I'm trapped in a gold mine!

[MooreBonds]

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.

 

[Texas Proud]

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...

 

[flotsamandjetsam]

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..

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.

 

[Nords]

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...

 

[Texas Proud]

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...

 

[flotsamandjetsam]

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.

 

[flotsamandjetsam]

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.

 

[Nords]

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.

 

[verygoodthings]

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.

 

[verygoodthings]

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.

 

[verygoodthings]

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.

 

[verygoodthings]

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.

 

[flotsamandjetsam]

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.

 

[verygoodthings]

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.

 

[Buddha44]

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.

 

[flotsamandjetsam]

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

 

[packrat44]

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]

Goldmine Update

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]

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]

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.