IPO – Initial Public Offering

New York Stock Exchange

New York Stock Exchange

Definition: An IPO, or Initial Public Offering, is the first public sale of stock in a company.

A corporation does not need to be publicly traded, and, in fact, most are not. They are used, primarily, to act as a liability buffer between the people who are doing work and the clients for whom they work. Additionally, they can be used to borrow money from all the same sources that an individual can – but the shareholders’ assets are not held against the loan. There are also many taxation benefits, varying from region to region, to using a corporation.

At some point, however, a company may want to acquire additional capital, often in order to expand their markets and operations, or to launch new products. There are several ways that the companies can raise this capital, for example, borrowing the funds from a bank, or getting a cash infusion from a large investor. The result, however, may be at the cost of debt, or a significant portion of equity and control that the current owners of the corporation may not want to take on.

Usually, when stocks are traded on the market, the funds are exchanged between the two investors involved in the trade. During an IPO, however, money paid for stocks is given to the company issuing the stock. A third party called an underwriting firm may be used to assist in the sale of the stocks, and they will take a percentage of the proceeds of the sale.

For this reason, issuing new shares to sell on the public market can be extremely beneficial to the company, as they can acquire large sums of cash (typically in the millions of dollars for a successful IPO) at a predictable rate. While they may have difficulty in setting the correct price on their shares, as long as they don’t overprice the shares too much, they can often count on a failry large infusion of cash for a controlled amount of equity.

Existing shareholders in the company generally welcome an IPO (and, in fact, many hope for the day the company goes public) as it gives a real value to their holdings. For example, if the three founders of the company owns 1 million shares each in the company, when the company goes public, issuing an additional 1 million shares, while they are [usually] not allowed to sell their shares for a certain amount of time after the IPO, they now know how much their shares are worth in real dollars.

Which brings up another point. There are a lot of regulations surrounding these public offerings, and who can trade what, and when. There are, at the time of the offering, few statistics about the company making the offer, meaning that investing in such a company can be extremely risky. Not only that, but the company is not allowed to make certain types of releases around the time of the offering in terms of research.

While an IPO can quickly bring in large amounts of investment at a relatively low cost, as well as provide initial shareholders with a return on their holdings, they are, in most cases, extremely risky for the new investors.

Thanks to @momoesque for the topic suggestion.

Surprising Connections

What is the most interesting connection made through your network that resulted in a contract or a sale? We all know the benefits of networking, but I was wondering just how remote a connection other people have found to have landed them a job. I’ll start by giving two personal stories.

My Current Job

When I graduated university, I didn’t have a job, and spent several months teaching part-time at a community high school. During that time, I got engaged, and at the engagement party, the father of my wife’s close friend heard I had a degree in computer science. He gave me his e-mail address, and suggested I send him my resume. I e-mailed it that night.

Three weeks later, I was called for an interview, and then a week later, for a second interview a few weeks after that. Two days before the wedding (it was only a 4-month engagement) I was informed that I got the job, and would be starting a month after the wedding.

Landing a Contract

The second story happened more recently. I did some work for a client for about 15 months building a fully customized inventory management system. I was at an engagement party for a friend, and another guest was chatting with the groom, and asking him about what he did. He mentioned that he worked for my client, and in an off-hand way, said “Elie would know, he wrote our software!” The guest turned to me and asked me what I did, which I quickly explained. A month later, I was hired to build a catalog of 200K files for a community organization he represented.

What’s the most interesting connection you’ve been involved with?

Dragons' Den Season 5 – Tools of the Trade

Kelvin.23 from Kevin Royes

Kelvin.23 - a great multi-tool

Wednesday night was the first episode of Season 5 of Dragons’ Den on CBC, and it was fantastic. Also called the Celebrity Episode, 3 well-known TV celebrities were on hand to endorse great business ideas.

For fashion, there was Jeanne Beker from fashion television. Mike Holmes was there to check out the tools (and inform one Den hopeful that she better make sure her liability insurance is paid up). Debbie Travis, a well known expert in home decorating, was there to check out the Kelvin.23, the subject of this post.

