You are young, athletically or artistically gifted and highly compensated as a result of those gifts — in other words, you are prey for the predators.
In this case, the predators who are really con artists are disguised as friendly and trusted advisors, claiming expertise in areas ranging from evaluating and recommending business investments to judging and choosing friends. But their goal is to skin you.
We’re all familiar with the story of the superstar who made millions by the age of 25 yet was bankrupt by the age of 30. Some people are overly critical of the victim, as if they would have made better decisions had they been paid a $15 million bonus at the wise age of 21.
The true villain, however, is not the athlete or entertainer, but the predator. Had anyone showered me with $15 million when I was young, I am quite confident that the money would have quickly vanished in a whirlwind of cars, homes and all manner of unwise investments.
How, then, does a young, highly compensated athlete or entertainer avoid becoming a pelt on the predator’s wall? What are the most common mistakes made by young multi-millionaires?
First and foremost, hire an experienced lawyer with a solid reputation. As much as you might enjoy the company of those who make up for a lack of credentials with a large dose of friendly back-slaps and overly-effusive praise for your talents, choose a lawyer who is neither star-struck nor overly eager to say what you want to hear.
Good lawyers are skeptics by nature, and a healthy dose of skepticism can balance a bounty of youthful enthusiasm.
Second, listen to you lawyer and follow your lawyer’s advice. Ignoring your lawyer’s advice, which is the most valuable thing that your lawyer can provide, is worse than not having a lawyer, since you’re paying for nothing.
Third, don’t agree to any business venture or large expenditure without following the first two rules above.
Let your lawyer evaluate and advise you before you invest in “the next Facebook” or some other “next big thing.” The bankruptcy courts are filled with people who put everything into a “can’t miss, high-return, safe” investment.
So what are the basic rules that lawyers use in evaluating a potential investment? It comes down to a two-word term frequently used by lawyers — due diligence.
Due diligence means gathering and verifying the underlying facts upon which an investment will be based. Typical questions asked during due diligence include requests concerning business plans, models, projections, contracts, bank accounts and the track record and reputation of the person or entity soliciting the investment.
Another essential part of due diligence is reviewing the quality of the materials describing and providing for the investment opportunity. If those materials are sloppily-prepared and filled with typos and other errors, then the underlying investment opportunity likely also is flawed. In the investment world, outward appearances matter.
As you and your lawyer evaluate an investment, what should you consider?
There are a number of basic deal terms that vary depending upon the type of investment offered to you, but there are a few rules applicable to all investment opportunities.
The first rule is that if an investment looks too good to be true, then walk away.
It’s astonishing how many people ignore this simple rule. Recall the story of the woman who purchased a new iPad for $50 in the parking lot of a restaurant. When she got home and opened the package, she discovered that she had paid $50 for a plank of wood. And that was a cheap lesson.
But there are also some rules that are less apparent without experience.
Beware of any investment where your money goes to pay for the services of the person seeking the investment. If the money goes from your pocket into an entity and then from the entity to the predator’s pocket, you likely have just been skinned. In short, follow the money.
Understand that you are the source of funds and you need to fully understand the use of the funds.
Along the same lines, understand what happens if the investment entity was liquidated the day after you fund it. Unless you would receive your investment back before anyone else receives a dime, you likely have been skinned.
And understand the risks.
There are low-risk, low-return investment opportunities, and there are high-risk, high-return investment opportunities.
But low-risk, high-return investment opportunities are scarcer than hen’s teeth. Should you decide to invest in the “next Facebook,” be prepared to lose your entire investment.
In sum, your investment should offer you better odds than a casino, but at a lower return. After all, if you want a 48 percent chance of earning a 100 percent return in under a minute, Las Vegas is not far away.
And unlike predators, casinos don’t conceal the odds.