Miscellaneous Archives

Your Company Considering Investors? Get Ready to call the “C.O.P.”

Published on November 22nd, 2016 by Alan L. Sklover

“ In capitalism, those with the capital usually get the ism.”

– Unknown

ACTUAL CASE HISTORY: Paul and his partner, Elise, seemed to be “riding a rocket.” Their six-year-old software company had come up with a very neat solution to a common business problem, namely, real-time updating of the prices charged by a company’s critical suppliers. It almost ensured lowest prices.

Their success, though, was their problem: they needed to hire very talented coders, who were in increasing demand, and for this reason quite expensive to hire. This left them cash-starved, and unable to continually update and enhance their product to meet market demand. Fortunately through their accountant, they were introduced to an investment firm that was interested in providing a cash infusion in return for a piece of the company’s ownership.

The initial meetings went quite well. In return for a $5 million cash infusion, the investors wanted only 10% of the company’s stock, and 5% of its profits. After a brief time Paul and Elise suggested that their business attorney – an expert in software patents – prepare the necessary legal papers. Instead, the investment firm suggested their own internal attorney should prepare the legal papers, in order to save money for Paul’s business, which was “music” to Paul’s ears.

After presentation, review and minor modifications of the legal papers, the investment was completed, and Paul and Elise were more ready than ever to grow their business through new – and now affordable – hiring opportunities.

All went well . . . for about six months. Then the Board, now composed of Paul and Elise, and three younger members of the investment firm, had one of its monthly meetings. At that meeting, the Board voted 3 to 2 to cut salaries and benefits by about 10% in order to slow the company’s rate of “cash burn.”

Paul and Elise didn’t think it would be a good idea, but they gave in, and explained to their staff members that this was a sign of “long term thinking,” and necessary to show the investors their deep commitment. They also cautioned their staff that the cuts were necessary to keep relations with the investors on a positive note.

Two months later, the “fit hit the shan” when the Board voted to issue a “special dividend” to the investment firm, in effect, to themselves, and replace the company accountant and the company lawyer with their own. Paul and Elise started feeling like someone had “hijacked” their company. Unfortunately, they were right. What they had built up over years of effort and sacrifice was, slowly but surely, slipping through their fingers.

The changes kept coming, including a decision to pay the investment company a monthly “management services fee,” a company name change, the office was relocated, more debt was piled on, and the investors even brought in other investors, with what was called “super-voting” shares. Before they knew it, the best assets of the company were being sold to competitors, while Paul and Elise were reduced to mid-level managers of a company they once independently ran. This was not what they had envisioned. Not near it.

When they consulted their own attorney, they soon learned that his expertise in software patents was not expertise in company operating documents, and that embedded in the legal documents they had signed, nearly invisible to them, was their agreement to permit the investors to do essentially whatever they wanted.

Yes, the investors still owned just 10% of the “stock,” and received just 5% of the “profits.” While at first that seemed comforting to Paul and Elise, the larger “control” decisions being made daily made “ownership” and “profit” issues not to matter much at all.

LESSON TO LEARN: “C.O.P.” stands for “Control,” “Ownership,” and “Profits.” It is an analytical and explanatory rule of thumb I have made up and use often when working with the creation, growth and evolution of small and/or young companies.

“C” stands for “Control.” Control means who will make decisions, how they can be made, and what limits exist on those decisions. The “Control” provisions of a company’s operating agreement (no matter what its title may be) are rather boring, often confusing, and almost always ignored by the non-lawyers. That often leads to tragedy, because “control” provisions can change who owns a company, what profits they get, and even who will remain owners, officers or employees of a company. “C” comes before O and P in the alphabet, and comes first in “C.O.P.” because it is far and away the most important of “C.O.P.”

“O” stands for “Ownership.” Ownership means who owns how much of a company. While it seems to be so very important, if those who “Control” a company can change its future ownership, what “ownership” means, or who gets the usual “fruits” of being an owner, it makes the initial ownership not as important as it often seems.

