I'm not quite sure I understand. The owner signed a deal giving the lender the power to place people in the company, and prevent any recourse.
> A bank can legally make you sign a release of any wrongdoing the bank may ever undertake in the future (!!) as a condition of their loan. Crazy?
Not to rub salt in, but I think the "make you" wording is telling here. No one made anyone take this loan. This is not crazy; it makes sense that one party might want to protect themselves from lawsuits. What's "crazy" is accepting such a deal, giving them access to the company.
In essence, the owner put himself at complete odds with the lender. Indeed, it sounds like the lender had a huge incentive: loan X, if default, gain 2X. No one should have accepted it, but that doesn't mean it should be illegal. I suppose it's assumed that as a business owner, you'll have a lawyer or be careful when signing things, unlike payday loans and such.
On a personal level though, it does suck and it is really terrible when you have to work with someone that's trying to undermine you. It's incredibly frustrating.
And he mentions that in the article, he was very naive.
The sad truth is that this stuff doesn't get taught well (or conversely its the only good reason for getting an executive MBA where you learn from other executives). One of the random events that can make you a better entrepreneur is to interact with someone who is sociopathic early in your career. To experience the feeling that this person is totally on your side and then experience them ripping you to pieces for their own gain really helps add perspective to your future dealings.
More generally though: read everything you sign. Expect it to all be used. If you can never see a clause being needed, then remove it. If the other side insists then you need to figure out the real motives why.
If anyone comes away from this discussion with one thing to remember, remember Michael's words. If it is in the contract, it can happen.
This is a true story, but I've changed the names to protect the parties, they read HN so they can out themselves if they want to :-) There was a really egregious clause added to the BigCorp Employee contract and one of the new employees objected to it explaining how it could be used. That kicked off a really interesting conversation with HR at the employee intake session which went like this ..
"Oh we would never do that!", said HR.
So He said, "Well fine, lets remove it."
And then HR said, "Well we really can't change it."
"Why not? If it isn't what you meant, why did you say it?", responded this employee.
"Oh it is just boilerplate." HR said.
"Then remove it if you don't care one way or another.", employee responds.
"But that would take so long to get done." HR said.
"Not a problem! I retyped it in and changed it and printed it out again we can use this one." said the employee.
"Oh but we have to have legal review all of it to make sure nothing else changed." says HR.
"Great, let them review it, I'm happy to wait.", they said.
"But we can't let you work if you don't have the signed paperwork." says HR.
"Ok, how long will legal take, a week? two weeks? Lets just move my start date back to then." offered the employee.
"We'll go see how long it will take." says the HR person, "In the mean time can you wait in the lobby?"
"Sure" says the employee.
The HR person returns, "I'm sorry, we've decided that you aren't a good fit for BigCorp. You can go now."
Security escorts our now non-employee to the door and watches them leave silently.
Every line in a contract has a reason for existing, who ever wrote the contract will have a number of them in there which can be used against who ever is signing the contract. A judicious person will identify those lines and have them removed, or develop strategies that will nullify them later. But you really do have to put yourself into the frame of mind that the other person is out to get you, or you might miss them.
What's to keep this non-hire from logging into Glassdoor and warning everyone else (and existing employees) about the offensive contract verbiage?
If that's not legally actionable, then what's the ethics / negotiation cost/ben of that same non-hire implying at the beginning that this would be the eventual recourse if (s)he wasn't hired?
What's to keep this non-hire from logging into Glassdoor
and warning everyone else (and existing employees) about
the offensive contract verbiage?
Nothing. As long as they remained factual. It's unlikely existing employees would have much response though, they already work at the company and will have accepted those contract terms. Different types of people (ie risk/reward and people coming from different cultures tend to take a different view over contract terms.
If that's not legally actionable, then what's the ethics /
negotiation cost/ben of that same non-hire implying at the
beginning that this would be the eventual recourse if
(s)he wasn't hired?
I don't think that would have much impact, and in the context of hiring someone it would probably look pretty bad.
