At least on paper, Episode 23 was a heartwarming story of new beginnings.? Sure, Richard was subjected to an excruciating limbo during which Laurie interviewed other people for ?his? job as CEO.? But it turns out that was only for Richard?s own good?to make sure Richard would be seen as the best choice after a rigorous selection process?not as the guy who got his job back because he was hanging around the office.? There was a smallish hiccup when the indignity of Laurie?s process caused Richard to snap and air all his pent-up grievances to a Code/Rag reporter, who could have ruined everything for Richard by printing his tirade.? But fortunately, Big Head saved the day by providing the reporter an even bigger story about how Gavin Belson ?scrubbed the internet? of negative references to Belson or Nucleus.? By the end of the episode, Richard is reinstated as CEO and Pied Piper is relaunching work on the platform with a brand new batch of cheap, foreign engineers.
Meanwhile, Erlich?s persistent pressure on Big Head pays off, and Big Head agrees to form a microfund/incubator/VC firm as a ?general partnership? with Erlich.? Thus begins Bachmanity. Erlich and Big Head each contribute all of their cash and assets to the partnership, except, notably, Erlich refuses to contribute his shares of Pied Piper.? What does all that mean?? To begin with, a general partnership is a separate legal entity.? It is formed when two or more people agree to carry on a for-profit business as co-owners.? Forming a partnership does not even require documentation.? Whenever two people carry on as co-owners of a business?as long as they don?t specifically form a different kind of entity (like a corporation or a limited liability partnership)?then they have formed a general partnership even if they didn?t mean to do so. ?However, Erlich is only contributing $36,000 to Bachmanity, while Big Head is contributing the proceeds of his Hooli severance last valued at $20 million.? Erlich wants documentation of this deal, so he dictates a partnership agreement for Big Head to sign.
Erlich?s decision to form a general partnership is interesting though.? The huge disadvantage of general partnerships is that each of the partners is personally liable for all debts and obligations of the partnership.? This means that if the partnership can?t pay its bills, creditors can come after Erlich?s and Big Head?s personal assets, like their houses, cars, bongs, shares of companies (e.g. Piped Piper) not contributed to the partnership etc. ?In addition, each of the partners can bind the partnership?each partner can sign contracts for which the partnership will be liable?and the partnership is liable for all the activities of each of the partners in the course of partnership business.? If a partner, while doing partnership business, injures someone or commits a tort, then the partnership is liable.? In other words, if Erlich runs over the Bam-Bot while buying supplies for Bachmanity, then Bachmanity is liable for damage to the Bam-Bot.? And Erlich and Big Head can each be held personally liable if Bachmanity doesn't pay up.? In contrast, limited liability partnerships (?LLPs?), limited liability companies (?LLCs?) and corporations generally protect the members, owners or shareholders from being personally liable for the organization's debts and obligations.
For these reasons, forming Bachmanity as a general partnership has created endless possible ways things could go drastically wrong for Erlich and Big Head.? And even though Erlich is pretty clearly taking advantage of Big Head, it looks like Big Head might have created the first possible threat to their fledgling venture.? Back in Episode 19, Big Head signed a confidentiality and non-disparagement agreement with Hooli in exchange for his $20 million severance payment.? Big Head agreed not to say anything negative about Gavin or Hooli, publicly or privately for life.? But in order to save Richard's CEO job, Big Head gave the Code/Rag reporter an even bigger story about Gavin Belson's attempt to scrub the internet. ?When the story goes public, Hooli is almost certain to consider this a breach of the agreement and come after Big Head to get the $20 million back.? What happens to Bachmanity then?!
Perhaps not all is lost.? The first thing to remember is that a partnership is a separate legal entity, and it is not liable for Big Head's actions unless those actions were in the course of Bachmanity business.? Talking to Code/Rag doesn't seem to be related to Bachmanity's business (Bachmanity doesn't even own Pied Piper shares).? In addition, Hooli's easiest claim is that Big Head breached his personal contract with Hooli.? So, most likely Bachmanity won't be directly liable for what Big Head did.
But what if Hooli proceeds directly against Big Head and a court awards a $20 million judgement to Hooli.? Can't Hooli just seize all of Bachmanity's assets to satisfy the judgment?? Interestingly, probably not!? Here too, the reason goes back to the fact that Bachmanity is a separate legal entity.? Bachmanity, not Big Head, now owns the $20 million.? Moreover, a partner is not a co-owner of the partnership's property, and has no interest in partnership property that can be transferred, either voluntarily or involuntarily.? In other words, Big Head does not ?own? or ?co-own? the $20 million any more?he has no interest in that money that could be transferred back to Hooli (either voluntarily or by a court).? The only transferrable thing a partner ?owns? is the partner's share of profits and losses, and the partner's right to receive distributions.? The same is true of a corporation.? Shareholders don't individually own the corporation's equipment, or cash in the corporation's bank account.? If a shareholder's shares are transferred, the new owner doesn't gain the right to demand cash from the corporation's banker.? In fact, a partnership interest is less transferrable than shares because the new owner of the partnership interest does not obtain the right to participate in management of the partnership, or to inspect the partnership's books.? By contrast, shareholder voting rights transfer with the shares.
So, if Hooli gets a huge verdict against Big Head, it can probably obtain Big Head's partnership interest in Bachmanity's profits, losses and distributions, but Hooli shouldn't obtain Big Head's voting rights in Bachmanity.? (Similarly, even if Erlich had contributed his Pied Piper shares to Bachmanity, Hooli wouldn?t be able to obtain ownership of those shares through a lawsuit against Big Head personally.)? On the facts so far, Bachmanity could be pretty safe from Hooli.
Of course, if Hooli can bring and win a claim directly against Bachmanity, then things would change.? Hooli could obtain the right to seize Bachmanity's assets (including the $20 million), and to go after Erlich's and Big Head's personal assets if Bachmanity's assets were not sufficient.? In this scenario, Erlich?s shares in Pied Piper could be at risk even though he didn?t contribute them to Pied Piper.
Erlich insists to Big Head that every successful partnership is about ?committing fully, blindly and without concern for the consequences.?? Let?s hope that pioneering spirit doesn?t land Erlich, Big Head and Bachmanity in too much trouble?
Blog
Big Head, Big Dreams, Big Mistake? (Silicon Valley ' Episode 23)
Written by Tenaya Rodewald
May 27, 2016
Estimated Read Time: 6 minsAs seen in
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Disclaimer: This alert is provided for information purposes only and does not constitute legal advice and is not intended to form an attorney client relationship. Please contact your Sheppard attorney contact for additional information.