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Old 01-28-2011, 04:11 PM   #21
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Are there any other minority shareholders on the Board? Do any of them have a desire to diversify?

Another option in my opinion would be to try to convince the Board to buy you out a little at a time, say 1% per year over 15 years. For much of that time you probably could stay on the board. You could think about scaling back your time as well, work part time or consult. That keeps your ear to the ground and involved so you know what is happening to the value of the stock.

Probably not what you want to hear, but how about buying out the CEO via leveraged buyout and then sell the whole company or take it IPO. Maybe that is a little over the top, more work than you want to do, but could be an option if the CEO likes building new things. Let him cash out and start something new. It keeps you in the game for a few more years and definitely will add stress. But does provide an exit that you don't seem to have now.

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Old 01-28-2011, 05:30 PM   #22
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Originally Posted by Rambler View Post
Are there any other minority shareholders on the Board? Do any of them have a desire to diversify?

Another option in my opinion would be to try to convince the Board to buy you out a little at a time, say 1% per year over 15 years. For much of that time you probably could stay on the board. You could think about scaling back your time as well, work part time or consult. That keeps your ear to the ground and involved so you know what is happening to the value of the stock.

Probably not what you want to hear, but how about buying out the CEO via leveraged buyout and then sell the whole company or take it IPO. Maybe that is a little over the top, more work than you want to do, but could be an option if the CEO likes building new things. Let him cash out and start something new. It keeps you in the game for a few more years and definitely will add stress. But does provide an exit that you don't seem to have now.

R

He did not mention anything about value etc.... but I would bet that whatever state he is in there has to be enough equity in the firm for the firm to buy his stake... IOW, his stock 'value' might be higher than the equity in the company... he says the firm is making good profits, so I would assume that there is money there, we just don't know how much... but then why are there no distributions Or little distributions...

The Sub S I work for could not buy out a 15% shareholder... we just don't have enough equity... even if we wanted, it just is not legal...

The owner might not want to invest more into the company unless he got a great discount... he probably has most of his money in this company... more so than the OP... he probably needs to diversify, not buy more..
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Old 01-28-2011, 06:16 PM   #23
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Originally Posted by Rambler View Post
Are there any other minority shareholders on the Board? Do any of them have a desire to diversify?

Another option in my opinion would be to try to convince the Board to buy you out a little at a time, say 1% per year over 15 years. For much of that time you probably could stay on the board. You could think about scaling back your time as well, work part time or consult. That keeps your ear to the ground and involved so you know what is happening to the value of the stock.

Probably not what you want to hear, but how about buying out the CEO via leveraged buyout and then sell the whole company or take it IPO. Maybe that is a little over the top, more work than you want to do, but could be an option if the CEO likes building new things. Let him cash out and start something new. It keeps you in the game for a few more years and definitely will add stress. But does provide an exit that you don't seem to have now.
R
Whoa, Rambler. That's thinking outside the box. Leveraged buyout? Way too ambitious for me. I am looking for a low-stress exit, but thanks for your thoughts.
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Old 01-28-2011, 06:38 PM   #24
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He did not mention anything about value etc.... but I would bet that whatever state he is in there has to be enough equity in the firm for the firm to buy his stake... IOW, his stock 'value' might be higher than the equity in the company... he says the firm is making good profits, so I would assume that there is money there, we just don't know how much... but then why are there no distributions Or little distributions...
Distributions are covering my taxes at 40% marginal rate and then some. Undistributed profits are added to my basis.

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The Sub S I work for could not buy out a 15% shareholder... we just don't have enough equity... even if we wanted, it just is not legal...
I don't understand about the company not having enough equity to buy my stock. They have quite a bit of cash but I would have to give them a note for 2 to 5 years.