An assumption in the underlying story is that the contract terms the company wanted were unreasonable.
If it's in a company handbook then it's a standard term, so the organisation thinks it's reasonable - it's probably best to try and understand why they want that situation. Assuming right from the get-go that it's something invidious and offering a threat that 'if I don't get my way I'll go public' isn't likely to get a sympathetic hearing in most situations (I think). While it's possible that someone is trying to screw you over, it's generally best to just assume their mistaken and to try and clarify why it's a problem.
I was dealing with a small venture capital company that wanted to invest a smaller sum into my company. I read the contract and found 10 things I did not like. I started with the main point: You make the contract with my company, not with me, as a person. (Part of my companies possible Cashflow would have been used to pay back the investment).
They said: "Okay, that is not possible. Anything else you don't like?"
Tu their big surprise I did not bother negotiating with them any further bust just told them I am not interested anymore. Later I showed the contract that was offered to me to a friend who works as a lawyer in PE. He just laughed.
READ a contract. Assume the counter party consists of major league assholes. They say they won't interpret a certain paragraph in that way? Then why not change it to clarify that? They promise you things? Why not put that in writing INTO the contract.
> A bank can legally make you sign a release of any wrongdoing the bank may ever undertake in the future (!!) as a condition of their loan.
That may or may not be legally enforceable. I haven't seen the contract, and I'm not a lawyer.
But, beyond this particular term in the contract, if he didn't have a lawyer of his own, if not from the start before he signed any contract at all, then certainly as soon as Comvest started to look sketchy, that's the biggest mistake of all.
I am curious to learn how a lender wound up with the ability to force operational decisions in the absence of a default, that doesn't seem right to me. Either something else is going on, he let the lender force things he didn't have to, or he signed a very very bad loan without legal counsel or bad legal counsel.
> Indeed, it sounds like the lender had a huge incentive: loan X, if default, gain 2X.
I don't know the terms of the deal, but I very much doubt they had an incentive to drive the company to bankruptcy. If the company were a prize, thet would have been picked up by someone else in bankruptcy. The fact that Comvest were 'undermining' other deals smells more to me like they were intent on preserving their place in the capital structure, and not having the value of any warrants they owned diluted.
My understanding is that following the bankruptcy Comvest provided debtor-in-possession financing, and at the auction there was only one bidder.
As a Boston native, I have spoken with multiple people who worked for / knew people who worked for karma loop. It (was?) a company that grew in spite of its culture / founder. Lots of drinking, open drug use, sex in the office, etc. Apparently the parties were wild, though!
I am very sympathetic to the founder, and he made a lot of very bad decisions (that he admits) but ultimately, the reputation coming out of karma loop locally was that they were way in over their heads and a dumpster fire.
I think this cautionary tale is important and worth reading, but taking on a bad loan wasn't the only issue they faced.
The other side of the fence has a private equity company realizing they may have just entered into a world of chaos and taking the steps they felt necessary to protect what capital they could.
Not understanding the repercussions of the financial moves you are making on the company's future may be an indication as to the general sloppiness of which the company is conducted.
More on the culture: "Instances of employees drinking so much that they slept in their offices or under their desks weren’t unusual. Drug use was rampant. Marijuana use was commonplace and, according to multiple former employees, there were even times when managers offered employees cocaine. “It was a regular thing,” said one former staffer who spent five years at Karmaloop."
I don't understand what they're saying right before that: "Employees were expected to take care of business—drinking on the job or getting high was not tolerated—but things changed come quitting time." Things got wild when people quit?
Really who do you know? Because Comvest helped spread that around at time of filing and it is not true they have a whole way of spinning story..while I couldn't say anything against it under threat of $6mm dollar garuntee they said they wouldn't enforce if I kept quiet.
