Taking Some of the Risk Out of Risk-Taking
Keeping the Dream from Becoming a Nightmare
Entrepreneurs are, by nature, risk-takers. While others are content to work a 9-to-5 job, accept monthly paychecks and follow the mandates of their employers, entrepreneurs are willing to risk financial ruin, the embarrassment of failure, and sometimes familial dysfunction, in order to pursue their own dreams. Taking risks is everyday fare when you are an entrepreneur. There are some things an entrepreneur can do, however, in order to avoid some of the risks inherent in being an entrepreneur.
First and foremost, act on information, not on impulse. Do your homework. You say you’ve found a great opportunity on the Internet? How about doing some due diligence? Find out whether other people have benefitted or fallen victim to this potential scam, or whether this really is a great opportunity. Likewise, if you are in unknown territory, seek the advice of professionals. Are you about to negotiate your first licensing deal? If so, you might want to get someone who knows what they are doing to look at it and tell you what you are getting yourself into, or what you are giving away.
Reducing Liability
Another way to reduce risk is to spread it. Let’s say you’re going to start a new business so that you can try to make money from a new invention. You plan to patent your invention, find someone to manufacture or license your invention, buy or lease office space and buy or lease office equipment. You could do all of these things personally, but if something goes wrong, who is going to be left holding the bag?
To spread the risk, you form different corporate entities through which to perform these different tasks. After you patent your invention, you assign the patent to an intellectual property holding company. When you find office space, you form a real estate leasing company to lease the space. If you can afford to buy the building, you form a company to own the real estate, and then have the leasing company lease it from the company that owns it. When you find office equipment, you form an office equipment leasing company to lease the equipment. If you can afford to buy the office equipment, you form a company to own the equipment and then have the leasing company lease it from the company that owns it. When you find someone to license your invention, you form a licensing company to which the IP holding company licenses the invention, and then the licensing company licenses the invention to the interested party.
Why form all of these different companies? To insulate yourself from liabilities and to insulate assets from liabilities. If you form all of these companies to perform all of these tasks, you aren’t personally exposed to any of the liabilities, the companies are instead. Likewise, if you form all of these companies to perform all of these tasks, the assets (the patent, the office building, the office equipment, etc.) are all insulated from liabilities related to the other assets. The patent is insulated from the office building lease obligation, the office building is insulated from the office equipment lease liability, the office equipment is insulated from any patent infringement claim, etc.
Consider Your Options
Another way to reduce risk is to avoid unnecessarily risky situations. You have found a business you like, but you think you know how to take it to the next level. Some might be tempted to buy the company. Buying someone else’s company is very risky. You have no idea what contractual liabilities the company has, what tax liabilities the company has, whether the company has complied with corporate formalities, etc. A much less risky option is to form a new company (or companies) and to buy the assets of the existing business. It is much easier to verify the condition of an asset than it is to verify the condition of a company.
In summary, while entrepreneurs gain a lot from the risks they are willing to take, they can also gain a lot from reducing the kinds of risks they are taking. Making informed decisions, seeking the advice of professionals, spreading the risk and avoiding unnecessary risks may help you take some of the risk out of risk-taking
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