“P” stands for “Profits.” Profits means who gets moneys that the company earns, after paying the bills and taxes, and how much they get of the profits. Profits is the least important, because it can be changed in so many ways by those who have Control to do so. “P” comes after “C” and “O” in the alphabet, and comes last in “C.O.P.” because it is far and away least important of the three.

The legal documents that govern how a small or young company operates are essentially devoted to (1) who will make what decisions, (2) how those decisions will be made, and (3) the limits, if any, on those decisions. (Sort of like the U.S. Constitution, come to think of it.) Unfortunately, these documents are often very confusing, obtuse and highly “legalistic,” enough so that they can put an insomniac to sleep. Attorneys not familiar with the issues that arise in the “governance” of smaller businesses, and the applicable law, often meekly comment “Looks pretty good to me,” which is a sure sign that he or she is well beyond his or her legal expertise and street smarts.

When presented with a business operating agreement by potential investors – a “partnership agreement” for a partnership, a “shareholder agreement” for a corporation, or an “operating agreement” for a limited liability company – principals and their attorneys often mistakenly focus, first, on “Ownership,” and numbers of “shares” or “units,” which describe who owns how much of a company. The thought is, “If we own a majority of the shares (or units), majority rules, right?” The truth is, “No. Not necessarily.”

Next, principals and their attorneys, when presented with a business operating agreement by potential investors, often next focus on the “Profits,” or the phrase “profit distribution.” If a certain amount or percentage seems reasonable, then they are often pleased, seeing a reasonable sharing of profits as a sure sign of good intentions and reasonable business investor-partners.

What they rarely focus on sufficiently, because it is a “fuzzy” concept often “buried” or “disguised” in a whole slew of provisions written in legal mumbo-jumbo (that is a Latin phrase meaning “hocus pocus”) is the most important issue: “Control,” meaning “Who makes what decisions, how, and what limits exist on those decisions?” At the risk of being sued, I will refer to this issue as “The Art of the Deal” although, in truth, it is often more accurately characterized as “The Art of the Steal.”

So, the focus of thinking, analyzing and negotiating investment in small businesses must be on “Control” because whoever has control can later change both “Ownership” and “Profits.” Got it? “C.O.P.” and “C” comes first.

Don’t get me wrong: ownership and profits are really important issues. But if someone has the “Control” to change them, against your judgment or will, the initial “Ownership” and the initial “Profits” don’t mean a hill of beans, as those with “control” can change them. And, if they have the “Control” to fire you, or your partners, or change the name, location and model of the business, what good is their investment in the first place?

There are innumerable ways that “Control” can be disguised, stolen and “fuzzied.” The idea is to make sure it is hard, if not impossible, to make later important decisions against your wishes, in violation of your vision, and against your interests, by asking for changes, or insertion of limits, that will protect your “business baby.”

Bear in mind, something that is also quite important: only you understand your business, how it works, what makes it tick, and even what your vision is. Don’t presume that your lawyer or any other lawyer knows those things – and the things you fear, too. We all know you want your business to succeed and grow. We don’t know that much about what you would find hurtful to your dream, because, frankly, it is your dream. The best collaboration with an attorney on these issues takes several cups of coffee, multiple mugs of beer, or at least a whole lot of candid conversation.

Bottom line: as you can see, a 10% ownership and 5% share of profits, can – by legal papers – be turned into a sale of a company. When it happens in a large company, we call it a “corporate takeover.” In a smaller version, it is simply a personal tragedy.

WHAT YOU CAN DO: Like it or not, investors in a smaller or younger company often have different interests than those who have started and/or built it. And their perspectives may be different, too. If your company finds itself about to speak with “money people” regarding their coming in as investors, don’t let them hijack the ship. Use “C.O.P.” as your analytical and navigational tool. Here are 18 pointers, hints, and insights to help you do so:
Read the rest of this blog post »

Growing Business Need Funding? Think “S.L.I.C.E.”