We built an eCommerce company that did over $100mm a year for 5 years, and was profitable for 6 years you really think it was a roman orgy in the office? Did we have wild parties once a quarter yes? But other than that we worked hard and focused... Secondly, of course we had lawyers look at docs unethical lender have laws in Deleware that are completely one sided in banks favor.. The truth is you can sign away right for future wrong doing by your lender.. Believe me I have tried ever angle to get around this so I could not just defend myself but counter suit..I will cover in future posts... It is unfortunate my fellow entrepreneurs would buy such nonsense but . We had 240 emlpoyees all in 20's and 30's we had as much drug use as any company that employees people that age.. Hubspot.. People love to sensationalize things but I think this group is smarter than that, come on guys! I decided to share to be helpful to others and exspose Comvest .. Who incedently just lost their right to enforce by summary judgment their garuantee against me and judge ordered trial as she felt there was enough evidence they acted badly she could not just uphold the contract.. So I fight on! But also work on new stuff right here at YC happy to provide insight around this topic or any others.. I built a company that did roughly $1 billion in revenue over the 15 years I ran it and started it out of my parents Basment ..I did it once so I learned a lot and always happy to share and help!
I work with some people who worked at Karmaloop. I've heard that it simultaneously was a great place to work (plenty of challenge and room for growth), but also a terrible place to work (bonuses paid out in virtual currency, very poor product management, etc.)
It's also described in various articles about the company, if you want to read more. I post with an account linked to my real life persona and I stand by what I say.
I'm not questioning the veracity of the claim but rather the generalisation made of an entire company.
For what it's worth an online article is still a third party source just like the friends you mentioned.
Surprised that I got voted down so much. All I am saying is that sweeping generalisations based on information one has not witnessed is wrong. Is that so bad?
Sorry, I tried to change the word "slander" as I didn't realise it was offensive. There does not seem to be a way to edit comments.
In any case my intention was not to be insulting or accusatory. It is just that from my previous work experiences when hearsay is passed around they become almost impossible to dispel - the onus of proof falls on the accused as opposed to the accuser(s).
Here's a sourced article with the exact same claims:
> “We were a ratchet crowd,” said one. “There were afterparties in our office where people were having sex, there were drugs being done. That company has done so many crazy things that a movie should be made about it.”
That was more like a rant than a "cautionary tale". Without any details, it was hard to make anything of that article, other than the author was angry and bitter at banks.
As a business litigator, I learned there are 3 sides to every story: one side, the other side, and what really happened.
From what I've seen in the news, it was just a chain of poor business decisions made by the company when they decided to expand and dumped a bunch of cash into side projects that had to essentially be written off eventually.
Exactly. It is entirely plausible to me that this guy got screwed but as written I only made it about halfway through and couldn't even find the lines to read between.
> I had literally liquidated everything (down to my wife’s engagement ring and all my savings, 401k, etc.) and (foolishly) put every penny I could find back into Karmaloop to try to save it - yet they came after me anyway. [...] A bank can legally make you sign a release of any wrongdoing the bank may ever undertake in the future (!!) as a condition of their loan. Crazy?
Not sure about they details but they could have come after him to make sure he doesn't have resources to come after them, even though he already signed the contract. But perhaps the contract was signed as the CEO of the company but not as him personally?
Interesting article. I'm interested in the financial schemes (of the venture lenders) in the upcoming series of articles or any anecdotes from HN members. This article was more introductory than informing...
The financial model is pretty much straight out of real estate development and private equity. The best up side for the lender is often being able to call the loan and take control of the asset. My anecdotal observations imply that this is pretty common outside Silicon Valley because it's the model the local yokel investors know through experience. The popularization of "startup" as a synonymous with "new business" and the common idea among founders that raising money and pitching investors and getting mentored is the first priority make happy hunting grounds for this type of investor.
That's not to say there aren't vultures on Sand Hill Road, but the standard model there tends to have greater alignment of interests between founders and investors.
I saw this a lot first hand doing commercial small business real estate. Hard money lenders give someone a loan to start a restaurant, and if it fails to meet the obligations of the loan, they can foreclose on the restaurant and other property or assets the person has signed as collateral.
Taking money as a loan with a personal guarantee is always a very high risk situation and should be avoided unless you absolutely have to.
