Selling Temporary Equity

Patrick Lammert and Mark Weber were 25 years old when they decided to start a business in an industrythey both knew--color separation. They had scraped together $50,000 but needed $50,000 more. They found someone who was willing to front them themoney--and give them their first business--but he wanted 51% ownership in return. So they cut a deal that allowed the entrepreneurs to own their businessentirely themselves later on: all involved in the transaction were keen on arranging a mandatory buyback of equity five years later.

Jack Schumann, the investor, was willing, in effect, to lend money to the venture if it put up its equity as collateral. He wanted an active role helping theentrepreneurs manage the company properly. Part of the deal, too, was that Lammert and Weber's company, Wisconsin Technicolor, in Pewaukee, wouldpay Schumann 5% of gross sales each month as a consultant fee. "I think it was a real good benefit for us," says Lammert of having Schumann around. Hecredits Schumann with giving the company habits like focusing on profitability and designing good work flows for clients.

In 1994, the two founders paid about 9% of the previous year's $3.2 million revenues to Schumann to reacquire the 51% equity. They were happy, but so toowas Schumann: his $50,000 investment had grown to $280,000, a 41% compound annual growth rate.

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