I'm trapped in a gold mine!

[flotsamandjetsam]

Thanks Buddha44. I have corporate but not tax council. I will work on that.

[packrat44]

Quote:

Originally Posted by flotsamandjetsam I built up a 15% ownership position before drawing a regular salary. Meanwhile, DW has worked for government for a little over 20 years. Her job security has enabled my startup adventure. She is in FERS and will become eligible for a small pension and continued health insurance in a few years (reduced, of course, by the number of years prior to 62 if she retires early). The company is an S-corporation and the profits are passed (on paper) as ordinary income to the shareholders. First question: In general terms, how should I compensate for this high risk/high reward investment in our portfolio? We are about 70/30 now, not including my stock in this company. The value of my piece of the company is roughly equal to the rest our investments, combined. .

DW and I are in a similar situation with 15%+ ownership in a S-Corp. The value is also estimated to be equal or greater than our liquid portfolio. Because of the non-liquid nature, I do not include the stock in our portfolio or consider it in regards to asset allocation. While it has value, the amount is nebulous until sold. However, different from you, I expect a sale within 5 to 10 years.

I believe your DW can retire under FERS at 60 with no decrease in benefits if she has at least 20 years service.

[Ready-4-ER-at-14]

Congratulation on being in on a ground floor thing as a minority private placement stockholder that paid off well. One of mine just went belly up after a three year struggle. At least it was a fun ride.

Investment banking IPOs do seem to be opening up. Seems they generate up to 20x the annual income up front and often like the ceo to hang around during the transition. Warren Buffett is said to make cash offers to business owners that approach him with a profitable business where the owner wishes to stay on. Owners like it to be able to diversify their wealth. Again of no help if the guy has no interest.

Regarding your company risk, is there a publicly traded stock in essentially the same market situation as your company that has options available? Should your company and say Hunt transportation have similar market dynamics, you could buy long term puts (LEAP puts) on the similar company and somewhat insure yourself against general market forces that would affect your company and a competitor.

[flotsamandjetsam]

Well, that is an optimistic take on my situation. I am indeed in on the ground floor. If I can't get out on the first or second floor, I guess I will just stay in the elevator and see where it goes.

I would love to hedge my position. There are industry leaders that might track generally but there are many company specific risks. I will look into options.

I am persuaded that I should ignore my investment in the startup in my asset location because it is nebulous, as packrat44 puts it. I am a 70/30 kind of a guy. I guess I will stick with that. Good thing I am not counting on my startup investment for retirement.

[flotsamandjetsam]

When we last left our hero, he was trapped in a gold mine: He owned a minority share of a successful small company. He wanted out but the majority owner would not buy his stock for any reasonable price.

Finally, the situation is resolved! I sold my stock back to the company.

It came down to this:

The company stopped distributing earnings beyond what was necessary to cover (S-corp) tax obligations. Cash built up dramatically. At the annual board meeting, the majority owner/CEO wanted the Board of Directors to approve a fat bonus for him, based on strong sales and profits. As a director I had veto power over his bonus. I refused to approve the bonus unless he distributed the excess cash. This standoff finally tipped the balance and we negotiated a price that worked for both of us.

As part of the deal, I resigned my job at the company but will be consulting there through an agency. I will be working at the same desk for maybe 30 hours a week. It remains to be seen if I can be effective as a contractor. I am not sure what the dynamic will be like as a contractor/former employee. I may go from 25% ER to 100% ER sooner than expected!

Oh, and that stock I sold? The proceeds added a nice cushion to our portfolio. Sad to say, we are probably not going to change our lifestyle at all. LBYM is fine for us but a little boring for friends and family. Cut loose! live it up a little!, they say. We may do a little more traveling.

I am busy moving the proceeds into our investment mix...Subject for a new thread.

Thanks to all who offered advice.

[Bimmerbill]

Congrats!

[haha]

Quote:

Originally Posted by flotsamandjetsam When we last left our hero, he was trapped in a gold mine: He owned a minority share of a successful small company. He wanted out but the majority owner would not buy his stock for any reasonable price. Finally, the situation is resolved! I sold my stock back to the company. It came down to this: The company stopped distributing earnings beyond what was necessary to cover (S-corp) tax obligations. Cash built up dramatically. At the annual board meeting, the majority owner/CEO wanted the Board of Directors to approve a fat bonus for him, based on strong sales and profits. As a director I had veto power over his bonus. I refused to approve the bonus unless he distributed the excess cash. This standoff finally tipped the balance and we negotiated a price that worked for both of us.

Good outcome. It does however illustrate how a minority owner can get jacked around. Early in my career a colleague tried to broker me a minority position in a waste paper to cellulosic insulation concern. I was interested. My accountant pointed out to me all the ways I could get held up, and I never even entertained this idea again.

Of course I am something of a control freak.

Ha

[Cassius King]

Congrats! Glad you were able to liquidate your investment in the company. Would of hated to see you get jerked around and not rewarded.

[clifp]

Well done Foltsam. I do think you are being much too modest on your potential contributions to the board. Being a key member of a successful startup is pretty unusual, having a successful exit from a startup in your situation is practically unheard of!

You mention that you talk to business valuation expert. I am curious how close was his opinion on the value of the company to the price you eventually got? Did the business improve the next year or pretty much stay the same.?

[flotsamandjetsam]

Quote:

Originally Posted by clifp You mention that you talk to business valuation expert. I am curious how close was his opinion on the value of the company to the price you eventually got? Did the business improve the next year or pretty much stay the same.?

Well, the valuation expert came up with a value for my share of the company using a "capitalization of income" approach that would be appropriate if the company were being sold. The price I negotiated for my share was about 40% lower. The real value of a minority share of a small company is only whatever the majority owner is willing to pay for it. In my case, what I was willing to take and what he was willing to pay eventually converged and we had a deal.

The company is still growing robustly. I have not had any second thoughts about missing out on future growth. Once my investment had grown sufficiently, my focus turned to protecting my gain and reducing risk. I feel great about the deal and my improved circumstances. I am a little apprehensive about continuing to work there in diminished standing. We will see how that goes.