Back in 2015, Jessica Ruhfus took a loan from a family member to get her brand collaboration platform Collabosaurus off the ground.
Some 18 months later, just as the business was starting to gain traction, that loan landed her in a pricey legal battle that almost cost her everything.
Today Collabosaurus is bootstrapped and profitable, and just launched its app. But Ruhfus still carries the lessons from that very early error.
It’s not that borrowing the money was a bad idea per se. Her biggest mistake was being all-too-casual about it.
Here’s how Ruhfus learnt to always have a watertight contract in place, and the value of investing in lawyers.
The mistake
Ruhfus’ biggest mistake came very early on in her entrepreneurial journey, in a failure to get a watertight loan agreement in place, or investing in a lawyer to help her do so.
She isn’t able to go into the specifics for legal reasons. But she took a loan from a family member to help get Collabosaurus started, without having a contract in place detailing the terms of the loan.
Ultimately, that “backfired majorly,” she tells SmartCompany Plus.
“It was verbal agreements and handshakes and all that sort of stuff,” she adds.
Further down the track, the terms of the loan agreement came under question, and there was no clear solution. Ruhfus soon found herself embroiled in a bitter and expensive legal battle with a family member — one that became emotionally and financially draining.
“You just trust people close to you,” she says.
“When it comes to business, you probably shouldn’t do that.”
The context
Ruhfus took on the loan in order to fund the launch of Collabosaurus, but things didn’t turn ugly until about 18 months later.
“At the time, we had just started seeing some movement,” she explains.
She was still working part time as a waitress to help support herself and the business, but she was starting to get some traction.
Needless to say, the business didn’t exactly have cash to spare.
“We were already so, so miserly with every single dime,” Ruhfus recalls.
The impact
The lawsuit, and the costs involved, slowed down the growth of the company “massively”, Ruhfus says.
“It set back the business, from a financial standpoint, about 18 months,” she estimates.
“To recoup the costs and everything, to get back on our feet after that … It was pretty heavy.”
There were even times she thought this could be the end of Collabosaurus, before it even hit its stride. One lawyer recommended closing the company as the best next step.
Another suggested creating a new holding company, changing the name and transferring the intellectual property across.
But Collabosaurus was just starting to gain momentum and recognition. And around this time Ruhfus got a call from Apple, inviting her to speak at an event.
It was early days, sure, but it wasn’t the time to walk away.
“I had a couple of options, and closing the business was definitely one of them,” she says.
“But I didn’t really entertain it.”
The fix
For Ruhfus, unfortunately, there was no quick fix to the problem. It was more a matter of time and perseverance.
She had to continue in her part-time job for longer than she had hoped, in order to keep investing in the business and to cover her legal fees.
She also tried to raise a venture capital round to speed things up a bit, but ultimately wasn’t successful.
“We kept pushing on and, inch by inch by inch, growing,” she recalls.
“There definitely wasn’t a quick fix.”
She did, however, have a fix for never letting it happen again.
The lesson
Now, Ruhfus invests in lawyers when it comes to drafting contracts. And this is the advice she offers to other founders.
When you’re at a very early stage, even spending $400 or $500 on getting a contract drafted seems like a huge expense.
“It doesn’t really seem like a necessary cost if everything else seems dandy and fine,” she says.
“It seems as if it’s a big investment, but the protection that it gives you is worth its weight in gold,” she adds.
Ultimately, failing to do that could end up costing you considerably more down the track.