This month a reader asks how he should reward employees with equity: should he sell it or give it away, and when? Maybe he's asking the wrong question. What's your advice on equity sharing, or any of this month's questions?
Do Your Own Deal
I own a one-person personal-training business. I want to attract some accountants, lawyers, and other professionals as investors. Can I can put together an offering memorandum without a lawyer?
Yes, but Dennis O'Connor, a lawyer with O'Connor, Broude & Aronson, in Waltham, Mass., says a do-it-yourself offering is unusual and unwise. Make a mistake and you'll have to rescind the offering and give the money back to investors. If a jury finds criminal fraud, you'll be fined by the Securities and Exchange Commission or state securities commissions. If civil fraud is found, investors could sue for punitive damages. If there's no fraud, and you simply make a mistake, you could be sued for negligence.
Still interested? A company's officers may sell securities without a license in some states, according to Drew Field, author of Take Your Company Public , (Simon & Schuster, 1991, $24.95). Other states require you to pass exams. Call the state securities commission, or check The Blue Sky Law Reporter (Commerce Clearing House, available at most law libraries), which lists state regulations.
If you're raising money in several states, you may have to register the offering with the SEC. The local SEC office can tell you if you qualify for exemptions for small offerings. Call the SEC's publications unit (202-272-7461) to order its Small Business Package, which walks you through the offering process. And write for copies of the Regulation D private-placement package (SEC, 450 Fifth St. NW, Washington, DC 20549, Attn. Public Reference Branch; state that you're willing to pay for copying, billing, shipping, and tax). And ask the state securities commission in your investors' home states for guidelines and advice.
To Market, to Market
My company has never done formal market intelligence, lead follow-up, sales-force management, or forecasting. Now I've been asked to establish a marketing department. What books will help?
Standard Steel Specialty
Beaver Falls, Pa.
For an overview of marketing, David G. Fubini, managing director of McKinsey & Co.'s Boston office, recommends The Portable M.B.A. in Marketing (John Wiley, 1992, $24.95). Authors Alexander Hiam and Charles D. Schewe "strip away the vocabulary and get to the substance."
When you're ready to write a marketing plan, "there are some basic primers out there to get you going," says Geraldine A. Larkin, manager of the emerging-businesses department at Deloitte & Touche, in Ann Arbor, Mich., who wrote one of them, 12 Simple Steps to a Winning Marketing Plan (Probus, 1992, $16.95). For step-by-step advice, Gordon Paul, co-author of Marketing Management: Strategies and Programs (McGraw-Hill, 1985, $45.85), suggests Strategic Market Planning (1990), by Robert J. Hamper and L. Sue Baugh, and The Successful Marketing Plan (1990), by Roman G. Hiebing Jr. and Scott W. Cooper (both from NTC Business Books, Lincolnwood, Ill., $39.95 and $34.95, respectively). The first identifies pitfalls; the second tells how to write a plan.
As you're writing the plan, you'll need a guide to available resources. Chuck Savage, vice-president of sales at Kullman Industries, a construction company in Avenel, N.J. (see "A Seminar of One," Sales & Marketing, December 1991, [Article link]), recommends The Marketing Sourcebook for Small Businesses , by Jeffrey P. Davidson (John Wiley, 1989, $24.95). Also try the American Marketing Association ($145 for an annual membership; 312-648-0536) and the Direct Marketing Association (membership fees begin at $495; 212-768-7277), which has a database of direct-marketing facts, theories, and case histories.
We run a small student-exchange program that brings Scandinavian teens to the United States. Our problem is selling the program's merits overseas, so we'd like to find a partner who knows the ins and outs of recruiting in Scandinavia. How do we find such a partner?
Try seeking an independent trade consultant through your banker, Small Business Administration officials, and small-business development centers (SBDCs). (The SBDC Connection, 800-633-6450, can recommend the appropriate SBDC.) Consultants can pinpoint reliable contacts stateside and abroad and explore financing. Many can arrange for preparatory language and cross-cultural training, and can assess political, economic, and security concerns.