Published on September 27th, 2016 by Alan L. Sklover

“In capitalism, if you don’t have the capital,
you can’t get the ism.”

– Unknown

ACTUAL CASE HISTORY: Actually, I’ve assisted in numerous case histories on this issue. So many of my clients have, sooner or later, earlier or later in life, decided to leave the world of employment and go out on their own into one sort of business or another. Some have continued in their existing industries or professions, some have ventured out into a new and exciting industry. Some of the new industries they have ventured out into have only existed for a few years.

Perhaps the one misconception that most people have about growing businesses concerns their continual need for new funding: Most people believe that a growing business gushes with extra cash, so that their owners can take out for themselves greater and greater income. The truth is just the opposite: a growing young company – no matter how successful – is almost always in constant need of extra funding. It’s like a 9-year-old child who needs new sneakers and clothing every six months due to rapid growth, but is not yet old enough to get a job to pay for them; instead, parental assistance is necessary.

If your new or growing company is in this mode, here’s a general outline of thinking that has been of help to my clients in your circumstances.

LESSON TO LEARN: If you want to be a business person, you’ve got to accept the cold, hard fact that access to capital is your oxygen; without it you simply cannot survive. Sooner or later you will have a “dry spell” that will strain your resources, or perhaps miss important opportunities due to funding restrictions that will go instead to your well-funded competitors.

There are many sources of business capital, ranging from winning the lottery to robbing a bank, neither of which would I suggest you depend on or resort to. Rather, my own clients have depended upon a variety of funding sources that are realistic. For them, we have identified five sources of potential growth capital, the first letters of which conveniently spell the acronym “S.L.I.C.E.”

Each new company has its own unique circumstances, needs, assets, resources, opportunities and quirks. But each new and growing company needs, too, its own “guide” up “the mountain” of business growth. That is why we offer this conceptual framework for you. With it you can begin to focus your thinking, focus your efforts, and more likely achieve your funding needs and your business growth goals.

A caveat: When you read over this list of five sources of growth funding, and think about it and discuss it with your friends, partners or advisors, you need to maintain a wide-open mind. One or another of the explained alternative sources of funding may, at first glance, seem entirely inapplicable, impractical and/or unfeasible. You will likely be tempted to quickly discard one of more of them as impractical, inapplicable or even beyond your company’s capabilities. I urge you not to close your mind prematurely, or for that matter, ever.

Don’t make up your mind so fast; instead brainstorm to determine how you might possibly consider each alternative funding source. No, you should not rob a bank; but you should seek out even unknown Aunt Sadie’s with lots of money and nothing to do with it. The real trick to identifying and acquiring capital for new or growing businesses is creativity, because no one source of growth capital fits all, and all you need is one. I am convinced that, but for the necessary creativity and perseverance in the search for growth capital, many businesses that failed would not have done so.

A second important point: These sources of growth capital are not mutually exclusive. In fact, they are quite complementary. For example, lenders and investors like to see founders put some of their own money into the mix, or as it is often referred to, “skin in the game” before they “contribute” their own. Such “self-funding” combined with “loans,” is just one example of complementary sources of growth funding.

WHAT YOU CAN DO: With your own business needs, circumstances and opportunities in mind, consider these five broad categories of growth capital:
Read the rest of this blog post »

“What is Joint Employer Liability?” Many Workers Have Two Employers, But Don’t Know It

Published on October 21st, 2015 by Alan L. Sklover

“I got a job working for a hostage negotiator.
One day I tried to call in sick, but my boss talked me out of it.”

– Anonymous

ACTUAL “CASE HISTORY: Thomas was an experienced software coder. He was registered with an employment agency that regularly placed him on coding projects with its customers– usually for three to six months at a time. He was considered an “independent contractor” and earned $35 per hour for his efforts, without benefits. The employment agency handled all of the details of his assignments, collected the fees from the customer, and then paid Thomas for the hours he worked. It was part of a significant trend that many people refer to as “outsourcing” or “employee leasing.”

