Q: I am starting a new business and intend to issue stock to management-level employees. As the founder and technical manager, I will retain 38 percent of the stock. What means do I have of protecting my personal security in the venture against decisions of the board of directors, CEO (which I am not) and stockholders?
Via the Internet
A:Ronald A. Lebetsamer is an attorney and principal of the firm Popeney, Lebetsamer & Grange, A Professional Corporation, in Torrance, California. In practice for more than 24 years, he specializes in business formation and business transactions:
In contemplating your question, I am struck by the frequency with which this issue arises in the context of business formation and expansion. Having been forced many times as an attorney to deal with the consequences when a business founder fails to consider the possible downside of issuing ownership interests to employees, I strongly advise that you postpone a decision to issue voting rights and ownership interests to new employees until after a suitable "honeymoon period" has passed so that you can determine the suitability, compatibility and trustworthiness of those employees.
The process of reacquiring the interests of those employees who turn out to be unsuitable for your new company can be both expensive and emotionally painful. Additionally, if a founder has given up voting control, it may be impossible to reacquire the interests, a thought which should have a chilling effect on any founder thinking of doing so.
It's my assumption that you feel it's necessary to issue ownership interests at the commencement of employment to attract the talent needed to complement your own expertise. This is not always necessary. Sometimes, simply the potential for ownership, coupled with an attractive compensation package, is sufficient incentive. Most managerial applicants are primarily concerned with adequate compensation and secondarily concerned with ownership in the enterprise.
With these thoughts in mind, the following are possible alternatives to issuing immediate ownership interests:
1. Consider granting options (for the future purchase of stock) rather than outright ownership of shares. Use of options allows management the leeway to determine when an employee becomes eligible to receive options, when the options will mature, and the purchase price for the exercise of the options. The use of options also gives the founder a possible built-in contractual means to reacquire the shares in the future.
2. Consider creating more than one class of common shares--one class that has all or at least a majority of the voting rights and one class that doesn't have voting rights or has limited rights. By retaining the shares with the voting rights, you can protect your position and retain ultimate control while granting ownership rights in the enterprise.
3. If you are not irrevocably wedded to the concept of using a standard corporate structure for the operation of the business, you might consider utilizing the newer limited liability company (LLC) format. This form of business entity provides virtually the same limited liability to its owners as is afforded to those who own shares in corporations but is potentially a much more flexible way to deal with issues such as retaining control of the business. A well-planned LLC is governed by an operating agreement, similar to a partnership agreement. The operating agreement can easily create different classes of membership, retention of voting control by the founder and other similar provisions without the cumbersome inflexibility of the corporate format.
With the many considerations inherent in your situation, I recommend you consult with a qualified attorney before you commit to the issuance of voting interests in your new venture.
Q: We're a small graphic design firm and have spent many years illustrating everything from cereal boxes to annual reports. Because our designs have been so well-received, we've recently created a line of greeting cards (all new designs, of course) we'd like to market. My question is: How should we market our product? Do we begin by calling small card and gift shops and asking them if they ever purchase locally? We know very little about the retail business and need advice.
A: Christopher D. Gigley is managing editor of Gift & Stationery Business, a monthly trade magazine, and Web master for the magazine's Web site, Giftline, at http://www.giftline.com :
One of the great things about the greeting card business is that anyone with a good idea and sound business sense can get in. The industry is driven by small, creative companies that can react to trends quickly and incorporate them into new cards. Often, these companies are design firms like yours.
The most effective way to reach stores, to make important contacts and to get a feel for how the industry works is by exhibiting at trade shows. Any retailer who sells gifts, from mom and pop stores to department store chains, attends these shows. By investing money in a booth, you'll get great exposure for your new cards. And because the gift industry is obsessed with what's new, buyers tend to swarm to first-time exhibitors.
The gift show circuit includes stops in virtually every major city in the United States. Each show draws exhibitors and attendees from its region, but there are a handful that attract a broader audience. Below is a list of those shows, the show management companies and phone numbers to call for more information:
California Gift Show (Los Angeles Convention Center), Atlantic Marketing Center (AMC) Inc., (800) 395-3901
Atlanta International Gift and Home Furnishings Fair, AMC Inc., (404) 220-3000
The Markets, Dallas Market Center, (800) DAL-MKTS
Chicago Gift Show, George Little Management Inc., (800) 272-SHOW
New York International Gift Fair (various locations), George Little Management Inc., (800) 272-SHOW.
The crown jewel of the show circuit for paper vendors, however, is the National Stationery Show in New York City. While gift shows include all types of gifts, the Stationery Show sticks mostly to vendors of greeting cards, stationery, giftwrap and other paper products. Call George Little Management at the phone number listed above for more information.
You may find that several of these shows have waiting lists for potential exhibitors. Don't be discouraged. Sales representatives who already have booth space may want to exhibit your product line; all you need to do is find out who these sales reps are and pitch your card line. You can do this by asking the show management companies for contacts or by attending the shows and approaching the sales reps yourself.
Most gift shows take place twice a year, in the winter and summer. While the winter show season is January and February, the summer show season runs generally from late June to August. Business at the winter shows tends to be a little more brisk than those held in summer.
In terms of the types of retailers to deal with, you should consider what is manageable for your company. Can you fill a single order for 100 cards, 1,000 cards, 5,000 cards? Are you prepared to absorb the discounts large chain-stores typically demand for the voluminous orders they make? Be careful not to rely too heavily on only one or two large retailers; if they suddenly stop doing business with you, your sales will be drastically cut.
There are plenty of retailers out there looking for greeting cards, and the number is growing. Clothing boutiques, florists and even pet stores are among the expanding range of retailers adding greeting cards to their product mix. The good news is that you can reach large numbers of them easily by exhibiting your cards at a trade show.
Gift & Stationery Business, fax: (212) 279-3960, email@example.com
Popeney, Lebetsamer & Grange, APC, 1500 Crenshaw Blvd., 2nd Fl., Torrance, CA 90501, (310) 320-2333.
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