Anything You Want

My $3.3 million mistake

Ever since I was a teenager, my dad would occasional y send me things to sign—

things  for  the  family  business.  I  didn't  understand  the  complexities  of  it,  and

didn't need to, so I'd just sign without question.

Four years before I started CD Baby, as I was recording my first album, I needed

to borrow $20,000 to buy studio equipment. My dad said, “Instead of my lending

you money, start a corporation. Then the family business can buy shares in your

corporation.”

So I did. Because my band was cal ed Hit Me, I cal ed the company Hit Media

Inc.  My  dad's  company  bought  some  shares,  and  that  helped  me  finish  my

album, and I continued to run my record studio at a profit.

Four  years  later,  I  was  living  in  Woodstock,  New  York,  and  started  this  little

hobby cal ed CD Baby.

The first time I got a check addressed to “CD Baby,” I brought it down to the

bank and told the bank tel er, “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 an alias 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 ten minutes and $100, so I said OK.

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Four years later, CD Baby was doing real y wel . A few mil ion dol ars in sales.

Half  a  mil  ion  dol  ars  in  net  profits.  I  paid  my  dad  back  the  $20,000  I  had

borrowed.

I cal ed up my accountant in January. “OK. I got al the Quicken books balanced.

Should we file early this year?”

He said, “Oh, you don't need to file. CD Baby is just a line item on your dad's

company's tax return.”

I said, “Uh... what?”

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

“Uh... what?”

“You should talk to your dad.”

Yes, it turns out that when I borrowed the $20,000 eight years earlier, I didn't

realize that I got the $20,000 by sel ing 90 percent of Hit Media Inc. to my dad's

company.

Then  because  the  bank  tel  er  advised  me  to  make  CD  Baby  an  alias  of  Hit

Media, that meant my dad's company owned 90 percent of CD Baby as wel .

FFFFffff.... SSSSssss.... RRRRrrrr.... Oh, what a horrible sinking feeling. What I

thought was my company al these years was not actual y my company. I owned

only 10 percent.

I couldn't be mad at my dad. He was doing me a favor back then and thought I

knew what I was signing. Nobody thought my little hobby was going to turn into

a multi-mil ion-dol ar business.

It was my fault for not reading what I signed. My fault for letting a bank tel er's

quick advice make that major decision for my business structure.

What  made  it  even  worse  is  that  I  couldn't  just  buy  the  business  back  for  the

original  $20,000.  The  IRS  wouldn't  al  ow  that.  The  only  way  was  to  pay  ful

market value, as determined by an outside valuation company.

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In the end, I had to pay $3.3 mil ion to buy back that 90 percent of my company.