Kevin Royes from Vancouver invented the Swiss Army Knife of home decorating, and everyone on the show loved it. Called the Kelvin.23, it features a variety of tools that will let you do most light to medium jobs around the house:

With 23 essential features integrated into this one compact design, kelvin.23 is ideal for anybody in need of a quick fix. It hammers, screws, measures, levels and even shines a bright light when you need it most. Made from cast aluminum, zinc, carbon steel and ABS plastic…kelvin.23 is built to last.

The deal Kevin was asking for was $200,000 for 10% – and he had $250,000 in sales during the preceding 6 months prior to the filming of the show to back up his $2 million valuation.

The first Dragon to decline was Kevin O’Leary on account of the initial description of what the money was to be spent on – manufacturing. There’s risk in manufacturing that Kevin O’Leary felt was not intrinsic to the business. While further questioning of Kevin Royes revealed that he intended not to set up a factory, but to directly negotiate the manufacturing process, Kevin O’Leary remained out.

Jim Treliving, however, saw a bargain at $200,000 for a solid business, and offered his money. When Arlene Dickinson asked to go in on the deal, Jim balked, and so Arlene made the same offer on her own. Robert Herjevac offered to match Jim’s offer in conjunction with Jim (that is, combined at $400,000) for 25% of the company, and Arlene joined the partnered bid.

With three of the Dragons vying for a piece of his company, Kevin Royes stepped out for a quick consultation with his wife and his marketer for the U.K. On his return, he countered with an offer for $500,000 for 25%, which, after some brief discussion, was accepted by all three.

This was someone who played his cards well. Kevin had a solid business, impressed Debbie Travis, who would then feature the product on her show and record an infomercial as part of the deal. He had sales to back up his valuation, putting him in a strong bargaining position.

But most of all, he impressed the Dragons as soon as he did his demo. At that point, they were interested in investing, and he could stick to his valuation, and they would pay for it.

Founders Agreements

I was reading a question on Answers OnStartup from someone who was not happy with his founders agreement, and wanted to know his options for renegotiating. The agreement made was as follows:

I early on pushed for getting an operating contract agreed to by all three because I intuitively believed “make things explicit” would prevent heart-ache in the long run. My one big mistake was not doing due diligence, that I’ve now done, on how things should be done for a startup. The agreement that we are currently under is each founder gets a third, but we log our hours and get paid an hourly wage (significantly less than my contract rate but significantly more than A’s salary rate) which will be paid when when the company starts making money. The wage was a concession to me because I knew I’d have a lot of up front labor (but its now not seeming worth the risk its supposed to offset).

Partnership Agreements

The meeting of partners

The issue with this arrangement is simple – there’s no vesting, and the contributions being made by each of the three founders is not going to be equal in terms of time (although the value of the contributions may be equal in other ways).

First, what’s vesting?

Vesting in terms of a startup is the granting of partial ownership in the company (that is, shares in the company) that the employee gets over time. What this does is ensure that the employee will do their work (or they will be forced to sell the unearned component of their shares), while guaranteeing to the employee that they will, in fact, get their shares if they do the work required.

This is important in a startup in which the various people involved will have different levels of contribution, at least in the early stages. However, an assumption is made that the idea, IP, or company is initially owned by a single person (or company) which is recruiting others. In order for the initial founder to guarantee his investment in other people, he can vest their portion of the company.

In the case of the question above, however, the company was founded with three people, each with an equal share. Vesting was not actually an option, since no one owned the company beforehand (that is, who is the current owner of the company if not all three founders). Therefor, what this person needs is not a vesting schedule, but a solid founders agreement.

A founders agreement can be as simple as a single sheet of paper called a Statement of Understanding. The first lines of the paper would be something along the lines of:

This document is informal, and is intended to be the basis for a formal Memorandum of Understanding between the parties named below. It is meant to be interpreted as plain English as understood by a reasonable person. It is not a contract, but is intended to define the parameters under which a company may be formed.

