Derek Sivers

Programmer, writer, avid student of life. I make useful things, and share what I learn.

Articles → My $3.3M mistake

Ever since I was a teenager, my dad would occasionally send me things to sign. Things for the family business, where I was part owner. I didn’t understand the complexities of it, and didn’t need to, so I’d just sign without question.

In 1994, as I was recording my first album, I needed to borrow $20,000 to buy studio equipment. He said, “Instead of lending you money, start a corporation. Then the family business can buy shares in your corporation.”

So I did. Because my band was called Hit Me, I called the company Hit Media Inc.

My dad’s company bought some shares, and that helped me finish my album, and continued to run my record studio at a profit.

Four years later, I was living in Woodstock New York, and started this little hobby called CD Baby.

The first time I got a check addressed to “CD Baby”, I brought it down to the bank and told the bank teller, “I need to set this up as a new business, so let’s open a new business account.”

She said, “Oh you don’t need to do that. You can just make it a DBA on your Hit Media account.” (At that time, Hit Media was a recording studio and booking agency.)

Seemed a little strange since CD Baby was definitely a new business, but it saved 10 minutes and $100, so I said OK.

Four years later, CD Baby is doing really well. A few million dollars in sales. Probably half a million dollars in net profits. I paid my dad back the $20,000 I borrowed.

I call up my accountant in January to say, “OK. I got all the Quicken books balanced. Should we file early this year?”

He said, “Oh, you don’t need to file. CD Baby is just a lineitem on your dad’s company’s tax return.”

I said, “Uh... what?”

“You didn’t know that your dad’s company owns 90% of CD Baby?”

“Uh... what?”

“You should talk to your dad.”

Yes, it turns out that one of those pieces of paper I signed without question had sold 90% of the shares of Hit Media Inc to his company.

That would have been fine, except the bank teller advised me to make CD Baby a DBA of Hit Media, so now that meant my dad’s company owned 90% of CD Baby.

FFFFffff.... SSSSssss.... RRRRrrrr.... Oh, what a sinking feeling.

I couldn’t be mad at my dad. He was doing me a favor in 1994, and thought I knew the deal. Nobody thought my little hobby was going to turn into a multi-million-dollar company.

It was my fault for not reading what I signed. My fault for letting a bank teller’s quick advice make that major decision for my business structure.

What made it even worse is that I couldn’t just buy it back for the original $20,000. The IRS won’t allow that. The only way was to pay full market value, as determined by an outside valuation company.

In the end, I had to pay $3.3 million dollars to buy back that 90%.

Lessons learned: