Charles “Chip” Tate, founder of the widely respected Balcones Distilling and one of the most important young guns of the craft spirits movement, may or may not be involved in the business he created by this time next year.
This is a tale that’s been gaining traction in the press for some time now, but it’s only recently that, thanks to a change in a court order, Tate himself can more fully tell his side of the bizarre story.
Balcones, whose Waco, Texas whiskey has garnered countless awards and plaudits, not to mention legions of passionate consumers, was a business on the rise, the craft whiskey equivalent of cult whiskey sensation Pappy Van Winkle, with bottles of Tate’s award-winning whiskey selling out on release. So much so, in fact, that Tate felt the time was right to bring on investors to help facilitate its growth. Initially, the relationship between Tate and his investors proceeded relatively smoothly, with Tate running the day-to-day operations and his investors helping things along with funds and three of the five seats on the board.
Somewhere along the way, however, the relationship turned sour…and then, ultimately, adversarial. The investor group accused Tate of threatening to shoot the lead investor, a charge Tate denies. Ultimately, it became clear that this was a power play for one of the hottest and potentially most lucrative craft spirits companies in the U.S. market, and the business marriage would not—could not—last.
Drink Me Editor-in-Chief Brian Freedman recently spoke on the phone with Tate, and the story he heard had all the makings of a thoroughly modern tragedy that goes right to the heart not just of business, but also to the very crux of what it means to be a craft distiller. Here is our conversation, edited and condensed for space and clarity.
Brian Freedman: Take me through why it’s gotten so complicated. How did it get to this point?
Chip Tate: The essential points to cover are the ones that really haven’t been touched on yet. There have been tensions with this investment group for a while, especially since they had a better picture of what this project was going to cost. Since then there have been a number of attempts by them to essentially take over the company, though I don’t know if that’s to try to sell the company to a larger group. That’s purely speculative. I don’t know what the plan would be, but the means to where they’re trying to go has been pretty clear. They’ve made three or four different proposals whereby essentially they take over the company.
There are a lot of things they can’t do right now in the company without my permission, including sell it. The big issues have been surrounding that. Things got really tense with board meetings. It was in the beginning of July when they clearly started ramrodding things through in board meetings. Bringing things up that had never even been discussed before. Really draconian policy. Cancel all the credit cards, three signatures on checks, daily reports for this and this and this. You say, ‘Okay, you seem concerned about something. What is it you’re concerned about?’ No discussion. Passed motion. Boom.
Towards the end of July, I could tell that things were getting quite tense and I continued to try to say, ‘Hey guys, this is going nowhere. This is looking more and more like a divorce so let’s be grownups about this. One of us needs to leave. You all are clearly unhappy. I would really like to stay since this is the company I built and founded and so forth.’ They said, ‘Yes, that’s fine.’ We kept bringing them different offers for their shares, and they wouldn’t hear it. It was kind of confusing because on the one hand they were saying they were willing to entertain offers. On the other hand they weren’t entertaining any of the offers, nor were they giving any feedback on them.
They weren’t at any point saying this offer just isn’t high enough or the parameters aren’t good?
They were, but in very unreasonable ways.
Give me a for instance.
They’d been involved for not quite a year at that point and they were trying to say that anything less than double their money was downright insulting. Most people would consider double their money in a year or anywhere close to it pretty good, especially in a contentious situation like that. You generally just want to walk away whole. We were continuing to try to negotiate with them on that and this all came to a head August 5th. This is when I would say that [the] shenanigans proper started. Essentially some of the employees, I think—presumably, although I can’t know for sure, in league with the investors—broke into certain social media accounts. Some property from the distillery was missing and I was trying to get hold of folks to say do you guys know anything about this. No answer, no answer. Greg [Allen] said, ‘That’s odd.’ Just acting very nonchalant about it.
Greg is one of the investors?
Greg is the head of the investor group, yeah.
He acted nonchalant about the fact that property was missing from the facility and that social media accounts had been broken into?
Yeah, we emailed him. Both me and my lawyer emailed him and he said, ‘Huh, I don’t know anything about that.’ Again, kind of a strange reaction…Normally you’d say, oh goodness, that’s a shame. What did you do? What’s the situation?
What was missing from the distillery?
As far as I knew it was one computer. It would have been the tiniest thing, but that computer was what we used for all of our accounting. One of the employees…that was their primary computer.
What happened when the social media accounts were broken into? Were false tweets posted? What happened there?
No, not at that point. At that point there was nothing really going on. Of course, I was just trying to ascertain: did an employee do this? If so, why did they do this? Did somebody else break in under the guise of being them? Just the usual thing when you’re denied access to something that you administer you’re trying to figure out what’s going on.
They broke in and changed the password settings?
Let me backtrack here for a second. When you took on these investors, was the presentation of their end goal and the nature of their involvement different than what it ultimately ended up being?
Was it more of a partnership in the beginning? And if so, at what point did it take that turn. Was it immediately after the ink was dry, or did something facilitate that?
I would say it was gradual. There were a few things that were quite clear, as in we’d discussed it at great length and codified it in our operating agreement. One was that I didn’t intend to sell the distillery to a big company at that point, and I wasn’t saying ‘no we’ll never consider doing that,’ just that, as majority shareholders, if we were offered some ridiculous sum of money that we’d have to make that decision together and not based on the money. [Rather, it should be] based on what was right for the distillery. The other was that I would manage the company entirely. They wanted to have a board, which was fine. I said, ‘Okay, so this is a fiduciary oversight role, right?’ In other words, I will manage the company entirely and we’ll report to you guys what’s going on and you will ask questions and that will be it.
Really high-level decisions we’ll make together, like on how many millions we spend on a plant or something like that. Day-to-day business, that would be me, period. Once the ink was dry, gradually they tried to get more and more involved in the business. Kind of interjecting here and there. That was perturbing at times, but it wasn’t highly problematic [for me]. It became highly problematic on their end, but whenever they would try to have too much of a role I would just say… ‘I really appreciate your input on that and that’s a valuable contribution, and I will take it all under consideration and make a decision.’
Theoretically, then, they are supposed to just be in a fiduciary management role?
Right. Just to say that I manage the company. I manage all the day-to-day business and so when it comes to making those decisions, then I make them. The biggest reason for that is we’re trying to do something that’s a little novel. I feel like one of the hazards that can happen is that people who run the company tend to be business-oriented types. There’s nothing wrong with that per se if they also are artistic types in terms of, [for example], if you’re in an art business you need to understand the art business. If you have the artist being run by the business people, then the art suffers.
The flip side of that, the business people will say you’ve got numbers that have to add up and you’ve got payroll. That’s all very true, but that’s why I wanted the top position to be a combined role like that. So that the art can drive the project with a proviso that that requires business leadership to solve any of the problems that need solving to make the art what it needs to be.
They were trying to step in the way of the art?
Yeah. The point is that it’s not an ‘I’m the chief of the universe’ sort of thing. There’s a very specific philosophical reason that we discussed at length my role as president and head distiller, to make sure that the direction of the company and the financial decisions get made in terms of, every time you choose to bottle a barrel or not it’s both a business and an artistic decision. I would claim that it’s not an either/or sort of thing. That one is the other, meaning making bad artistic decisions when you’re a craftsman is making a bad business decision.
Did they see it that way?
I’ve never been clear on exactly where we disagree. Obviously they wanted to run the company so, de facto, I guess, they disagree with that principle because Balcones is what it is because of that perspective and how I’ve run it so far.
You would say, “I want to bottle barrel X,” and they would say, “Nope, barrel Y.” Is that what it was?
No, see they would never try to get down to that. The problem would be more global. There’d be 10 barrels. This actually happened one time. I’d say, ‘Look, we can go ahead and bottle these and they’re passable, but I think the better thing to do is give them a handful of months more so they go from passable to really, really good. Let me point out the obvious, which is that if we put this off three months, then this is revenue we’ll realize next quarter and not this quarter.’
Then you get to the meeting about the revenue and they’re like, ‘We’re really distressed that the revenue is blah, blah, blah.’ You’re like, ‘Well, we made that decision together.’ You can’t have your cake and eat it too. It’s a long-term business and it’s one that I think if you’re used to mass producers and other sort of commodities, that it’s hard to understand. I can give you averages and general figures and all that for how long the whiskey takes to mature, but there’s no way to turn [whiskey] into a formula. You can count on the fact that you won’t know for sure until you know, until you bottle it. That’s just part of the magic of making whiskey.
Is that something that they didn’t understand? It sounds like they were not in the spirits business beforehand, is that correct?
No, they weren’t. I don’t think that has been a problem; I think the most important thing is to know what you know and know what you don’t. A hazard with investors is the confusion between being invested in something and being involved in something. You walk up to a whiskey company and you’re thinking, ‘this is cool and I’d like to be a part of it.’ What do you know about making whiskey? Nothing, never done it, don’t know anything about it. As soon as you write a check nothing has changed, nothing has changed about what you do or don’t know about the whiskey business, but I think psychologically it gets harder to see it that way.
The one thing that’s clear is this was a major power play. There are all kinds of things I really can’t get into for legal reasons but I think it was more than just a philosophical argument. I don’t think that everything was what it seemed when we invested with these guys. I’ll just say that.
