Portrait of Luca Pacioli (1445–1517) with a student,  The Father of Accounting and Bookkeeping

Original YTMP content by Peter J Reilly

The conflict including litigation around the Non Sequitur Show has generated a lot of impassioned controversy among a community of youtubers and their fans and followers. It has been going on for a little over a year. I became interested in it recently because it overlaps with my Kent Hovind coverage.  NS has several Kent Hovind videos. I thought that study of the case might give me some insight into the internet information economy.  It did.  I also have some practical observations on the way Steve McRae and Kyle Curtis did business.  They might be of some use to you if you ever decide to team up with somebody in any sort of venture.

Some Relevant Background On Me

My main career was in large local and regional public accounting from 1979 to 2011,  Near the end of 2011 my firm sold to Grant Thornton, a not quite Big 4 firm.  I lasted with GT until May of 2013 .  I then had a boutique practice with my life partner and another couple until the end of 2018.   I’ve continued to do some consulting.  Besides the particular technical things I am familiar with, such as partnership taxation, I’ve learned how business succeeds or fails for organizations of between one and a few hundred people and from negligible revenue up to tens of millions.

Then there is my second career.  The core of it is as a contributor to Forbes.com.  In the internet ecology that makes me a content provider.  I started blogging at the end of 2009. I was accepted as a contributor to Forbes.com in June of 2011.  I have a youtube channel but that is mainly there to support my blog.  Here is my pride and joy from that channel – something about Kent Hovind of course.

Basically I have made some money from writing and lost a good bit of it fooling with video.  Of course, I had a very lucrative day job until 2018 and have been living the life of Reilly, in the common sense rather than the eponymous sense, since the end of 2018.  Lately, I have been getting a little more serious about making money, which is why my partner and I are overhauling this site Your Tax Matters Partner.  I’m not all that sanguine about it, but mainly the effort is a form of self-expression and a way of connecting with people.  I find it rewarding.

Keep those two aspects in mind as I look at Non Sequitur in a very cold-hearted manner.  You may not appreciate the content that I have created, but I and some others are quite fond of it.  At this point in time, though, it is of negligible economic value.  Non Sequitur is similar to my work in that regard.  Clearly a lot of effort went into those 548 shows, quite a bit more than the creation of my over 2,000 posts I would think.  The amount of money we made is in the same ballpark, although almost all the money I made comes from the Forbes platform.  The yield from my own platform is pathetic,  The residual value of this site is negligible. Non Sequitur, on the other hand, appears to have no discernible economic value at this time given the litigation cloud it is under.

The Non Sequiitur Dispute Big Picture

There is nothing that odd or unusual in the conflict that Steve McRae and Kyle Davis are having over the Non Sequitur Show.  What is a little unusual is that they are actively litigating given the relatively small stakes, but given how stubborn people can be it is not that unusual.  What is very unusual is that they seem to have gotten thousands of people interested in their dispute and that they are playing it out in such a public manner.  If you go with the theory that there is no such thing as bad publicity and they are in an industry that thrives on views, that peculiarity might be a feature rather than a bug.

If this sort of dispute were going on in an accounting firm or a law firm or a medical practice, it would be kept out of view if at all possible.  And as it happens, this sort of dispute goes on all the time in those and all sorts of other businesses. One of the things that will prevent it from killing the entity is that the players have too much to lose if the entity collapses. But what sort of dispute is this?  Well, you can find probably hundreds of hours of video about it.  For example here is a collection put together by Cheshire Viq , The collection totals about 40 videos and it seems about 50 hours.  If you go for it all you are never going to get that time back.

I will ask you to consider investing about half an hour in a video that accepting it at face value counts as primary evidence.  It is Steve and Kyle coming to an impasse about the channel.  I found it on Reddit, for whatever that is worth.

Fundamentally Kyle has taken control of the show and does not want to relinquish any of that control.  He believes that the revenue (or possibly profit) percentage which was 50-50 should be changed.  Steve is quite passionate about the notion that he would be getting 50% in perpetuity.   Kyle seems to think that he can change the deal because of the extra effort he has put in.

Steve is strongly passionate about “residuals”.  His vision seems to be that there will be future revenue from the body of work that can be passed on to the next generation.  Kyle focuses a lot on the notion that he is doing the music and the artwork.

Kyle seems insistent that things be done his way which involves him doing more work and making all the decisions, therefore, necessitating a change in the split.

The conflict is compounded by a lack of transparency,  Steve does not have access to the financial records.  Kyle alludes to the matter of how Steve should be receiving the money which a CPA is somehow involved in.  That is a matter that will come up in some of the later coverage, but in this video Steve is dismissive of Kyle’s concerns.