But consultants can cost $1,000 to $2,500 per day. With five dissimilar educational markets to explore, you'll need one adviser per country, so fees will multiply. You may be better off expanding cheaply. "Go directly to the individual schools or national teachers' organizations," advises Bergitta Andersson of the Swedish Information Service, in New York City. To start, get the names of foreign-university and secondary-school administrators and send them information. Consulates and embassies in Washington, D.C., should provide names, and also check with the U.S. Information Agency's Nordic-countries desk officer (202-619-5283), as well as its educational-exchange unit (202-619-6299). Also contact the Department of Commerce's trade specialists (202-377-2000).
Mature competitors like American Field Services (212-949-4242), in New York City, and Youth for Understanding (202-966-6800), in Washington, D.C., may feel secure enough to advise an upstart like you.
A $30 membership in the nonprofit American-Scandinavian Foundation (212-879-9779) connects you with 22,000 alumni and subscribers.
Every Worker an Owner
I'm adding the first employees to my environmental-consulting firm. I believe it's important to give employees equity. How should I go about it? How do other small companies do it?
Eric Jay Toll
Carson City, Nev.
Equity sharing is a balancing act, Corey Rosen says, and most CEOs won't spare the attention it requires. Rosen's organization, the National Center for Employee Ownership, in Oakland, Calif. (510-272-9461), publishes "Employee Ownership for Smaller Companies" ($10), a 21-page planning guide, and the more comprehensive "Alternatives to ESOPs" ($25).
First, you must determine your business's value. Consult Business Valuation Manual , by Tom Horn (Charter Oak Press, P.O. Box 7783, Lancaster, PA 17604; 1990, $32.70, including shipping), or Shannon Pratt's Valuing a Business and Valuing a Small Business (1988 and 1990, both from Business One Irwin, Homewood, Ill.; $85 each; both for $145). Then consider your alternatives: to give or to sell stock or options. If you give employees stock, the IRS will tax it as wages. If employees buy the stock out of after-tax dollars, you may discount the price by up to 15% without tax consequences. If you sell to many employees, your state may require disclosure of company financials to anyone who expresses interest. Disclosure becomes expensive. You can avoid that by making stock purchase a condition of employment, but some states don't allow it. Check with your state securities commission.
Many companies give employees options to buy stock at a set price later. That won't bring you a lot of cash, and it might not motivate employees as a greater commitment of stock might, but it postpones your loss of equity and cuts legal costs.
Don't ignore such considerations as pricing and redeeming shares. Early on, Bob Kelliher, president of Manufacturing and Research Inc. (MRI), a medical-supplies distributor in Tucson, gave stock to a key employee. Later he and that employee had a falling out. It took three years to settle debts. Now he says, "My first recommendation on offering equity is 'Don't!' But if you do, it should be with an end play in mind."
Easy end plays include going public or selling the company. If neither seems likely, you could set aside money to buy back shares when employees leave. You could write a buy-sell agreement, which would stipulate who buys shares from whom and how those shares are priced. (That becomes more complicated with more people involved.) Or you could require new employees to buy stock from those departing. (But if the share price rises, it might become expensive to join your company.)
Companies fail to plan long term in other ways. If, starting out, you reward your cherished first employee with 10% equity, you may later want to give a more critical hire 15%. But will you want two people owning 25% of your company? "Plan not just for 3 or 4 people," Rosen advises, "but for 10, 20, 30." While an ESOP is inappropriate for a very small company, a study of ESOP guidelines is useful; "Employee Ownership" outlines them. Also check John Case's "ESOPs: Dead or Alive" (June 1988).
But before you make a move, assess whether equity is important to employees at your company, a fledgling consultant business with little transferable value. Shares won't be worth much until you grow significantly. Maybe employees would prefer a generous pension plan or profit sharing -- benefits that give them real money without risk. Ask them. n
-- Reported by Michael P. Cronin, ChristopherCaggiano, Karen E. Carney, and Vera Gibbons.