You worked hard designing your fashions. You cobbled together just enough cash from friends and family to open your own business. You continued to work hard and your work was noticed. You had arrived. Orders started coming in faster than your little shop could turn them out. Third party investors liked what you were doing and invested in your company. They said you just needed to focus on design and customer relations, they would take care of the financial matters. Everything was fine, until the money guys wanted you to sell to stores where you didn’t want your products sold. You objected, they said “your fired”. Not only that, they said they own your name, your trademarks and they will sell fashions with your name on them wherever they want. Oh, and you have to sell your interest in the company to them and can’t compete. This is no longer your company, it’s theirs.
How did this happen? When you started, you formed a limited liability company and proudly put your name on it. As a result, the company acquired trademark rights to your name in connection with goods of the type you were producing. You even registered the trademark that included your name to protect your company’s rights. When the money guys bought in, they insisted upon a greater than majority interest. They also required the operating agreement to be amended. Among the amendments were provisions enabling any member to be removed and when removed to be compelled to sell the removed member’s membership interest to the company at a price equal to the removed member’s capital account, an amount that is likely a fraction of its fair market value. The amended agreement also required a former member to not compete for a year. The money guys used all of these opportunities to essentially take over your company when you didn’t agree to dance to their tune.
Could this have been avoided? With proper planning, yes. Your name or whatever other names you want to use on your fashions should be the property of a separate company owned and controlled only by you. It can then license those names to other companies, especially a company in which a majority interest will be owned by persons other than yourself. The terms of the license can also restrict how the names are used. When investors buy in, either limit their vote to less than 50% or require super-majority votes for critical issues so that your percentage, even if a minority interest, can trump their vote. Build other protective terms into the operating agreement, such as no forced removal of a member, buy-outs at fair market value, and limiting any decision related to design or reputational issues to you. The time to ensure that your rights are protected is before you lose control. However, even if you are already in a situation where too much control is in the hands of others, a reasonable investor may be willing to agree to modify an amended agreement that is less than satisfactory from your perspective in order to keep the genius behind the company’s success happy. Just don’t wait until they are showing you the door!