8 Legal Red Flags Passive Investors Should Watch Before Signing a Syndication | Ep 120

James: I

recently came across

breakdown from a guy named, lemme say this Ky

Alexi Turino Bow. Ski

Jessi: sounds

James: Dang. Totally. Got

it.

Anyways, nailed it.

he had,

he was talking about eight legal

red flags

that passive investors need to look

at before signing onto

syndication. So we're gonna

talk about

the day on that today on the

Furlo Capital Podcast, where

dive into the intricacies of passive real estate investing and all the flags that are related to it.

And our

mission is to equip

to invest wisely both property and people so that together. We can invest wisely in, build wealth and improve housing.

If that sounds right. I'm

James. is my wife Jessi.

Jessi: All I could think was of a knock, knock

joke.

James: Let's hear it.

Jessi: Knock,

knock, knock, knock.

James: Who's there?

Jessi: Banana.

James: Banana? Who?

Jessi: Knock. Knock.

James: Who's

there?

Jessi: Banana.

James: Banana. Who?

Jessi: Knock. Knock.

James: Who's there?

Jessi: Orange.

James: Orange too. Don, you put

Jessi: Orange. You glad

I

say banana.

James: Oh

Jessi: I, that's all I can think of because you said red flags and then I was like, oh, we're both wearing orange. And then my brain just goes to really bad. Knock-knock

on jokes.

James: Okay. Alright.

Jessi: This is the level we're at right

now.

James: Dang.

All right. Let's

make this shape darker and talk about red flags. Yeah. He he wrote this article about Scoot and what's his name? Yeah.

Jessi: See

James: if you can say it. It's right there.

Jessi: Yeah.

Alexi

Cherno.

IE.

James: yeah, you

you got it and then the name keeps going a

a little bit longer,

Jessi: but it's,

Belky Sky.

Okay. I don't

know how to read that, but

James: actually makes me feel better. I feel like I,

Jessi: Alexi,

you got the first name,

Alexi.

James: It's Chernobyl El Skid. Chernobyl El Ski. I'm sure I got the

Jessi: Chernobyl

James: Aon

is wrong, but that's okay.

Jessi: But it's S-S-K-I-Y. How do you read that?

James: Sky. It's

just extra Skyy, skyy,

Skyy.

Jessi: Okay.

Anyways.

James: Wow.

Jessi: Off track.

James: Yes. Flag red flag number

one.

Jessi: Alex's red

flags.

James: Yes. The sponsor

And I didn't modify this slide, this article for those

you who

actually saw it like this isn't exactly it. Yep. So

slightly changed. Anyways, the sponsor can

change the deal. I don't change it any further.

So

there's some operating agreements, let's back up a second here. So the big deal that I think investors need to remember is sometimes you get a slide deck, you get some sort of presentation, you get a lot of pictures, a lot of numbers, that

of stuff, and it all looks awesome.

And it's it's

amazing.

hop on Zoom calls and you talk to the sponsor and you're like, this is so

great.

And

at the end of the day, there's

one

thing that matters. It's the paperwork.

That's it. There's specifically, there's three of 'em.

the

operating agreement,

defines how

this company are forming to go do the investment's gonna work.

There's the private placement memorandum. Which is the thing that says, here's all the risks that are involved in this. And then you have your subscription agreement, which is the thing that the passive

actually signs

saying, okay, I'm committing to this much and

Jessi: For paying

you

when

James: I'm

I'm buying these

many shares.

Jessi: Oh. That's what the investor is

correct.

James: This is Yes, general. Those are like the three big ones that you as

investor care

about.

Jessi: Okay. So no

matter what they

in their presentation,

James: Yep. Or

Jessi: don't say. Or don't say, you should.

look at the legal documents.

Yes. It says

know what it

is you're signing up.

James: Yes.

Jessi: That is like

common sense.

But if your legal documents say

that

the sponsor can change anything at any time, that's

James: there you go.

go. Yeah.

Jessi: Or

Or

James: not

without investor

approval. And look, the sponsor has a lot of things that they can do without investor approval.

But there should be really big things where they need to talk.

Like

Jessi: can, like what's our,

what are concrete examples

James: of what refinance, sale that kind of stuff.

Jessi: Those are big things that they should get permission or

James: Yep.

Jessi: Let investors

James: yep. We're gonna totally

change our business plan and redevelop this property instead. Okay.

