Tag Archives: Shares

What Do You Gain by Buying Out a Co-founder? Six Points

Situation: A CEO founded his company with a long-term friend. For several years, this co-founder has contributed little and has proven to be difficult with key employees. In an important sense, the co-founder has become a distraction. A challenge is that the co-founder is a significant shareholder. What do you gain by buying out a co-founder?

Advice from the CEOs:

  • First and foremost – peace of mind. While the CEO and his allies control a majority of shares there is no guarantee that this remains the case. Long-term it can cause headaches to have a large block of shares in the hands of someone who could be hostile. The challenge is gaining control of a solid majority of shares at a reasonable price.
  • How is the value of the co-founder’s shares determined?
    • In most minority interest situations, minority interest is discounted because it is of limited value to a non-company purchaser. While it may be necessary to pay a premium to gain controlling interest in the company, this will be a premium over the discounted minority interest value, not over the fair value for all shares.
  • There are two aspects to a purchase: price and terms. It is acceptable to accept the co-founder’s price, but insist on favorable terms, e.g., 10 years to pay at 5% interest.
    • Set the terms so that the company guarantees the payment, not the CEO personally.
  • At this point the co-founder is a disruptive force within the company. Act now before more damage is done.
    • As to order of business, take action with respect to the co-founder first, then negotiate the purchase of his shares after he is no longer an employee.
    • Be sure to communicate the decision effectively to the other employees. Speak to the long-term strategic value of the company, the CEO’s vision for the company, and a determination to build the company into a viable entity with a range of customers and growth opportunities for the team.
  • Important steps as you move forward:
    • Have a plan.
    • Speak to an attorney – the company should pay but this is the CEO’s attorney, not the company’s attorney. Assure that as CEO you limit personal exposure and do things appropriately.
    • Assure that the employees understand and support this action and that they clearly understand the plan going forward.
    • Offer the co-founder a more generous severance package than would ordinarily be considered prudent.
    • Fire the co-founder as soon as plans are in place and announce a Board Meeting 30 days hence to discuss the management restructuring.
  • As a final note, this is one of the most difficult things that must be done by a CEO. The co-founder has been a long-term friend. Nothing about this is easy. It is likely to get more painful before it gets better. In the long run, however, this can be better for both individuals. Work toward that objective.

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How Do You Plan for Business Expansion? Five Factors

Situation: A company has built a very successful single site business, and wants to expand geographically. They are investigating where it makes sense to duplicate operations in new sites and where it makes sense to consolidate operations. The company’s secret sauce is in their system and procedures. How do you plan for business expansion?

Advice from the CEOs:

  • Look at the shared services piece and the cost/benefit tradeoffs. What services are best centralized, and what are the critical on-site services that you want duplicate in remote sites?
  • Other companies use remote offices for field personnel, but centralize all shared services. Centralized shared services include invoicing and collections, financial reporting, telemarketing, anything dealing with trade names and print or trade-marked collateral, and an array of other services which would be too expensive for individual sites to duplicate, or where leaving things to the individual sites might result in inconsistency of service and erosion of the brand.
  • How do you replicate key talent? Consider whether key talent can be retained in the shared services side of the business, not the cloneable service delivery sites. Typical franchise operations have people who are difficult to replace or replicate so most do not try to include these roles in the service delivery operations.
  • You will need to provide for a sales role in your remote offices as business development will be critical to early success of new sites.
  • In the transition from “successful small” to “successful large” most businesses find that the medium stage is the most difficult. Issues to consider include:
    • Does your direction match your expertise – do you have support of individuals knowledgeable about franchising?
    • What are the margin differentials within the business? Do you want to clone the high or low-margin areas of the business? Develop profitability models for your central and remote sites, and assure that the sites will have sufficient profitability to assure their short-term success. This will make it easier to proliferate the remote sites.

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How Do You Negotiate New Shares for the Founders? Five Suggestions

Situation: A company’s founders will be fully vested in their options by the end of the year. Also, the option pool for founders and employees has been exhausted. The CEO has spoken with the Board Chair and Compensation Committee about this in terms of fairness and incentives for future work to both founders and employees, while making it clear that the Founders are not unhappy. The Chair listened sympathetically and promised to get back to the CEO. Is there anything more that the CEO should do to negotiate new shares for founders and employees?

Advice from the CEOs:

  • Seek a letter of understanding from the Board that the founders and employees will have access to future stock incentives, and a timeline as to when this might occur – either in the near future or at the next financing round.
  • Wait a few weeks and have an informal follow-up conversation with the Chair about his current thinking. Ask whether he would like any further supporting information on the issue.
  • So far, your approach has been non-threatening. Keep it this way.
  • Maintain focus on fairness and your tone supportive of the best interests of the company.
  • Don’t press the issue if you sense resistance.

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