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The owner might not want to invest more into the company unless he got a great discount... he probably has most of his money in this company... more so than the OP... he probably needs to diversify, not buy more..
That's a good point. The majority owner has everything tied up in this company.
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Old 01-29-2011, 12:14 AM   #25
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The CEO seems verrry comfortable in the corner office. I don't see a sale anytime in the next year. I need to plant the idea in his subconscious somehow...
What's the CEO's exit strategy? Probate?
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Old 02-02-2011, 11:08 PM   #26
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Are there any other minority shareholders on the Board? Do any of them have a desire to diversify?
I'd second this suggestion. What is the CEO's % ownership? Can you gain the agreement of the other board members to get a majority vote to either increase distributions above 'minimum to pay taxes', and/or buy back part of your shares?

How about if the owner buys part of your stake, then distributes the shares to current employees as a partial employee-owned company?

Also, any interest in your competitors buying a 15% stake? 15% is a pretty healthy stake (not to mention the board seat). If all else fails, dropping a hint about selling your stake for a reasonable price to a competitor might finally get the attention of someone. Sure, it has the potential to backfire...but if you don't have any options left, it's something to possibly consider threatening to do.
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Old 02-03-2011, 10:16 AM   #27
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I'd second this suggestion. What is the CEO's % ownership? Can you gain the agreement of the other board members to get a majority vote to either increase distributions above 'minimum to pay taxes', and/or buy back part of your shares?

How about if the owner buys part of your stake, then distributes the shares to current employees as a partial employee-owned company?

Also, any interest in your competitors buying a 15% stake? 15% is a pretty healthy stake (not to mention the board seat). If all else fails, dropping a hint about selling your stake for a reasonable price to a competitor might finally get the attention of someone. Sure, it has the potential to backfire...but if you don't have any options left, it's something to possibly consider threatening to do.

If they were smart... they would have a clause against selling shares to a competitor... our company does...
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Old 02-03-2011, 06:32 PM   #28
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He did not mention anything about value etc.... but I would bet that whatever state he is in there has to be enough equity in the firm for the firm to buy his stake... IOW, his stock 'value' might be higher than the equity in the company... he says the firm is making good profits, so I would assume that there is money there, we just don't know how much... but then why are there no distributions Or little distributions...

The Sub S I work for could not buy out a 15% shareholder... we just don't have enough equity... even if we wanted, it just is not legal...

The owner might not want to invest more into the company unless he got a great discount... he probably has most of his money in this company... more so than the OP... he probably needs to diversify, not buy more..
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I'd second this suggestion. What is the CEO's % ownership? Can you gain the agreement of the other board members to get a majority vote to either increase distributions above 'minimum to pay taxes', and/or buy back part of your shares?

How about if the owner buys part of your stake, then distributes the shares to current employees as a partial employee-owned company?

Also, any interest in your competitors buying a 15% stake? 15% is a pretty healthy stake (not to mention the board seat). If all else fails, dropping a hint about selling your stake for a reasonable price to a competitor might finally get the attention of someone. Sure, it has the potential to backfire...but if you don't have any options left, it's something to possibly consider threatening to do.
Thanks for your thoughts TP and MooreBonds. There are really only two owners, The CEO and me. There are a few employees with unvested options. I negotiated my seat on the BOD. I can't transfer it if I sell my stock. If I get desperate enough, I could shop my shares around to our competitors. That would be a last ditch effort to recover some value, only in the case of total estrangement with the other owner.

I enjoy my work. I just don't like feeling trapped by an investment. I am not ready to sell out at a low low price. I will hope for a "liquidity event" (love that phrase) and reassess in a few months. Maybe one more year. I will report back when something gives. Thanks for your thoughts.
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Old 02-03-2011, 11:05 PM   #29
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I enjoy my work. I just don't like feeling trapped by an investment. I am not ready to sell out at a low low price. I will hope for a "liquidity event" (love that phrase) and reassess in a few months. Maybe one more year. I will report back when something gives. Thanks for your thoughts.
An experienced angel investor told me the other day that sometimes a company just can't take it further with the incumbents.

Some startups are funded by investors seeking tax credits or other "reimbursments" for their risk. The investors have no compelling reason to seek liquidity (of any sort) because they're waiting for their five-year tax credit or their small-business cap gains 0% tax eligibility.

