Divorce Destroys Capital

How do you go from a $3 million net worth and $120k/yr income to bankruptcy in under five years?

Divorce.

Capital Acquisition is Half the Battle

In 1995, my father owned half a rapidly growing landscaping company doing around  $3 million in sales a year. They had just bought and built a new office/headquarters, and were growing at around 10% a year.

That year, my parents decided to get divorced.

The Other Half is Capital Retention

My father immediately hired an attorney to represent himself in court. The attorney required a retention fee of $5,000 cash in order to take him on. That week, my mother got an inkling of my dad’s net worth, and decided she needed the best attorney possible.

A relative gave my mom the $50,000 retention fee necessary for the top local attorney.

Lawyers Exist to Litigate

In Florida, husbands can be held liable for their spouse’s attorney fees. In my dad’s case, he was.

Immediately, he lost $55,000 of his net worth, but more importantly, $55,000 of his liquid net worth.

They Profit by Destroying Deals

Early on, my father and mother decided it would be best to do a 50/50 split of assets. However, the attorneys would be rendered useless, so they launched personal attacks to stir the pot and increase fees.

Whenever a deal seemed close, a new personal attack would arise. But on the horizon loomed a bigger problem. Liquidity.

Creating a Need to Liquidate Assets ASAP

Child support payments are one of two possible debts that can land you in jail. (The other is taxes.)

Desperation for liquidity means one thing: you are at the mercy of whoever can provide it, and at whatever discount necessary.

Leaving You in a Horrible Position to Make Deals

My dad’s partner offered to buy his half of the business. What started off as a million dollar buyout ended up being manipulated and talked down to around $250k, because of a desperate need for capital.

You Must Have a Prenuptial Agreement

Even if it’s only to keep your net worth from going to lawyers who will use it against you, to make you hate the person you loved. Decide ahead of time not to waste resources, capital, and worry arguing through the wealth destroying proxy of lawyers.

The Bill Gates Capital Play

In 1975, Bill Gates and Paul Allen read about the Altair computer in Popular Electronics. The Altair was a sub-$400 computer, available for hobbyists around the world. Bill Gates quickly realized the Altair would create a bunch of new enthusiasts looking for software.

The Best Capitalists Don’t Gamble

Rather than getting a loan, buying an Altair, and programming and building a product, Gates contacted the owner of the business making the Altair. He said he was building a high-level interpreter (BASIC) for the new processor at the heart of the Altair. Would he be interested in meeting?

Only after Bill Gates had secured a meeting with the owner of Altair did he begin building a program. And he didn’t buy a computer to build on. Instead, he used computer time at Harvard to build his commercial software. Because the processors at Harvard were of a different architecture, he had to write his code within an emulator. In one week, he built a broken project, without complete functionality.

At the meeting, Allen demonstrated the software. He got a contract from the owner of Altair to build BASIC for $3,000. Microsoft also received a royalty payment for every copy of BASIC sold.

They Utilize Someone Else’s Capital

Later on, Microsoft won a court battle against the owner of Altair. They won the rights to sell BASIC on their own, to the Altair’s direct competitors.

Altair paid Microsoft to build software, and Microsoft ended up selling to their competitors.

Double Down With Bigger Agreements

Five years later, IBM came to Microsoft and asked about building software for their new IBM PC. Gates discussed possible features, and agreed that BASIC should be an integral part of the new PC.

When the conversation steered towards an operating system, Gates recommended  CP/M, then the most popular operating system on the market.

However, the creator of CP/M refused to sign a non-disclosure agreement. So IBM came back to Gates and asked Microsoft to build an operating system for their PC platform.

Use it To Buy Existing Solutions

Bill Gates went out and bought a copycat CP/M operating system built in six weeks by a single person. Microsoft worked out some of the kinks, and presented it to IBM. They loved it. But what happened next is what makes Gates a genius businessman.

And Retain All Rights

So Gates ended up with the rights to sell the software IBM paid to have created. This meant all the cheaper PC clones would need to buy a copy of his software. DOS went on to more than double sales for Microsoft that year alone. Sales in 1980 went from $7 million to $16 million by 1981.

This growth happened again without risking significant capital. There was no big gamble, because the development costs were already paid for by their first customer.