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By Sanjeev Kumar
Founding Attorney

What basic mistakes should entrepreneurs avoid when seeking investors?

A recent case decided in a Dallas, Texas courtroom shows that YouTube videos can be big business — and that traditional legal rules still apply to an area of the web that may seem like a free-for-all. The losing parties’ response to the case also suggests that conduct that is commonplace online may not play well in court.

Avoid making unrealistic contractual commitments

The litigation centered on a partnership between two outside investors, David T. Moss and Brandon Keating, and YouTube channel owner/operators Brian Martin and Marko Princip, who were seeking funding for their videogaming channel. The outside investors signed a contract agreeing to put up $1500 in exchange for 30% ownership and 30% of the profits of the partnership for each of them.

An unsigned agreement can be binding

In their lawsuit, filed in federal court, the investors claimed Princip and Martin breached the contract and committed fraud and tortious interference. The defendants said that one of the investors had terminated his contract years earlier and that the other had never signed the final partnership agreement.

The jury found for the plaintiffs, awarding them 60% of Princips’s earnings on the site, plus  $1.5 million in future earnings— and $16 million in punitive damages. One of the plaintiffs’ attorneys claimed the defendants’ perjury led to the enormous verdict against them. Another noted that the YouTube channel in question had more viewers than some cable television channels, which may have been a factor as well.

Mischief after losing a lawsuit could be seen as contempt of court

The defendants, who seem to have not taken their contractual obligations seriously, reacted impulsively to the verdict, with one of them tweeting an invitation to subscribers to upload porn to the YouTube channel at the center of the lawsuit. The judge had previously ordered the defendants to “not do anything to harm” the channel.

The judge responded to the porn prank by ordering the defendant to appear in court and show cause why he should not be held in contempt. In court documents and at a hearing, the defendant said his post was an “April Fool’s Day” joke. The judge accepted his apology.

Agreements have consequences for large corporations and small start-ups

Whether an entrepreneurial project is small or large, it is important that the parties understand and respect the terms of their agreements. Nothing may come of a start-up, but it is always possible that promises made carelessly early on could involve large sums of money later. It is also important that the parties behave maturely during the litigation process to avoid compounding a mistake.

If you are involved in launching or investing in a new business, sound legal advice can help you make deals that make sense. Experienced attorneys can also advise you on how to testify and behave to ensure a positive outcome should litigation prove unavoidable.

About the Author
Sanjeev Kumar is the founder and principal at the Kumar Law Firm, which provides a wide range of legal services to entrepreneurs and business owners in the area of business & corporate law and intellectual property along with related areas of interest to clients such as business succession planning, wealth preservation through estate planning, and alternate dispute resolution.