Jessi: Yes.

James: Whatever.

Jessi: That would be big.

James: Yeah. They might say, Hey, we're gonna alter the distribution structure.

Jessi: Oh.

James: Oh, that would be like, what?

Jessi: Yeah. That's great.

James: Yeah.

You thought you invested

in a five year deal

value add project.

Now suddenly you're in a 12 year waiting.

wait and hold

Jessi: lot the market to recover.

James: Whoops.

Yeah.

Jessi: Very.

James: Yeah.

So you just gotta

be aware of it.

And that kind of stuff happens, right

where they did have an exit plan,

the market does change and they go, we're gonna

hold onto to it.

But again, oftentimes in that kind of stuff, hopefully they're getting extra feedback and

Jessi: and yeah.

Ha.

James: So you just want, you wanna look at those approval requirements and what are those major decisions, and that there are just clear limits on their

authority.

Again, they don't have to be like you did. Sure. Just clear. That's it.

Red flag

at number two of Leski in his article is there's no real

fiduciary duty. So pop quiz time. Do you know what fiduciary means?

Jessi: Yeah

something financial like you're representing someone or you have financial responsibility or

something.

Yeah.

James: So myself as a sponsor, I have a fiduciary responsibility to my investors, meaning I put their needs before mine

So some agreements quietly remove

all of that.

And

instead of being

to act on the investor's best interest, it

may say things

They're gonna work in good faith or

commercially reasonable

Jessi: efforts.

Why in the world would you

sign something that says that?

James: I dunno. 'cause I, it's

dude, I've, having looked at and worked on these documents, like the legalese behind it, that

sounds hard to catch to

Jessi: Okay, so how

would,

so

so

I. Is the only way that you would identify these red flags that you're looking

at the legal documents and you're going

that seems fishy. That doesn't sound right,

James: That's

Jessi: if they're really hard to identify,

then

James: dude, that's

why

AI is so great. I might miss them, throw those docs

in

there and ask it questions like this, and then go back to your sponsor

say, Hey,

I, it says this line. Can you interpret it for me? What does this mean?

Or, I

it says this or

that. Okay. Yeah.

So you just wanna make sure

there's some sort of. Accountability in there, and at least they're saying, yes, I'm gonna look after you guys first.

Jessi: That's what, yeah, that's what would hope.

James: That's

what you

would hope.

Yes. You would hope that, but there's things that get, that can get tricky.

Okay. For example, I looked at a deal, this was a long time ago now, they were doing a syndication, it was out of the state and it was a massive project.

I don't remember the exact numbers, but like 50%, at least 50% of the funds were going

towards construction. And turnover costs, that kind of thing.

And the construction crew that he had selected was his friend and also him who was a part owner. And so now at least, there you go. Huh. There's a bit of a conflict of interest here. Who is the fiduciary? Because you have a fiduciary to us, but you also have a fiduciary to this construction company.

Jessi: Right.

James: And he actually has a bigger share of ownership for the construction company. Money than he would for the syndication. 'cause he was one of four or five sponsors in a deal that only had

whatever it was,

10, 15, 20 to 15%. And so I'm like, I like

I,

you know if you're in his shoes. Who that's messy,

Who does he have

that responsibility to? Is it to his partner that

owns 50% or

is

to the investors,

What you would like

Jessi: it to be?

Ideally it all works out and

you

pay both and you're

But

James: man what are the chances of you noticing that costs are just 10% more than what

could have been?

Or

just

take just a little bit longer than they normally do.

Jessi: Yeah.

James: Like that's where

it gets, it's really tricky.

Jessi: That's like a

bonus red flag. Or if if your sponsor has companies that they're invested in working on the

deal

James: Yes and no because they're, and it's, this is this is the trick of it all. That's

where you go when you ask questions. Yeah, because what they might, another way to

of it is, Hey,

we're full stack. Like we are not dependent on other contractors, so you can quicker, you get my full attention. This is the project we're doing. We're not trying to

in a bunch of subs and

other stuff.

You got me, I can do this. Think about that for property management, right? That's exact same situation, but you can definitely see where you're like, oh,

we got

all this

in house. We're not gonna try to find a good property manager

Already

found one,

and he's not going anywhere and he's going to charge a reasonable rate.

Here's the rate. That's the nice part about property management. Is the interest. The management fee is upfront and everyone can see it. So it's pretty fair. So interesting. It is interesting, huh?