However in retrospect, it would've been better for the BOD and the investors to tell management "This company has come as far as it's going to get with current management. Either shop for a sale or search for your replacement."

So maybe it's possible that you'll find other like-minded shareholders who also want a little liquidity...
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Old 02-04-2011, 12:05 AM   #30
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Thanks for your thoughts TP and MooreBonds. There are really only two owners, The CEO and me. There are a few employees with unvested options. I negotiated my seat on the BOD. I can't transfer it if I sell my stock. If I get desperate enough, I could shop my shares around to our competitors. That would be a last ditch effort to recover some value, only in the case of total estrangement with the other owner.

I enjoy my work. I just don't like feeling trapped by an investment. I am not ready to sell out at a low low price. I will hope for a "liquidity event" (love that phrase) and reassess in a few months. Maybe one more year. I will report back when something gives. Thanks for your thoughts.

Just a question that has not been asked or answered... is the CEO being overpaid If so, maybe that is why there are no large distributions...

I would ask that all profits be distributed or held for a specific growth item...

I would also ask around the firm if anybody would want to buy in...
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Old 02-04-2011, 08:17 AM   #31
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Just a question that has not been asked or answered... is the CEO being overpaid If so, maybe that is why there are no large distributions...

I would ask that all profits be distributed or held for a specific growth item...

I would also ask around the firm if anybody would want to buy in...
Good question, TP. The CEO's compensation is about 10% of net profit, including salary and bonus. This seems generous but not excessive.

Maybe I should sniff around to see if anybody is interested in buying in. I think we have at least two people in the organization who have the resources.
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Old 02-04-2011, 08:27 AM   #32
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An experienced angel investor told me the other day that sometimes a company just can't take it further with the incumbents.

Some startups are funded by investors seeking tax credits or other "reimbursments" for their risk. The investors have no compelling reason to seek liquidity (of any sort) because they're waiting for their five-year tax credit or their small-business cap gains 0% tax eligibility.

However in retrospect, it would've been better for the BOD and the investors to tell management "This company has come as far as it's going to get with current management. Either shop for a sale or search for your replacement."

So maybe it's possible that you'll find other like-minded shareholders who also want a little liquidity...
Nords, This is a bootstrap startup with no outside investors. It may be true that there are tax considerations that I am not aware of.

I think you are right that at some point growth will stall under current management. As a board member, I need to "help" the CEO recognize when the time has come.
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Old 02-04-2011, 09:50 AM   #33
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Nords, This is a bootstrap startup with no outside investors. It may be true that there are tax considerations that I am not aware of.
I think you are right that at some point growth will stall under current management. As a board member, I need to "help" the CEO recognize when the time has come.
I gotta admit, with every amplification of the situation it looks like you're well and truly trapped.

It seems as if the only way out is to get the CEO (or his family) motivated to make an exit. Short of a health crisis or a family emergency he doesn't seem to have any reason to change.

I guess another option would be to find some "fresh blood" who could replace your skills or do even better for the CEO... then they could buy into your job and the partnership at a fair price. You could cash out and retire to some sinecure like "vice chairman emeritus" where the execs know they can reach you if they have any questions.

As for the value of these assets to your asset allocation... right now they appear to be zero. If a bank or a brokerage firm wouldn't lend you money against them then they're not an asset.
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Old 02-05-2011, 03:24 AM   #34
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What does your shareholder agreement look like? That will define whether you are able to sell your shares to another business (including board seat). What is the officer structure of the company, are you in an officer role? What is your stalemate provisions, provided there are only 2 members on the board of directors (You + CEO?).

There are ways to make demands in situations like this without things going sour between you and the CEO. I have a great deal of personal experience with this. You are entitled to some profits above and beyond the distributions being made to cover tax liabilities.