The rest of the document outlines who the various people or companies are subject to this statement, what each one will be contributing to the partnership, and what each will get in return. Over time, this document can be expanded to include things like payout options, buyout options, dividends, reinvesting profits, and so on.

Regardless, it is critically important that any partnership have such a statement at a minimum, in order to prevent misunderstanding later. It should be easy to understand – it’s not about creating a complicated legal document that covers all contingencies. It’s to make sure that each of the partners understands what is expected of them and what they will stand to gain from the arrangement.

If you are looking to get into a partnership with someone, whether you are initiating the arrangement, or the other person is, make sure that you have such an agreement, and that any concerns you might have are outlined in it.

A Newspaper's Saviour: E-Readers

With costs on the constant rise, and convenience becoming one of the most important factors for consumers, newspapers are facing hard times. Managing the cost of creating, printing, and distributing content is becoming more difficult. On top of that, a newspaper at your doorstep no longer represents convenience, especially when the same content is available online, often for free.

Fortunately, there’s a new way to distribute content – portable e-readers such as the Kindle or the Nook, and there are rumors that Apple will be releasing an iTablet (although Apple has yet to confirm this). Newspapers can now reduce (and, in theory, eventually eliminate) the costs of printing. They can put a cap on distribution costs. There’s no waste in terms of extra copies being printed. The customer gets total convenience by having content sent to them automatically (no more soggy newspapers on the front step). You can keep up with the news while on vacation.

With this in mind, it’s not a surprise that many newspapers have eagerly signed deals to distribute via the e-readers. The selection available is staggering (the Kindle currently supports over 75 newspapers and 35 magazines) in addition to the books available.

Personally, though, while I own a Kindle, I haven’t signed up to get my newspaper that way. The reason? It costs too much.

The cost for my newspaper (I subscribe to The National Post) is $10 per month on the Kindle. My subscription, sent to my door, is about $6 per month (I get a special because of some other products I subscribe to). Since I can get all the content online, I’m perfectly happy to stay with my printed version at the lower price. The convenience is not worth $48 per year.

I tried to figure out why it costs more to get the paper via the Kindle than it does to get it delivered. First, I am aware that $10 per month is significantly less than the normal cost of the paper, or $20 per month. Second, Amazon is going to take a cut, which I understand to be up to 50% of the price.

In the long run, however, I think that the price of subscriptions will drop significantly as people start signing up for the digital versions of the publications. At least, they’ll drop relative to the increases in the cost of the printed editions.

Product Review: Amazon Kindle

I was recently given two Kindles by a client as part of a project, and in the process, was able to play around a fair bit with both the large and small Kindle. (For those who are aware, only the smaller of the Kindles is available here in Canada right now, and I had to get the Kindles shipped to me from the US.)

I’ve had the readers for about 6 weeks now, which is more than enough time to discover the joys and, unfortunately, the flaws in the product. However, I’ll let my experience speak for itself.

I first tried reading a normal book on the devices, and found it to be a joy, especially while commuting. I’m not a big fan of writing in books, so the annotation feature and the fact that it’s a tiny, difficult to use keyboard don’t really matter to me. Even while wearing gloves, I could still navigate smoothly, and found that the device does live up the expectation of easy reading in all lighting conditions.

The smaller device is more compact, and therefor my first choice while commuting. However, with only a 6-inch screen, not much text can fit there at once, meaning that you need to scroll constantly to the next screen. The larger version is much larger, and therefore fits more text, but I didn’t like holding it the whole time. (What can I say? I’m lazy, and find the extra few ounces to be too much. Plus, there’s the jostling on the train to deal with, and I’m worried about dropping it.)

What really bugged me, though, is the lack of foreign language support. I wanted to load a text with a mix of English and Hebrew in it, but found that the only way to do that would be to generate a PDF from it, which are not as versatile as generating content in the Amazon format. To me, this one point pushed me to look at other options. Unfortunately, though, Amazon is not alone in its lack of support for foreign languages, and my guess is that it’s only a matter of time before the devices get a software update to support this as well.