Jessi: So yeah, so you just be

aware,

James: be aware

Jessi: of how

James: it's,

that's

it structured. That's the name of the game,

Yeah. They're red flags.

They're not, don't

this flags, i'm like, you gotta ask some questions. Just make sure you understand how it's to, how is that fiduciary responsibility splitting out?

Jessi: Yeah.

James: And maybe they got a good answer, I don't know.

Jessi: Yeah,

I am

sure. Yeah.

James: yeah,

Sure.

Yeah. Sure. Red flag number three, broad

sponsor, indemnification.

There's another buzz word dictionary. SAT word, indemnification.

Jessi: Alexa, what does indemnification

James: Yeah, no I use chat for those kind of questions.

Hey, yo, Gemini I have had, it has been a,

an interesting week.

I have had

A

More

than normal reference using grok for their AI tool, which is the thing that's

hooked up the Twitter or X or whatever.

Okay. Which

I've never

I,

Jessi: yeah. I

James: I'm very

used that one very. I'm interested, I'm very happy with the current tracks that I'm down. Yeah.

Which, and maybe what's got me down that track is for the first time this week, I actually

Claude. 'cause someone said it's

better

than

writing.

than if they're

like, if you're gonna do over 200 words,

you should

check out Claude. And so I did. And I did I had actually three of 'em. All stacked. Oh. With the exact same prompt for all of 'em.

Yeah. I totally chose the

cla one out. Yeah. That's the best, huh?

all of 'em. It required

the least amount of rework and rethinking.

Jessi: Interesting.

James: Yeah. So

haven't tried GR yet Mostly

'cause they're

like,

the best for real time

information.

Yeah. I don't like living that

Jessi: one. Yeah.

Like fact

James: But anyways,

Jessi: Anyways,

James: a random indemnification

is the

idea of

I

how much you can come after. Me for doing that.

Jessi: Okay.

Okay.

Yeah. What are like, what are my legal rights if

you

James: mess

Jessi: up something?

James: so many deals protect the sponsor from liability unless there's something like

fraud, criminal misconduct, or gross negligent.

Yeah.

So

again, they're saying like,

Hey,

you can't come after me if I'm

bad at this. Gross, negligent. If I'm just a little negligent, you can't come after me.

But or

if

The market turns

to,

Jessi: Yeah. If it's something outside of your control, I could see that.

James: But some of the problems with that is things like gross,

negligent.

It's pretty difficult to define and prove legally, which means maybe

like his gross,

poor underwriting, sloppy decision making or avoidable mistakes.

Yes. Market goes down. How

did I react in that situation?

Jessi: situation? Okay,

Did I

James: direct?

Jessi: That's so subjective.

James: Yeah. That's

why it's a red flag.

Jessi: Yeah,

because you get

it. You may or may not

Respond how I would respond.

James: Yeah.

Jessi: It doesn't

mean it's good or bad. No,

James: just

is. Yeah.

Yeah. You

get it?

Jessi: All right. You

The tricky

James: behind this, we are

Jessi: time indemnification.

So

how much in, this is a weird question. I don't think I'm phrasing it right. How much indemnification is

enough.

Is that the right way to say

that? I

James: know. Yeah, that's fine. Of

it

more like

what's the level of behavior that actually creates. Liability.

Jessi: Okay.

James: That's

more the way to think about it. 'cause it may not use that word indemnify. It actually, I think it does in certain places.

Especially in that PPM. But,

it's just

worth figuring out okay where can I like legally say, do you didn't do this right. You call you from,

poor performance.

Jessi: And,

James: It's

tricky.

Honestly, at the end of

the day, you gotta

trust the sponsor. That's the real secret to all of this. If you don't invest.

'cause you get, because you get these. Situations.

Jessi: Okay.

that makes more sense, is to take it back a step and say, do I trust this person? 'cause if I trust this

person,

then I can likely trust

the legal setup of,

if anything goes

south,

I'll be taken care of. They'll be

held responsible. Yeah. Whatever.

James: Yep.

yep.

Jessi: Worth looking at.

James: Did I ever tell you how many red flags there were?

total?

Jessi: Eight.

James: Seven. So close.

Jessi: Oh man.

Oh man.

James: I didn't

tell you eight.

Yeah,

there's eight.

Jessi: eight.

