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?
John Berry
Via the Internet
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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.
J. Campbell
Minneapolis
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.
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