Do you think that they had this subterranean plan this whole time, or is that something that evolved over the course of their involvement?
I would only guess it’s the latter. To be honest with you, I don’t have any idea. What they’ve done doesn’t make any sense to me. Even if they had strictly self-interested, profit-motivated reasons for doing x, y, or z, getting rid of the guy who designs the distillery, builds the distillery, runs the distillery, runs the stills, brings the whiskey, and is the face of the brand, wouldn’t be on the top of my priority list when it comes to protecting my investment.
Have you tried explaining to them that the nature of whiskey is one of uncertainty?
That’s where the misunderstanding was. I think that any investment relationship—and this goes as both a caution to investors and to business people—there’s a risk there. It’s like any marriage. We’re different people bringing different things to the table and that’s either going to be a marriage made in heaven or [a] potential for deep and catastrophic misunderstanding.
I think that there is an acute risk for craft distilling right now. It’s just the whole cutting edge, leading edge, phenomenon. There’s no formula that’s already been done that you can appeal to.
There is a general danger in misunderstanding a new business like craft distilling. The whole business proposition of craft is pretty different than your typical mass production facility. All that [is] to say my comments are really about these guys, about this relationship. Anytime you don’t really communicate well and you don’t fully disclose facts to the other party, that’s going to lead to trouble…
Let’s say for whatever reason, your involvement with Balcones ends and you were to start a new craft distillery, and you had the same level of success early on as you did with Balcones. How would you look towards the future if this were to happen again?
When it comes to these investors, either I need to leave or they need to leave. If they leave, they need to get paid, and if I leave, I need to get paid. Right?
If it’s the latter, then I would have some money, which would help. Then I would like to think that I’m in a better position now—in terms of finding investors and striking a deal that’s good for me—than I was two or three years ago. The point is that now, yeah, I would definitely have something that’s more like a bond or an opportunity for somebody to invest and say ‘you get to participate and you get to make money and I run the distillery,’ period. There’s no commas in that. There’s no buts or parentheses.
There are no seats on the board, there’s nothing. It’s like a bond.
It’s like a bond. You’ve got to be fair with people, but I would seek out people too that are more interested in just being a part of it, people who are really motivated first and foremost by the work of the craft.
If you end up being the one, and this is a big if, of course, but if you end up being the one who leaves and you get your money, you start something else—can Balcones still be considered a craft distillery? You could very well become sort of a test case for other instances like this moving forward. How do you see the classification and categorization of Balcones if you end up leaving?
I think it will really depend on what people do with it. I think one of the fundamental questions I would have if I were an investor is to say, ‘I know the skill set of the different people that worked there. Who’s going to actually run the distillery and blend the whiskey.’ I think we made full use of the team and I put in very valuable contributions [to] that. Is it still craft? I don’t know. Will it still be solvent? Will it still be good? Will it still be award-winning? That’s hard to say. It definitely will have the taint of having been rubbed in the ashtray of the worst kind of capitalism that takes, essentially, from somebody who built it up.
There are going to be a lot of issues beyond craft, like quality, safety. It’s a very hands-on workshop; there’s direct fire, and you…rig pumps to the lines. It’s kind of like being a fireman. You can mess stuff up and you can really get hurt. Those will be issues. The distillery expansion was originally my plan. It’s not clear to me how they would execute and run it. Who knows. If it was my money, I sure as hell wouldn’t try it without the guy who got us here.
It’s not just a large distillery. Those are unique still designs that I came up with that are even heated differently than most stills. They’re pretty unusual. I think the critical issue here is really more [that] this is a big business or, I guess, some guys claiming big business. I don’t know what you call it. One just sort of takes something that somebody else built. To me that’s a big problem more than anything else. It doesn’t bode well for character, I think there needs to be an equitable solution…
After they tried some pretty scuzzy stuff and it didn’t work, because they expected I would run and hide and cry in a corner, they realized they’ve got some issues. What’s going to be coming out in the next couple of weeks is what this is really about. When I say that these guys haven’t been forthright—it’s a bit of an understatement. That’s what this is really about… What’s so strange about all their allegations is normally, if you’re there to run somebody down, you say something that’s not confirmable. You don’t lie about what happened on a recorded phone call or about something that’s documented in an email. Sooner or later you’ll get down to evidence stuff, and then you’ll be disproven. That’s where we are now.
They realize that I’m not going to fold. I’m not going to run, I’m not going to hide. What this is really about is getting them to come out. These guys have not been honest. I want to get back to making whiskey, so either they need to go their separate way or I want to get started. I’ve got whiskey to make.