Dan Potter, the CEO of Video Update, based in St. Paul, Minn., cofounded the video retailer and franchiser with less than $1,000 worth of credit. "We simply charged the purchase of 80 movies to our credit cards, and we lived in the basement of our store," he recalls.
After 12 years Potter's capital needs -- and growth prospects -- have changed dramatically. "Our 1994 sales were $5 million, and we're projecting that this year's revenues will double -- so long as we can position our expansions correctly. But to get into the best mall locations, a video store needs either to have an impressive balance sheet or to belong to a public company."
Though Video Update's reputation was top-notch, the company was far from being its industry's dominant player. So, to earn investor interest, Potter considered other enticements. "Our investment bankers and I explored various ways to differentiate our deal."
Ultimately, Potter decided to put in escrow 65% of the stock he would retain after the initial public offering. "That stock would revert to me only if we achieved profit and growth goals," he says. "If we missed our targets, the stock would be destroyed. That seemed perfectly fair to me, because if we'd failed I wouldn't have deserved to own the stock."
Video Update's offering prospectus spelled out, in two pages, the exact rules that would govern and define the mechanics of the escrow deal. Potter would get the shares being held in escrow in two stages so long as he accomplished the itemized goals within a specified time frame.
Investors loved the offer. "We raised $6.2 million last year, and we're already planning to raise $8.5 million more," says Potter. "I really think putting my own shares at risk helped us do the deal. It demonstrated just how confident we are about this company and its growth prospects."