I think your first step is an experienced corporate lawyer, preferably with some level of background in M&A. Also familiar with tax law. You should also discuss this with your CPA.
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Old 02-05-2011, 03:32 AM   #35
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There are some bad lines of thought in this thread, I will list them:

1) Shopping the share around to competitors. Don't just go out on your own and disclose financial documents to competing organizations. And if the plan is to just tell them the company name, how exactly do you expect them to respond? The first thing they are going to want is P&Ls, Balance Sheet, Tax returns. I am not saying that a competitor is completely out of the question down the line, but I will say VERY unlikely in this minority position.

2) Do not sniff around if any other employees in the business have an interest in buying the share, or at least not yet. The step you need to take first is understanding the legal structure with what you have, and then working with a valuation expert to get an idea of what that position is worth.
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Old 02-05-2011, 03:36 AM   #36
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I gotta admit, with every amplification of the situation it looks like you're well and truly trapped.

It seems as if the only way out is to get the CEO (or his family) motivated to make an exit. Short of a health crisis or a family emergency he doesn't seem to have any reason to change.

I guess another option would be to find some "fresh blood" who could replace your skills or do even better for the CEO... then they could buy into your job and the partnership at a fair price. You could cash out and retire to some sinecure like "vice chairman emeritus" where the execs know they can reach you if they have any questions.

As for the value of these assets to your asset allocation... right now they appear to be zero. If a bank or a brokerage firm wouldn't lend you money against them then they're not an asset.
I agree about the asset value. I disagree about being trapped, we shouldn't scare this guy into thinking he has no power here. We do not know anything about his corporate documents.
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Old 02-05-2011, 03:42 AM   #37
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An attorney would be able to advise on the feasibility of a redemption. Certain issues like loans are going to be subject to subordination clauses putting you behind other company debts. This may or may not be negotiable with those lenders, and you may or may not have to carry the note yourself. The SBA offers a special loan program (The 7a program) that will provide the funding for you to be paid out completely in cash, and that loan ceiling is as high as $5,000,000 (Don't think your equity stake is anywhere near that, but I haven't seen your accounting stuff). If I had to just take a guess, I would not think you would be carrying this financing yourself, you are in a small enough position, and it is very feasible for the company to find a way to finance this debt.

Do not have conversations with the CEO about your willingness to carry the debt. Stuff like that can bite you in the ass.
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Old 02-05-2011, 01:19 PM   #38
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VGT, you make some good points. There are corporate documents that pertain that I can't discuss in a public forum. I have consulted with an attorney on several occasions over the last few years to protect my interests. I have also consulted with a valuation specialist. His calculation resulted in a very large range of value. Willing seller, willing buyer, discounts and all that. At this point the majority owner/CEO is not interested in a redemption although he was at one time.

I hear you about shopping, sharing, sniffing, etc. I won't do any of that without professional help.
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Old 02-05-2011, 01:38 PM   #39
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VGT, you make some good points. There are corporate documents that pertain that I can't discuss in a public forum. I have consulted with an attorney on several occasions over the last few years to protect my interests. I have also consulted with a valuation specialist. His calculation resulted in a very large range of value. Willing seller, willing buyer, discounts and all that. At this point the majority owner/CEO is not interested in a redemption although he was at one time.

I hear you about shopping, sharing, sniffing, etc. I won't do any of that without professional help.

I'm a business owner in a similar situation. I do own 50% control but I am aware of the circumstances of minority positions. If you'd like to hear my situation and the various steps I've taken you can message me direct and I will give you my phone number. Like you, I'd rather keep some details out of the public eye.
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Old 02-06-2011, 08:39 PM   #40
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From a tax perspective, S corps can be tricky since there is a single class of stock requirement. The benefit of this is that the majority shareholder will generally not be able to make preferential distributions only to himself if you leave and don't sell your stock without making pro rata distributions to you.

However, he can increase his salary to make up for it, although that is also scrutinized. Sales and redemptions are supposed to be at fair market value, but with an illiquid stock, that can be difficult to negotiate. The regulations do give safe harbors for valuations based on net book value.

I would recommend obtaining advice from both corporate and tax counsel.
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