A recent lawsuit makes allegations that, if true, shows what not to do if your New York startup business obtains any investment funding.
According to Business Insider, Marcus and Mitch Weller, the brothers who founded Skully, a company looking to design next-generation “augmented reality” motorcycle helmets that raised millions in crowd-sourced funds, allegedly used those company funds for personal purposes instead of its intended use of creating a marketable and profitable business.
The lawsuit goes on to list 19 examples of the reportedly false expenses, including:
- Rent for a personal apartment in the Marina district of San Francisco, then the subsequent moving and painting expenses when they moved to the Dogpatch
- Restaurant meals and personal groceries charged to the company AMEX card
- A payout of $80,000 to an unnamed cofounder, which was recorded as a trip to China
- A $13,000 Mai Tai and Extreme Tech Challenge in Las Vegas
- A Lamborghini rental during a personal vacation
- A “world tour” trip that included $2,000 for limos in Florida, $2,000 for a strip club, and $2,345 worth of paintings from Hawaii.
A notice on the company’s Indiegogo page now alerts those customers who preordered the $1,450 helmet that they’ll have to go through bankruptcy court to try to reclaim any money.
Skully’s board of directors forced the brothers out mid-July, and it was reported this week on Friday, that the company’s shutting down entirely. This leaves a huge legal mess to clean, as Skully raised 2.5 million dollars – not to mention over $11 million in venture capital money that must be addressed.
If true, the Weller brothers breached a fundamental duty in business – the fiduciary duty of care. It is a legal principle that directors and officers of a corporation must act in the same manner as a reasonably prudent person in their position would in making all decisions in their capacities as corporate fiduciaries. Part of that duty is the responsible use of corporate funds – which does not include personal uses like vacation rentals and keeping good financial records that reflect actual corporate expenditures – and accountability to investors and creditors.
Take this story as a cautionary tale: starting a business is a serious matter. If you are lucky enough to obtain investment financing and crowd-sourced money, account for every single penny and recognize your responsibility to investors, creditors and your fellow management and ownership. In the long run, you can all earn money together that you can then use for all the lush, extravagant things you wish.
*Gene Berardelli may be contacted at: GeneBerardelli@ipglegal.com.
Gene is a New York street-smart attorney with an extreme passion for success. Gene specializes in litigation, arbitration and general corporate law for New York-based and international clients. He, also, is the host of a popular New York talk radio program.
- Business Management Basics: Understanding The Business Judgment Rule
- Private Placement Memos Get Start-Ups Moving
- Business Plan or Private Placement Memorandum? An Introduction
- Winding Up Your New York Business: Essential Steps to Business Closure in New York
- A Good Business Plan May Turn your Startup Into Dollars
- Types of Investors That Can And Cannot Participate in SEC Regulation D Private Offerings