise. The law being about nothing if not the prevention of disputes and their resolution, we always advocate the preventative approach: set things up to prevent troubles from the start, so that they don’t jump out at you from a bend down the road—and make doing business either unnecessarily difficult or completely impossible.
Start with the form of your organization. Although it is legally possible, to a point, for two or more people just to announce they are a business and to operate as an unorganized general partnership, that is rarely a sound approach. Every partner will immediately become, and remain, personally liable for everything the business does and for its financial problems—all of them, whoever among the team may have caused them. You can make things a bit easier for yourselves by putting it in writing, but what you put in writing is critical, and it makes sense to organize in a way that limits personal liability. Keep in mind that the word partner, which has a precise legal definition, is thrown around indiscriminately these days to mean any pairing, from companies doing business together to people in love. In a general partnership, however, the old-time definition of partner applies: a co-venturer who is personally on the hook, for whatever he or she is worth and then some, for whatever debts and other liabilities the business may incur.
To prevent that from happening, two generally preferable organizational structures are available for new businesses that intend to engage in designing, manufacturing, distributing or selling fashions or accessories: the corporation and the limited liability company. They are both roads that lead to the same good end: if the business is conducted properly, its owners generally are immunized from personal liability for the actions of the company. Which organization form works better for you is a question that your legal and tax advisors will help you resolve at the time of organization.
For both forms, however, there is an important doctrine of law that has to be considered, and its consequences need to be avoided: “piercing the corporate veil.” It is every bit as brutal as it sounds. The “veil” of limited liability is “pierced” and you end up personally liable for the debts of the business, legal judgments against it, and so on. The easiest way for that to happen is for a business owner to use the company as a “mere instrumentality” for himself or herself, for example, using the business’s checking account to pay for personal obligations or otherwise comingling business and personal funds. You say you would never do that? Good. Now look over your shoulder and ask if your co-venturer is as careful in the segregation of business from personal affairs as you are. If that is not the case, it may be a good time to get the company’s attorney involved and do a business practices compliance review.
We never said that getting along is easy to do.
Credit: Alan Behr
So much has been written and said about partnerships. Who can forget these one-liners?
“In business, if two partners always agree, there is one partner too many.”
(Or words to that effect.)
“In all of love, one kisses and the other presents the cheek.”
(Generally speaking, of course.)
Both of these snatches of wisdom mean the same: when two or more people get together for anything, one of them ends up calling the shots, sooner or later.
Providing love advice falls outside the job description of the writers for these reports. (Not that we might not try our hand at it anyway when the mood overcomes us.) The point is that, in business, key roles and responsibilities need to be divided among venturers.
Business law is best practiced when the lines of communication between counsel and client are open and readily accessed. However partners may choose to organize themselves (whether as a general partnership, as a corporation, as a limited liability company, or as a non-entity or entity joint venture, to name several popular options), someone should become the prime liaison with outside counsel. If there is a legal department, that is easy: it will be one or more in-house lawyers. But in all other cases, howsoever the business is put together and operates, your lawyers need to be involved, and you will need someone to own the responsibility to communicate regularly (and proactively!) with your lawyers—even if that lucky someone happens to be you.
We are not suggesting that only one person speaks with lawyers. Business is rarely that simple. But we do note that the relationship tends to function smoothest when a skilled person within the organization who is sensitive to the legal issues that arise in the fashion business serves as the primary point of contact with counsel. So—should you be that person, and if not, who should? Ask yourself if you tell your marketers that, worst case, the lawyers can be brought in about potential problems with trademark rights for a new brand a day or two before its nationwide launch. Or consider if you occasionally suggest something such as “The contract looks fine—just sign it.” If so, you are obviously decisive and focused, but your future as legal liaison is not looking very promising—because you are potentially causing the business to run at an unacceptably high level of legal risk, and you are already announcing that you are not yet prepared to make adjustments to prevent that from happening in the future.
When people commit to do business together, they typically bring different talents and strengths into play. The most obvious example in fashion is the designer who pairs up with the business person (or as so many in my family were known, the garmento) who gets the product out the door and brings in the money. The person who is the liaison with the lawyers should be the one who understands that the legal ounce of prevention is worth the proverbial pound of cure and who can also most effectively communicate company needs to counsel and interpret and implement what comes back in response—from comments on contracts to regulatory compliance, and to litigation strategy and beyond.
It has been said that it is more fun to do business as a team than alone and that partners when truly complimentary can create and run businesses of exceptional strength. Just make sure that one of you raises his or her right hand and volunteers to stay in regular contact with counsel. Your partners will thank you for it.
With that simple but important consideration now chiseled in pixels, in our next series of posts we will offer reflections on what the law says about your rights when you team up with others.
Credit: Alan Behr