James: What if I it was funny, I read

that. I was

Jessi: is this a trick

question? Sorry.

James: Oh my gosh,

Yes.

Jessi: Why me

of another bad joke. Why? Why is this my state of mind?

James: Go ahead.

What do you got?

Jessi: Why was seven afraid

of nine?

James: I don't know.

Jessi: No. Why was nine?

Afraid of seven?

Because

James: I don't know.

Jessi: 7,

and nine.

James: Wow. So bad. That was really bad.

That's so bad.

Jessi: Double bad.

James: Do you know

what I'm really excited for? Do you know what?

what next week is?

is?

is April Fools. You're like, you're,

Jessi: I,

know, because I don't know. We're filming

this.

James: That's okay.

Jessi: But

James: it's amazing.

It's okay. Keep 'em coming. Red flag number four.

punitive capital call terms.

Okay. So you know what

capital

call is,

Jessi: Yes. It's if you need more money from your investors, you go back to them and you're like, Hey, actually we need a little bit

more.

James: Do you know what punitive

means? It's

Jessi: It's

bad. Yeah. You

James: get

Jessi: in

James: It's

usually like the the consequences for not. Doing it.

Don't, it's not proportional.

Oh,

Jessi: Oh, okay. Yeah

James: yeah. Again, it happens, but it could include penalties,

like extreme dilution. So

Normally,

okay, let's think about the math here. Let's say investors all, lemme

Jessi: make sure I'm understanding. So you are saying that

if you do a capital call and you ask me for more money and I decide I can't give you more

money,

James: uhhuh,

Jessi: then I get punished

James: Extreme. Extreme. So small. Let's do simple numbers. Let's pretend that we, there's just the two of us.

Okay. And we each put in a hundred dollars.

Jessi: Okay.

James: So there's $200 total.

Jessi: Yep.

James: And let's just say you own 50%. I own 50%.

Okay.

Let's just pretend whatever happens, we decide we need an extra a hundred dollars.

Jessi: Okay.

James: And so we say you get a choice, you can put in another 50 bucks, I'll put another 50 bucks. But if you go I don't have 50 bucks. To put in,

to put in.

maybe in what, what would happen is your share would go down normally from 50% down to

Jessi: share

James: third.

'cause now you have a hundred. Oh, because you're,

Jessi: yeah.

James: Yeah.

Because you're getting, and instead of go no, your share now goes down to 10%. Oh.

Jessi: You're, oh.

James: And whoever contributes this time round gets a big proportion. I'm trying to quote, incentivize you to contribute more. That comes off as punitive if you don't.

Jessi: What,

Some.

Okay.

James: Or I force

you can't.

Jessi: just can't.

James: well again,

like it happens and it will probably dilute, but you don't want it to be extreme.

Jessi: but Oh,

Oh, okay. Okay.

Okay.

So you're just saying the red flag is

if the dilution becomes punitive.

James: Correct.

Jessi: Got it.

James: Or

maybe there's some sort of force to sale of

your ownership.

Jessi: Oh.

James: Oh. If you can't contribute more,

Jessi: then you've

120 8 Legal Red Flags - a2 James: gotta

James: get out. You're out. Someone else has been. Replace you. All

Jessi: Alright. That's worth looking

James: Yeah.

Or you just lose your

Jessi: I would not have been aware of that. I

would've

Blown over that part and been like yeah.

Yeah. Whatever.

James: It's important to know. Mine's just a standard. Yeah. Can't do it. I get it.

Jessi: So you don't, there's

no

lowering of shares or

anything?

James: No there. If I have a

capital call and you're not able to contribute, we just redo the math. How much capital is now in the investment? What's

Jessi: so you, you always

James: it will dilute the proportion. It just doesn't, it's not

Jessi: It's not extra.

Correct. That makes sense.

James: You get

it.

Red flag number five. Removing

the sponsor is

That's impossible.

Okay. I'm excited for that. Short to just, it's coming.

Anyway, so some agreements, they technically allow the sponsor to be removed, but the conclusions, or I'm sorry, the conditions are unrealistic. Okay. So like you have to have

a 90 or even 100% investor approval in order to do it,

Jessi: which is pretty high. Pretty high.

James: It's pretty high.

Or

there's sort of criminal conviction that's required in order to do that. Them.