I really want to hear the other side of the story here. There's so much unfocused resentment in this article that I think something else is going on. (specifically, the asides about how the Venture firm flies private jets and hates minorities).
The whole point of venture debt is that if there is a bankruptcy, they get the whole company. Whether there was tortuous interference (I think that's the right term) or simply weren't willing to lose more money on this company, I don't know.
My basic take on the article is really just "man's company fails, he blames the last person to put in money".
Not missing a payment because the CEO is taking on personal debt to invest in the company is not really sustainable, and almost certainly a red flag to investors.
Based on the other article I link to, they seem to have been behind on their payments to everyone else as well. And were doing "deep discounts" to keep cash flow high. Clearly a bubble situation in my mind.
Weird coincidence, I was just reading about this story earlier in the week.
I'm interested in the scuttlebutt but at the end of the day I think this is a story of an entrepreneur who was fundamentally unprepared for massive success and then made a series of very expensive mistakes (including poor choices w/r/t executives and advisors) that proved deadly to his business.
Breaking down this story as someone naïve to the company and coming from the equity side.
> Comvest blocked other capital sources, jacked up fees, interfered wherever possible (among other things, they inserted an incredibly destructive and incompetent full-time advisor, and they simply delayed and dragged when time was of the essence).
Lenders are not shareholders. Unless you violated your indenture, they shouldn't have been given the right to "jack up fees" (interest?). They shouldn't have been given veto rights over corporation actions (again, unless Karmaloop was in violation of its indenture).
> Comvest came after me personally for $5+ million [guaranty]. Comvest knew I didn't have any money - I had literally liquidated everything
Never personally guarantee company loans. (Curious to hear who Karmaloop and the author's counsel were when this was signed.) If you do, maintain (a) insurance or (b) savings to cover the liability. Either way, this could make Comvest's claim a consumer loan, thereby qualifying for regulatory action, e.g. from the Consumer Financial Protection Bureau (CFPB) and/or the author's state banking regulator(s).
> A bank can legally make you sign a release of any wrongdoing the bank may ever undertake in the future (!!) as a condition of their loan
If you signed under duress (e.g. without counsel representing you), or believe Comvest did something illegal, you can terminate "for Cause". There are lots of ways to sue or arbitrate around this kind of language. If, on the other hand, you broke your indenture - that's why you hire counsel before signing.
In summary, venture debt isn't inherently evil. It is debt, however - lenders should be seen as being separate and distinct from shareholders. Throwing in warrants can increase the pain a lender is willing to take before they drop the axe.
That said, this doesn't sound like predatory lending. (Or venture debt; more like private equity). It sounds like Comvest got tired of management barely making payments while threatening Karmaloop's future ability to pay, found Karmaloop in violation of its indenture (or some consulting contract Comvest and Karmaloop may have signed for the "fees"), and decided to see if they could salvage the investment.
So he took out a multi-million dollar loan "under duress"? Unless Comvest hid in the bushes with a "psst kid want a terrible loan" and a knife, I highly doubt that's going to fly.
I assume it's some version of him saying to the lender "I'm mortgaging my house, selling my wedding ring to put money into this company, is there any way you can let us get by with lower payments" and the bank saying "No. We have a contract, and we're willing to put you into bankruptcy if you can't pay us."
> A bank can legally make you sign a release of any wrongdoing the bank may ever undertake in the future (!!) as a condition of their loan. Crazy?
Not to rub salt in, but I think the "make you" wording is telling here. No one made anyone take this loan. This is not crazy; it makes sense that one party might want to protect themselves from lawsuits. What's "crazy" is accepting such a deal, giving them access to the company.
In essence, the owner put himself at complete odds with the lender. Indeed, it sounds like the lender had a huge incentive: loan X, if default, gain 2X. No one should have accepted it, but that doesn't mean it should be illegal. I suppose it's assumed that as a business owner, you'll have a lawyer or be careful when signing things, unlike payday loans and such.
On a personal level though, it does suck and it is really terrible when you have to work with someone that's trying to undermine you. It's incredibly frustrating.