A Very Common Argument

This type of dispute is very, very common.  People get together in business because they have complementary strengths.  The other person or people can do something better than they can.  There is a tendency to think what you are doing yourself is the really valuable critical thing and those other things while necessary don’t matter as much.  When hashing this stuff out how hard you work is sometimes a critical factor.  Dental practices, for example, will base things on production, but how hard you work is not determinative in other fields

Can one partner unilaterally change an agreement?  In principle and possibly as a matter of law, no.  In real life, it happens all the time.  It is a combination of having the most leverage and the most chutzpah or the biggest you knows.

Oddly enough, Steve kind of had that power in this scenario. He wasn’t getting any money out of the channel and Kyle had cast a cloud over the future potential of revenue from the channel. My son helps me quite a bit on this site and I have actually gone to the trouble of specifying in my will that he inherits all the intellectual property.  It is kind of a joke between us.  In that video though Steve is passionate that the stream from the channel would be an important legacy to his daughter.  The passion is palpable

Kyle and Steve could not solve their impasse for a pretty simple reason.  Despite the positive passion of a significant number of fans, economically there is not much to Non-Sequitur as we will learn when we look at the litigation.

The Litigation

Although I have not spent scores, possibly hundreds, of hours looking through videos, I have reviewed all the documents filed in the litigation which are available at this site (you have to futz with the search function a little).  Steve filed a complaint in the Superior Court in Guilford County North Carolina. Kyle did not respond timely so the Court issued a default judgment on January 23, 2020 concluding:

Defendant shall return administrative control and primary ownership rights of the NonSequitur podcast, YouTube Channel,
and other accounts associated with the parties’ business endeavor, to Plaintiff;

Defendant shall provide Plaintiff with all financial documents associated with NonSequitur’s financial affairs and financial
condition within fourteen (14) days of this Order

Plaintiff, within thirty (30) days after receipt of the documents ordered to be produced to him, shall submit an affidavit
documenting any damages and attorneys’ fees for which he makes claim;

The Court retains jurisdiction for the purposes of reviewing and ruling upon Plaintiff’s monetary claims.\

What is going on currently in the case is Kyle trying to get the default judgment overturned, on the grounds that he was not properly served. I don’t find procedural issues like that all that interesting.  You can find hours of video on that also as I noted in my previous post. If I was covering this as I would a big tax case, I would just wait for the judge to rule.  It really doesn’t matter what anybody else thinks.

What is very interesting to me is Kyle’s initial filings where he gives the financial data on the channel.  The numbers are not audited, but based on collateral evidence they strike me as pretty plausible. It is from those numbers that we can get some insight into the business of youtubing and even the overall information economy.

Some Numbers

The data I find interesting is contained in Kyle’s filing in “Compliance to the Order” dated February 3, 2020, and filed the next day.  We get income statements for 2018 and 2019.  The tell us that for the whole life of the channel there was $49,158.72 of revenue and operating expenses of $69,010.66.  Let’s call it a $20k loss for simplicity.  According to the statements, there were no cash contributions  (There is a mention of a $2,500 software license contributed by Kyle).  The partnership deficit is funded by a payable to a vendor. The vendor is Kyle Curtis for his design services.

The Expenses

The expenses are overwhelmingly to Kyle for design services over – $65,000. That’s the $65,000 question that the judge will have to sort out if this actually goes to trial.

He has a long explanation of how he arrived at the right charge being $120 per show.  There were 548 shows. The reasonability of this charge is one of the things that you will catch impassioned debate about in the videos.  And there is a legal question about whether he could actually properly charge that to the partnership without quite explicit authorization from his partner.

Clearly it was not contemplated in the Steve Kyle confrontation in the video.  Kyle did not say to Steve “Actually Steve there is not any money available to distribute under the 50/50 agreement, because the partnership has not fully paid the $120 per show design fee that I am entitled to.”

Kyle throws in another poison pill of a sort.  He claims that he owns the copyright in all the images embedded in the show.  There needs to be a payment negotiated for that or the images need to be removed.  Accepting Kyle’s positions the channel is less than worthless to anybody but him,

In summary, the channel netted about $45,000 before payments to partners.  Kyle’s position is that he is entitled to all of that, which he has already taken, plus another $20,000 for his design services which he was performing as a contractor rather than in his capacity as a partner.  The equity in the 548 shows, whatever that might be worth, is under the cloud of his copyright claim on the images in the videos.