Jessi: I, I this goes back

trusting your sponsor, I feel like. Yeah. 'cause it's okay, you don't necessarily need strict rules in there or loose rules in there, for being able to get rid

of them

if you trust them.

But it's good to have

James: things written down in a fine.

Jessi: Sure.

James: Yeah.

Jessi: Yeah, but those sounded good. If they

do,

if they're fraudulent or do some criminal activity

James: Yes, but

That's my point. But that's it.

that's

Jessi: It

James: out

Yes.

But the

point is that it requires a huge bar. Usually it might be like a super majority

is like

60%.

Jessi: All right.

James: thing.

Not 90 or hundred something, it's actually unanimous. Yeah. And so you just wanna make sure that there's, and there's just defined performance metrics

Jessi: right?

James: that would allow to be rude.

if

needed.

Jessi: That makes

sense.

James: Good. Red flag

number six.

Oh, this one's

tricky

one. Ready for this one?

Jessi: Ready.

James: B stacking. B

Jessi: stacking,

James: yeah.

Jessi: Like nickel and

James: But from a fee standpoint.

So like for mine, the fees were there was an acquisition fee.

And

an ongoing

management fee. That's it. That's it for me.

Oh.

But maybe

there's also, that's

asset management fee, so acquisition, asset management fee. But maybe there's a

construction management fee, a financing fee, a refinance

fee, a

disposition fee. Disposition from you sell,

like every

time they have to do something

they get paid a little bit

of

just a little

something off the top.

Jessi: Interesting.

James: Yeah. Totally a thing. But this position one.

It happens.

If that, if you see that, just don't

it. Like the

good sponsors don't do it. Oh, they're like, no, I get equity just like everybody else. If we all win.

Jessi: That's, yeah. You would think that

you would think that would be fair, but I guess I could see

If you, if your mindset around your role as the sponsor is like, no, I'm providing this extra service for you because I'm doing all the legwork and putting it together and whatever,

and I should get paid the fee

to do that.

James: Yeah.

Jessi: It should be embedded

the numbers. I feel

James: That's, in

in my opinion, that's where the asset management fees. Sure. Yeah.

Jessi: I mean

you can adjust your, those two fees that you set up to, to reflect what you are worth and what you should be getting

paid.

I

think,

James: Yeah. What, and what you don't want to have happen is that the sponsor

gets

paid what was like in the spreadsheet and the FMA proforma, no matter what.

So even if the deal does bad, like

I'm cool, I got paid. Yeah, you don't

want that. You want to have incentives aligned as much as possible while at the same time recognizing No, it's foster put in like a ton of time and effort. It's funny, I just recently I did a presentation about my deal, the bigger tower, and I talked about how it was 18 months just to get it under contract and it was another five months to actually close the day.

It was a tremendous amount of work. I mean it was, yeah. Oh, it was a thing, not to mention the emotional toll and rollercoaster that I went on. But I was like, yeah, no, that, and I

got paid an acquisition fee for that and then making an ongoing management one, which

I

regularly get on the phone with the property manager

we're talking about stuff and going over things and making decisions,

and we're driving over there working and doing the things.

Yeah, no, it's totally

Jessi: sure.

James: legit.

Red flag number

seven.

The sponsor can sell or refinance without LP or passive investor approval.

Jessi: That's like another

James: That falls under

the major

Jessi: a big,

James: decision, yeah. Decision category

and or bringing in new partners,

replacing the operators.

Jessi: Yeah.

James: Those

Jessi: I think I don't know. I am

in my gut, I just feel like I would be the kind of sponsor who would wanna know everything. So I'd wanna know more

less.

James: That's not true. That's not true. Maybe not. You are effectively my passive investor.

Jessi: Yeah, that's true

James: for all, for

Jessi: but you tell me all the,

You

do you tell me all the things? Oh, no. Is this

a red

flag?

Should

what should I be

asking?

James: I like

You think I do. That's nice.

Jessi: I think I trust you. I don't

know.

James: Yeah. Yeah. When's the last time you've seen a financial statement? From all of our. Erase from me.

Jessi: Crickets.

James: I know?

Technically you do sign all of our tax stuff and

Jessi: say

James: can see all of it there, and it is all in

folder that is

highly accessible to you. You just don't,

Jessi: I just don't dig in ' cause I

James: don't,

my

point. You're like, I'm one of those people

wants to know everything. Yeah.

Jessi: I don't are everything,

James: but

are

you?