As is quite common in these “outsourcing,” “agency,” “contracted” or “leased employee” arrangements, Thomas worked at the offices of the employment agency’s clients, on the projects they assigned to him, often alongside their own employees, told what time to arrive and leave, where to sit, and always under their supervision. Somehow, he was not considered their employee.

One assignment for a large financial institution was particularly demanding, with very complex objectives that needed to be completed within an unusually short period. After two of the team’s five coders quit, Thomas ended up working through many nights and over many weekends to meet the project’s demanding deadlines.

After his financial institution assignment was completed, Thomas asked his employment agency whether he was eligible for overtime pay for the extraordinary hours he had put in. He was told “No,” as overtime pay was given only to “employees” and that he was an “independent contractor.”

When Thomas contacted us for a telephone consultation, we disagreed with what he had been told. Not only was he entitled to all of the payments, benefits and legal rights of an “employee” – including overtime – but he could demand those payments, benefits and legal rights from both the employment agency and the large financial institution that had “leased his services.”

Because the employment agency feared that Thomas would request overtime from the large financial firm, or perhaps that Thomas might even tell other temporary coders he worked with that they were entitled to employment benefits, such as overtime, they quickly paid up all overtime due Thomas, which was a very tidy sum. This was a vivid illustration of the “joint employer liability” doctrine in action.

LESSON TO LEARN: If you are a “contract,” temporary, “contingent,” seasonal, “leased,” “outsource,” or “independent” worker, in the eyes of the law you may well be an employee and, what may seem odd to some people, of two companies. Thus, both your employment agency and the agency’s customer for whom you toil may be liable to you for payments, benefits and rights denied to you.

Example: Department stores are not hiring “seasonal employees” at year-end holiday time, as they always used to do, but instead are increasingly turning to “temp agencies” to hire them and then “lease them” back to the department stores.

Example: Law firms are hiring “contract lawyers” who sometimes work for them for years at a time, but are nonetheless not considered by them to be their “employees.” These “contract lawyers” have the same law licenses as other attorneys at the law firm, do the same work as other lawyers, are supervised by the same people who supervise other lawyers, and work in the same offices as other lawyers. But, somehow, they do not get unemployment insurance, Social Security benefits, or protected leaves of absence that all employees are entitled to under the federal Family Medical Leave Act.

Example: Nurses in hospitals are being hired through “placement agencies” to do the same work as “employed” Nurses. But these Nurses are being denied overtime, the right to file sexual harassment complaints, paid vacation, and at times workplace safety protections.

How does this save employers money? By “outsourcing” much of the work they need to get done, companies are avoiding the considerable costs of employee benefits, payments and protections the law requires employers provide employees, such as (a) overtime, (b) unemployment benefit contributions, (c) payment of Social Security contributions, (d) Workers Compensation coverage for on-the-job injuries, (e) unpaid medical leave, (f) occupational safety, (g) even protection from harassment and discrimination.

The law, though, is not blind. It recognizes that quite often this kind of “outsourcing” of work is a charade, a subterfuge, and a deception. After all, if it was so easy to use another company to avoid employer obligations, no company would be an employer. It would be the end of “employment” as we know it.

Temporary, “on call,” “leased,” seasonal, contract workers, and others should be aware that the law provides that many of them are employees of BOTH (1) their temp assignment agencies AND ( 2) the companies on whose behalf they toil – just like employees

Recently, “joint employer liability” (sometimes called “co-employer liability”) has been applied to companies with a “franchise” business model. For example, in the fast-food industry many large companies are “franchisors” who sell the right to use their corporate name to smaller local “franchisees.” The law is increasingly making such large “franchisor” corporations, such as McDonalds Corporation, Dunkin Donuts and Wendy’s liable for unpaid wages and denied benefits to those who toil for their many locally-based franchised store operators, even if they have been labeled “independent contractors” or the equivalent.