What would be interesting and may come out if the case continues is a detailed cash flow statement that would show when it was that Kyle took payment from the partnership

Going by the numbers and excluding Kyle’s claims, I would argue that the channel is worth something, but probably not very much.  We’ll see how that works when we look at the revenue.

The Revenue

There are four revenue sources noted YouTube, Patreon, Tee Spring and Streamlabs. The bulk of the revenue is from Youtube and Patrieon $33k and $13k respectively. Patreon revenue starts in April 2018 and Youtube revenue starts in June of 2018. There is some unaccounted Patreon income that went to Steve’s account in January and February 2018 but it seems unlikely that this amounted to much.

According to VideoAmigo NS has achieved 6.2 million lifetime views.  I am not masochistic enough to check that number against the video list on the NS site.  I did confirm that there are 548 videos there and the numbers you see are consistent with the average of 12,000 views per show that the VideoAmigo number implies.  There is a rule of thumb that you will get about $2 per thousand views from Youtube.  NS does much better than that $5.32 and then it picks up another $2.09 from Patreon.  Round numbers including the other sources NS was getting about $8 per thousand views.

With those parameters, the site cannot sustain itself, if it needs to pay Kyle $120 per show.  It would need to average 15,000 views per show to cover that 16,000 when you consider the other expenses.

But there are those residuals in perpetuity that are so important to Steve.  The statement actually gives us a sense of that.  From January to May of 2019 over thirty shows per month are being produced and revenue is between $3,700 and $4,700 per month.  17 shows are produced in June and revenue drops to $2,900.  We get between $500 and $600 when seven shows are produced in the next two months and $350 with one show in September. Then you are in pure residual territory with no new shows.  In October there is just over $300 and between $100 and $200 per month after that.

It would seem that those 548 shows sitting on Youtube get fewer than 50,000 views per month.

The Stakes

So now we have a clear notion of what the financial stakes in the litigation are.  There is roughly $45,000 that Kyle has taken and those 548 videos which might be immensely valuable but are currently producing a negligible amount of revenue.  A commenter on twitter noted that with the other damages in the default judgment the stakes are much higher if Steve hits a grand slam, but that would only be true if Kyle has other assets with which to satisfy the claims.

Looking only at the business assets, I don’t think the game is worth the candle when it comes to litigation, but I am working on getting some better information on that. I should note that Steve in his commentary talks about $60,000.  I haven’t found that number in the filings, but whether it is 45, 50 or 60 does not change the overall picture much.

The Lesson

Putting aside their artistic differences, which might actually be of greater importance to them, the two partners had different economic goals that were not incompatible, had they done better.  If instead of averaging 12,000 views per show, they averaged 120,000, there would have been plenty of money available to pay Kyle a decent amount off the top with plenty left over to split.  Conversely, just the split might have been enough for Kyle and he would have just grumbled.  As it worked out though, it appears that Kyle’s need for current income overwhelmed what the show could produce.

Possibly after some period of time, they might have broken through.  If we take Kyle’s need as a given, the way you get from here to there is either by raising equity or borrowing.

Regardless, I’m going to tell you what I would have done if I were going into a venture like this.  I would have formed Non Sequitur LLC (possibly Non Sequitur Inc, but I’ll pass that by for now).  NS LLC would have everything, absolutely everything in its name.  There would be an operating agreement that would spell out the rights and duties of the members.  The revenue and expenses would concentrate into a single account and all members would have viewing rights to that account.  There would be a provision in the operating agreement as to how liquidation would work in the event of a deadlock among the members.  There would be something really clear about ownership of intellectual property and possibly an arbitration clause. That is just a rough outline because I would have some legal advice on the setup.

The problem with that is that it is an upfront cost of a couple of thousand dollars.  Maybe that was not practical for Steve and Kyle.  What they could have done though was concentrate everything in a single bank account to which they both had viewing rights.  That would have allowed them to have the argument about Kyle needing to be paid for his work currently rather than just let it fester.  It would not have been possible for Kyle to take all the money without Steve knowing that was what was happening.

Conclusion

It seems like you can’t cover this story without joining Team Stever or Team Kyle so I expect nobody will like what I wrote.  The case has helped me ponder the information economy a little further and might have more on that.  I would think that now that Steve and Kyle both have attorneys the smart thing would be for them to sit down and hammer out a settlement while there is still something there to settle with.  I would expect that one or the other of them will end up owning those 548 videos or they will divide them up or find somebody who will pay something for them.  Kyle was either entitled to the money he took or not.  If he does not have much in the way of assets it doesn’t matter that much.

Other Notes

I am so not up on things.  Kyle did a gofundme to raise $5,000 for legal fees which succeeded.