Jessi: Yeah. No, I guess

I'm

James: not There you go myself. It's okay.

Jessi: Yeah.

James: I just called you.

Jessi: I am your investor.

James: Yeah, you are.

Jessi: If I were investing with someone else who I didn't trust nearly as much as

you,

James: hence it comes back to it.

Jessi: Goes back to trusting the,

James: you gotta trust the sponsor.

Jessi: I'm like,

I, we have had

conversations and you've proven yourself over

how many

years ago?

James: Yeah. What's the math on that? Go ahead.

What's it gonna be? 18 notice gonna be, there you go. We're coming up on 18.

Jessi: 18. We were together for six before that.

James: No. That

That

that doesn't matter. That doesn't

Jessi: Yes, it does. I got to

know you six anyways. Yeah.

James: probably right. Dang.

Jessi: Anyways.

Is,

I got to know you. I trust you. I've asked you those questions at different times, and I've seen how

you manage money.

James: So

Jessi: If you don't trust your sponsor, I feel like you should ask a lot of questions and want to know

everything.

James: I

had a deal. I was invested in, I guess I technically still am. I try to ask a lot of questions and they never had any answers. And I just got, it was dumb.

I just stopped asking questions.

Who knows?

Maybe James

super satisfied. We answered all his questions. We're good to go. I'm like, no, I'm just disenfranchised.

Jessi: Nope. I'm just,

James: so I'm moving

on.

Jessi: It's

James: okay. I get a check every once in a while and just

get

Jessi: there you go.

James: All right.

This is it, right? Yeah,

This is it. Red flag number

OCHO

eight

some, what am I saying? Unlimited ability

to issue new equity.

Yeah. So some agreements allow the sponsor to bring in new investors at any

time,

which

I've never seen, but

Jessi: Why would that mean bad? Just 'cause they

James: they can

of the

your

it can delete your

canute your existing

equity.

It can change how the waterfall flows and just

reduces your ownership percentage and all sorts of stuff.

Overall, it

Jessi: And makes you feel less

cool.

James: Yes. And.

you just want

you just

want you just

want clear rules around everything and good expectations and yeah.

be like, oh yeah, I

got 20% of this. And then other people just

adding and all of a sudden you're like, wait, I'm only like

Jessi: yeah, wait a

James: which for the types of syndications what I do, which is a single purpose vehicle, it's it's very clear that this LLC is due by this.

That's all it's doing. And there's the project and that kind of thing. It's fine.

There's other

ones that are, oh gosh, there's

it's like an, this is like a, yeah, it's a single purpose or opened, LLC. There's a blind and semi blind.

I think I'm getting those terms right. So a semi blind.

and

this is what A lot of

Jessi: semi blind LLC.

James: Yeah. Or

a fund. A lot of

will do this where they'll say

We are investing in this type of thing. We're investing in

we're investing in Bitcoin types

of companies. We're investing in Multifamilies in this area. That's what

we

don't know the exact property. Put some money in.

Jessi: Oh. And

James: then we're

gonna

have a fund. And we're gonna go off and do our

Like

in theory, I could create. A property flipping fund.

Jessi: Yeah.

James: Where I'm like, Hey, we're gonna have,

I don't know,

a million

dollars in this fund that's just always there and you're gonna get paid some percentage of all the returns.

But the goal is to be like, for me to be able to just like cash offers day and night and just

after it, do the

terms, pay for all the construction stuff and have as much of that deployed as possible. And so that we're getting. Whatever, 20 50% returns on things. 'cause we're making these just like we're putting, we're like signing checks right there and closing left and right.

We're able to do four or five deals a month

we

just have

pile of cash

and as a result we're gonna big return and then we figure out

the

average is for all of it. And then you get some percentage of it. It's all send done. That's totally a thing. And a lot of the big flippers who they're like, yeah, we're consistently doing a hundred deals a year.

Like they don't want to have to raise from investors every

single time. It's way too cumbersome. It's better to say, we got a

a

a fund,

that's what we're doing. And you might say, this fund is gonna be open for two years. And then, and you're doing your thing

and then you do the payout at the end of two years.

'cause your investors don't wanna stay forever. And then what you do is you raise another fund and the interim and so then you just rule everything over that.

Jessi: Interesting.