WHAT YOU CAN DO: If you believe you may be one of those many workers who is treated as a “second class employee,” and may be due payments, benefits and legal rights and protections from a “joint employer,” you would be well-advised to consider the following:
Read the rest of this blog post »

“In-The-Meantime” Clause – This is One to Remember, and Request

Published on November 8th, 2013 by Alan L Sklover

You can’t do better than to expect the unexpected.

“Nothing is so certain as the unexpected.” 

-       English Proverb

TWO ACTUAL “CASE HISTORIES”: Melinda was a 32-year-old family practice physician recruited to leave her home and practice in the suburbs of Boston to join a large family-medicine practice in southern Maine. As is so often the custom, she was told that after two years of practice, provided her skills and demeanor were found to meet the practice’s standards, she would become a Partner in the practice, with a 15% ownership stake.

Melinda had no qualms about the deal. First, she was entirely confident she would meet all criteria for becoming a Partner in the practice. Second, it was spelled out entirely clearly in her contract, and her brother – an experienced attorney – said “It could not be clearer.” Third, the practice was a growing one, and her 15% ownership would surely “set her up for life.”

Then, 18 months after Melinda joined the medical practice, something entirely unexpected happened: a corporate health service headquartered in Boston made a very significant offer to purchase the family medical practice in order to merge it into their growing network of family medical service centers throughout the northeast U.S. The physician-partners all sold their shares in the medical practice for a handsome price, and were offered long-term jobs afterwards.

Melinda? Because she had not been a physician in the practice for two full years, she got nothing. She was not even offered a job by the corporate health service. It all came to be a very large loss to her – and a serious setback in her life plans.

Something very different happened to Howard, a 31-year-old hedge fund trader at a small hedge fund in St. Louis. After leaving a large Wall Street firm, he joined the hedge fund in large part because he was offered ten percent (10%) of the firm stock if he remained with the firm for two full years. Like Melinda, Howard saw it as an opportunity to become an “owner,” and to establish himself for the long term.

Fortunately for Howard, we assisted him with his contract of employment that provided him with his ten percent (10%) ownership interest. We insisted on what we call an “in-the-meantime” clause that provided that, if anything happened “in the meantime” to prevent his receipt of fully vested stock due to no fault of his own, in all events Howard would receive the stock or its equivalent in value in cash.

Sure enough, when Howard’s small hedge fund merged with a large hedge fund headquartered in Chicago, the owners received a hefty purchase price. Howard’s stock did not get a chance to vest, so he would likely lose out completely, as Melinda did. In Howard’s contract, though, his “in-the-meantime clause” saved the day. Because it was there, Howard received the same purchase price as if he had owned the stock.

LESSON TO LEARN: An ounce of “in-the-meantime” forethought is surely worth more than a pound of “I wish I had thought of that,” or even a ton of “I can’t believe what just happened.”

If, in your employment negotiations, you are being offered a “thing of value,” but must wait to receive it – whether it is elevation to a partnership, an annual bonus, vested stock or stock options, a promotion, or a coveted sales territory, just to name a few – insist on an ‘in-the-meantime” clause to provide that, if for any reason other than your own misconduct you don’t receive it, you will be given either its monetary value or an alternative, but no less valuable “thing of value.”

Chances are you will never need it. But, if you do, you sure will be glad you have it.

WHAT YOU CAN DO: So many of our clients have requested, and received, “in-the-meantime” clauses in their offer letters, employment agreements, relocation agreements, retention agreements, and other work-related contracts. While few have ended up needing to exercise their rights under their “in-the-meantime” clauses, those who have done so have been just thrilled to have the “safety net” they provide. Here are five things you can do to help yourself in this regard: Read the rest of this blog post »


Alan L. Sklover

Alan L. Sklover

Employment Attorney
and Career Strategist
for over 35 years

Job Security and Career Success now depend on knowing how to navigate and negotiate to gain the most for your skills, time and efforts. Learn the trade secrets and 'uncommon common sense' of Attorney Alan L. Sklover, the leading authority on "Negotiating for Yourself at Work™".

Receive All Our Posts - It's Free!

Monthly Newsletter, Discounts, Events