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89db8a0d — Derek Sivers formatting 4 months ago
                                                                                
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<title>My $3.3M mistake | Derek Sivers</title>
<meta name="description" content="Ever since I was a teenager, my dad would occasionally 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.">
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<h1><a href="/" title="Derek Sivers">Derek Sivers</a></h1>
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<div class="blogparent">from the book “<a href="/a">Anything You Want</a>”:</div>
<h1>My $3.3M mistake</h1>
<small>2009-05-27</small>
</header>

<p>
	Ever since I was a teenager, my dad would occasionally 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.
</p><p>
	Four years before starting CD Baby, as I was recording my first album, I needed to borrow $20,000 to buy studio equipment.
	My dad said, “Instead of lending you money, start a corporation. Then the family business can buy shares in your corporation.”
</p><p>
	So I did.
	Because my band was called <a href="/music">Hit Me</a>, I called the company <a href="http://hitmedia.com/">Hit Media Inc</a>.
</p><p>
	My dad’s company bought some shares, and that helped me finish my album, and continued to run my record studio at a profit.
</p>
<hr /><p>
	Four years later, I was living in Woodstock, New York, and started this little hobby called <a href="http://www.jpfolks.com/ECRoadTrip00/ECpages/cdbaby.html">CD Baby</a>.
</p><p>
	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.”
</p><p>
	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.
</p><p>
	It seeemed a little strange since CD Baby was definitely a new business, but it saved 10 minutes and $100, so I said OK.
</p>
<hr /><p>
	Four years later, CD Baby was 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.
</p><p>
	I called up my accountant in January to say, “OK. I got all the accounting books balanced. Should we file early this year?”
</p><p>
	He said, “Oh, you don’t need to file. CD Baby is just a line item on your dad’s company’s tax return.”
</p><p>
	I said, “Uh... what?”
</p><p>
	“You didn’t know that your dad’s company owns 90% of CD Baby?”
</p><p>
	“Uh... what?”
</p><p>
	“You should talk to your dad.”
</p><p>
	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.
</p><p>
	Then because the bank teller advised me to make CD Baby an alias of Hit Media, that meant my dad’s company owned 90% of CD Baby as well.
</p><p>
	Oh, what a sinking feeling.
	What I thought was my company all these years was not actually my company.
	I owned only 10%.
</p><p>
	I couldn’t be mad at my dad.
	He was doing me a favor back then, and thought I knew the deal.
	Nobody thought my little hobby was going to turn into a multi-million-dollar business.
</p><p>
	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.
</p><p>
	What made it even worse is that I couldn’t just buy it back for the original $20,000.
	The <a href="http://www.irs.gov/">IRS</a> won’t allow that.
	The only way was to pay full market value, as determined by an outside valuation company.
</p><p>
	In the end, I had to pay $3.3 million dollars to buy back that 90%.
</p>
<a href="/a" title="Anything You Want — by Derek Sivers"><img src="/images/DerekSivers-AnythingYouWant-318x450.jpg" alt="Anything You Want — book cover" title="Anything You Want — by Derek Sivers" /></a>

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