James: Holy a thing. Semi blind that though is where the the ability to issue new equity. Like you might say, yeah, I have a million dollar fund and I don't know, we.

we've,

we're

getting into it and I'm like, dude, actually we got an opportunity here. Let's raise an extra half a million dollars into the existing fund and then it balloons and your equity is now suddenly, whatever it is, one third less

Jessi: than

James: what was originally like Wait, what? What happened? Like I thought we were kicking about taking names.

Like I don't understand. It was, we got to,

I mean it might

work out. 'cause I'm like,

Jessi: it's an interesting

'cause you would think that other people putting more money in means that you can do a bigger deal and you get more back.

James: Maybe

that's the math

But

Jessi: of the pie doesn't get bigger.

James: but the pie

is bigger, but my piece is smaller. Yeah. On net I get more pie. Yeah. It's totally the idea. That's the entire premise behind syndications. Instead of doing an investment all by yourself on this little deal. Yeah.

Come

join me on the big one.

And we get

more pie. Yeah. Like totally think

It's,

it just depends on why they're going out for more investors.

Yeah. That's all.

Jessi: Alright.

James: Thank.

Yeah.

Jessi: Be aware.

James: It's interesting. So those are

are the red flags.

They're pretty cool. Time. Most passive investors, they

analyze the spreadsheet, which

good. You

absolutely should, but

more importantly, you want to analyze that legal structure. You wanna spend a lot of time

there.

It's hard, believe me, it's

Jessi: Hard. And you would trust chat to parse

out.

James: Okay. Legal

Jessi: documents,

James: great question.

the way

that I use it, is like bonus time. If you stay till the end. Congratulations. You're getting this. So the way I use it is.

And I use this

for almost every

single legal contract. I hate reading legal documents, but I'll have it read it. Can you summarize it for me? What are the key points? And I'm like, what is it that I should be, that I should look out for? What's something that the other party would be

about if I

was on

other

What's something that I should look out for?

And then when it tells me all

those things, I'm like, cool, where is that? And then, so I'll kinda get my overview and then it'll tell me, oh, it's on page eight, whatever. And then I'll go to page eight and I will read, reread section, the actual words. And there's times where I'm like, okay, it says this.

How do I interpret that for me? How do I say that?

And so it's

not a,

what you don't want do is upload a

a document.

and

say, Hey, summarize this

me. And five minutes later you're like, awesome. No, it's still like an hour long exercise and honestly, by the time you get

you're like, I've read

a significant

of this.

But it

was like reading it with

the notes turned on. Yeah. With the annotations. Sure. So you're like, okay. Okay, now. Yeah. You're not just overall structure. Context. Yeah.

Jessi: You're not just reading it. You're actually understanding

what it

James: Yeah. Because that

was my biggest

why I hated doing

it before.

I

Jessi: was like, you were reading it.

I have no

James: I dunno, this means this isn't

any fun. So I'd read the

first page.

skim the second page, read the

headers,

and then kinda get to the end and

like, yeah, there's signature page. All right, cool. I was like, it was so

like, oh, it was horrible.

Jessi: Yeah.

James: I often, I partnered with

who, they were great at reading

entire thing,

and honestly, that's one of the reasons why.

Get paid the big bucks.

they

have the stamina, but

they also have three

years of education to get the context. So when they read it, they understand

they may not know that exact contract,

Jessi: they, that

James: that's phrasing the context and stuff. And they go, oh, that's a thing I see that I never look out for.

That's what the training's all for, which should tell you something, lawyer become a problem in the future. But but yeah. Yeah.

So

the next time

you

an investment

opportunity the

question again is, and you may not see. You're not gonna see the legal documents right away. But if you're like, okay, like the spreadsheet, like where this is headed, that's the next thing that you add into.

Just look out for those kind of red flags that essentially just making sure that things

being reasonable and

chat and others are smart enough where you can

is this reasonable?

Is this

not? And it does stuff. Sure.

convenient. So

there you go. Hey,

red flags. Thank you

to

Lesky.

Jessi: Alexi.

James: Alexi,

Jessi: Alexis

Oh,

James: EKS,

Alex, what

I say?

Jessi: Leski.

James: Alex?

Alexis.

thank you sir.

Jessi: Thank

you, sir.

James: scholar and a gentleman.

Oh my gosh.

And

Jessi: We

apologize for butchering your name.

James: Oh man. Multiple

Jessi: times.

Couple times.

James: And with that,

thank

you for

listening. Have a great day

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