For the curious, the screen uses something called digital ink, which means that it’s not affected by ambient light conditions. The larger Kindle can hold about 3,500 books, and the smaller can hold about 1,500. The battery is pretty good, lasting about a week when reading for several hours a day (sorry, I can’t get more specific, as I have not measured it). It connects to the 3G network for downloading content, and you can shop for additional material directly from the Kindle, or order material from the Amazon website and it will be delivered to your Kindle.

Importance of Happy Employees

Building a business on loyalty

Building a business on loyalty

In my recent posts on questions to be constantly asking yourself as the owner of a small business (10 Questions to Keep Asking About Your Business and  Readers Respond: Questions to Ask About Your Business), the area I seemed to miss was in regard to employee satisfaction. Yet, this is a critical component to the success of your business, and deserves a significant amount of attention.

As a small business owner, you have few employees, and know each and every one of them by first name. They are, in essence, the family of your business. However, unlike your biological family, who are always part of the family, these people can come and go as they please. As a result, it is up to you to ensure that they stay around. The most effective way to do that is not to pay them more.

Money will only buy you so much loyalty. Think about the recent recession, in which businesses were forced to cut costs in order to survive. At times like those, a business that has been buying the loyalty of its employees will find that this is an expensive endeavor, and attempt to cut expenses. If money was the only incentive for loyalty, then the employees will leave at the first opportunity.

As a small business, then, loyalty must be earned. This is done by providing each employee with what makes them truly happy. While a nice paycheck helps, other factors can come into play.

If you have an employee who is creative, are you providing an environment in which they can express themselves?

If another employee likes challenges, are you constantly pushing them to expand their horizons?

Each person has a different issue that they find to be important. As the owner of the business, it is your responsibility to determine what those issues are (if you aren’t sure, you should ask each employee what is important to them in a workplace besides for salary). If your employees are happy and motivated, then you will find their loyalty to hold strong through the thick and thin.

Changes for 2010

The year has barely begun, and this is my first post here. I actually wrote this several days ago, which is the biggest change that will be seen on this site.

The last year has been a learning experience – I’ve set up this blog, tried a wide selection of topics for articles, and settled on providing interesting articles on subjects relevant to business owners. In that, I hope I have been providing you with quality content over the course of the last several months, and will continue to do so in the upcoming year.

What will be different?

In the past, I wrote articles as the fancy struck me, as I discovered a new topic to talk about. For that reason, if you look at the distribution of posts, you may notice that some weeks I post more than others. Some days I post several articles, and then silence for a couple weeks. Going forward, however, while I will continue to write the occasional off-schedule article, you will begin to notice regularity in the posting schedule.

Every Monday and Friday, there will be something new here, whether discussion of a news item, a hot topic in the social media buzz, or something else entirely. But it will be there.

On Wednesday, there will be a post from one of the following categories:

  1. Guest writers – I will be inviting people to post articles here, and there’s no telling who may show up. If you think you might be interested in writing an article here, please contact me with a summary of what you might like to write about, and where I can read some of your previous postings.
  2. Book reviews – as an avid reader, I cover about 3 books per week, and some of these books may be of value to you. I will select a few of the more useful books for a detailed review.
  3. Product reviews – no, this isn’t about affiliate marketing. This is about telling you, my readers, about some product or service that I personally find useful, and you might benefit from as well. If I’m getting paid to write the article, though, I’ll be sure to let you know.
  4. Site reviews – I come across a variety of sites during the course of the week, and whenever I come across one that would be of particular benefit to you, I’ll write about it and direct you there so you can enjoy it too.

So that’s the plan – 3 articles per week, with two of them being information-based articles, and the third being from a particular category. Of course, I’m always interested in hearing the feedback from my readers, so if you have any additional suggestions, please let me know!