Advise – Not Impose

Max Bialystock:  So you’re an accountant, eh?

Leo Bloom:  Yes sir

Max Bialystock:  Then account for yourself!  Do you believe in God? Do you believe in gold?…

From The Producers by Mel Brooks

 

So, I just had my second heated discussion (in three weeks) with another advisor about a mutual client.  Now, believe me, I truly respect the passion that an advisor can have for his or her point of view – I am guilty of that myself at times.  But, I draw the line when I have made my case and a client decides to do otherwise.  It happens and you learn to deal with it.

Though these were different advisors and clients, it was the same subject- providing liquidity for an equity-type plan in a mature private company.  First, let’s expand a bit on the issue.  Many owners receive advice that some type of plan which provides economic rewards for performance based on an increase in the value of the business is a good thing.  There is nothing wrong with that concept and the use of this technique (usually in the form of stock options) by public companies is rather widespread. But, public companies have a distinct advantage.  Those receiving the options can turn around and sell the underlying stock in the public market with no further cash outlay on the part of the company.  This is one of the advantages of being public.  It is when the company is not publically owned that the “rubber hits the road.”  Now, when that option is exercised in a private company, what does the new shareholder do to get liquidity?

So, why the heated discussion?  Well, in both cases, the other advisor stated that without liquidity, such a plan really had no value and when my clients in both cases weighed the risks and decided against liquidity, both advisors became adamant about it being required.  Both of my clients were ready to abandon their plans though they both felt they needed some type of plan.  When I asked each advisor how they would handle the liquidity requirement, one said that company A could borrow money to buy the shares back, the other suggested that company B could give the company the right to buy back the shares, when appropriate.  As my 8 year old granddaughter would say “really?”  Banks love to make loans where all the money that is borrowed goes right out the door to a shareholder and a shareholder is happy to wait until their company is good and ready before they buy back their shares.

So, let’s forgive the fact that I felt neither advisor had thought through then consequences of their advice (they did not account for themselves), it was them imposing on these clients a solution that almost caused the clients to abandon a technique that would help them grow their business.  By the way, we got rid of both advisors, developed an equity-like plan and a bonus plan and met the objectives the clients wanted.

So, if you are confronted with advisors who impose rather than advise, please be careful.  Advisors come and go, but you are stuck with the consequences of their actions.

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Don’t Forget What Got You Here

“Whatever you do

Do it good

Whatever you do, do, do, Lord, lord

Do it good”

Lyrics from Express Yourself – Charles Wright & the Watts 103rd Street Rhythm Band

So, I recently completed a two-part blog on Disruptive Technologies entitled “For Mature Companies Only” with some pointers on what mature companies should be aware of in their markets and steps to deal with this issue.  My points concluded with the fact that as a mature company, you are probably a market leader which gives you a competitive advantage. Being one who can dwell on the obvious, I had assumed that mature companies would not trip up on the basics.  Doing whatever you do “good” is a barrier to entry for others.  My recent consumer experiences now give me cause to reflect on the basics and issue this reminder to not forget what got you to become a market leader in the first place.

My first example was an established credit card company with a reputation for outstanding service. An errant (in my view) charge appeared on a recent statement.  I have been a card member since 1970 and I did something I had done only once before – I questioned the charge.  I subsequently submitted the required paperwork all dutifully prepared with extensive detail and documentation.  I then saw the response from the vendor to the credit card company which was basically a statement saying they thought I owed the money.  This was accompanied by a notice from the credit card company that they were reinstating the charge.  Like Vinny Gambini, I thought I had presented a “lucid, intelligent, well thought-out objection” only to be overruled.  After a few phone calls and convincing somewhat to just look at what I previously submitted, the vendor conceded the charge was incorrect and it was reversed.  In my eyes, the stellar reputation of my credit card company was tarnished and will be remembered at renewal time.

My second case actually involves two well-established home goods companies in our area.  Both have great reputations for customer service and for us, we continue to shop the old “bricks and mortar” way versus online.  We have always appreciated the chance to see the products first hand and to ask questions before we buy – things which are difficult to do online.  Well, on a recent Saturday, we went looking for a particular item.  Getting someone’s attention in either store was virtually impossible. We were patient as it was a little busy.  The staff was cordial as we waited for assistance, but it felt a bit like being on hold when you call and hearing that dentist’s office music while being reminded periodically that someone will be with you shortly. We waited both places in excess of 30 minutes and finally left.  Reluctantly, we turned to online shopping and completed our purchase.  No sense in sinking costs into brick and mortar if you are not going to staff it properly.

So, the punch line here is simple.  Mature companies look for sophisticated ways to prevent disruptive companies from penetrating their space.  So, why make it easy by forgetting what got you there in the first place – like solid customer service?  There are sufficient threats from disruptive companies in your space; do not add to your risk by forgetting the basics.

Be Careful When Issuing Equity

Vinny Gambini: You were serious about dat?  Quote from My Cousin Vinny

What prompts this blog comes from a conversation with one of my partners recently.  He had been served with his first subpoena on a client where we had only offered some tax advice.  Fortunately for us, it had nothing to do with our work, but the story was not the same for the Company.  It appears that the Federal authorities were interested in the company’s equity issuances – who got what, when and what paperwork had the Company retained.  They were looking for violations of Federal securities laws and the fact that they were seeking our documents indicated their probe was pretty thorough.

We constantly offer advice to startups and almost every conversation centers around the granting of a “piece of the business.” The methods of distribution range from seemingly innocent letters promising some poorly described ownership to actual stock sales.  Virtually every conversation is peppered with the advice to get a lawyer involved and yes, we are “serious about dat.”  The sale of shares or equity can become subject to Federal jurisdiction, as was the case here, and you do not want to be on the wrong side of that transaction.

I am not a lawyer, but in laymen’s terms, the government is always interested in two aspects of any equity deal.  First, is whether or not the investor has the means to sustain a potential loss and, second, is if the investor was provided sufficient information to make a decision.  If you have been following the evolution of “crowdfunding” you may have heard the term “accredited investor.”  This is how the SEC and others define the first part of the equation – can the investor bear the loss?  The famous poster child scenario for this is the mythical widow from Idaho who has $10,000 in life savings being persuaded by a “boiler room” salesman (a la “Wolf of Wall Street”) to invest it all in a tech startup.  That is a no–no.  The second piece is what the SEC struggles mightily with and that is the issuer providing sufficient information to make a decision.  They are trying to come up with something between a Prospectus (a tomb seen by many as one of the most difficult documents to understand) and a pitch deck.  I fear this debate will last for some time.

The sale of equity is not the same as selling someone a used car.  In the former, you have no real understanding of expectations on the part of the buyer.  They may think they just purchased the “next Google” or are expecting dividend checks to start flowing next month; thus the need to communicate the “risk factors” that should serve to temper those expectations. In the latter, people just expect a mode of transport which will get them from here to there.  There is risk in equity that should not be taken lightly.

So, please, if you are involved in the issuance of any type of equity instrument, do not do so without appropriate legal counsel. You probably would not sell your house without doing so and your equity is probably worth a whole lot more.