{"id":562,"date":"2010-11-21T10:30:47","date_gmt":"2010-11-21T09:30:47","guid":{"rendered":"http:\/\/www.telekta.com\/blog\/?p=562"},"modified":"2012-07-25T13:17:56","modified_gmt":"2012-07-25T12:17:56","slug":"scaling-down-multi-company-corproate-structures","status":"publish","type":"post","link":"https:\/\/www.telekta.com\/blog\/2010\/11\/scaling-down-multi-company-corproate-structures\/","title":{"rendered":"Scaling down multi-company corproate structures"},"content":{"rendered":"

Scaling Down Multi-Company Corporate Structures<\/em><\/strong><\/p>\n

\"\"<\/a>I have noticed a relatively new trend within smaller companies in that they seem to be more willing to experiment with ever more complex ownership and legal structures.\u00a0 I imagine that this is partly a fashion thing associated with the recent “Decade of the Banker”.\u00a0 Another influence is the European tax optimization tradition that encourages more complex legal and cross boarder structures, and finally Silicon Valley stock options and shared ownership have been a model for how to motivate the latest generation technical talent.\u00a0 The consequences of such complexity are often not felt until many years later.<\/p>\n

During the height of the Dot.com boom and its fashionable stock option plans, I worked as a division manager for a company owned by Bill Conway (Carlyle founding member). Bill is probably the single most talented businessman I ever met.\u00a0 For this company, he created a very generous corporate cash bonus plan that every worker could participate in, but he was insistent that all new shares only go to people who were risking company equity that they already own.<\/p>\n

<\/p>\n

Management teams evolve, change, and business divorces happen.\u00a0 When the company is publicly traded and relatively large, it is likely that any shares owned by the departing manager will be sold quietly and thus any disturbance to the rest of the company will be short lived.\u00a0 By contrast, a colleague of mine recently went through an ugly, emotional management divorce within the small company he worked for.\u00a0 Since he and the founder both owned a large percentage of the company, the only option was for one to buy out the other.\u00a0\u00a0 Emotions were high during the negotiations and consequently, little focus was paid to the core business during this time.\u00a0 Moreover, the discussions took far longer than anyone expected.\u00a0 The \u201cwinner\u201d was left with a damaged company that will affect its future for years to come.\u00a0 The \u201closer\u201d spent so much of his energy preparing for takeover that in due course he created a semi-competitive company in this already crowded market.\u00a0 The original company had been in a profitable second position, but the resulting two companies were fifth and sixth with far more limited outlooks.\u00a0 I saw similar disastrous results with another non-listed IT company I worked for.\u00a0 Contrast this to Bill Conway who retained 100% ownership in Brashear LP, paid generous cash bonuses to retain key employees when were they were succeeding and ultimately sold the company to a larger corporation.\u00a0 The lesson for me was clear: any splitting of shares of a non-listed company becomes a “marriage contract”– even if you give only 0.1% to someone.\u00a0 It is critical that the number of active owners in a small company be kept as few as possible.<\/p>\n

There are many other examples of complex split ownership situations.\u00a0 For example, I have also seen a number of companies that legally split their sales\/commercial business from their development, branding and corporate business.\u00a0 Normally, one might consider this as an intelligent way to focus business priorities, but when the ownership structures are adjusted as well, then things become more complex.\u00a0 In one case I am aware of, the owners pre-sold sales territories to investors in a way that investors pre-purchased software licenses that they could resell within their exclusive geographic territories.\u00a0 In another company, regional sales\/commercial offices were legal entities created as joint ventures with local investors.\u00a0 At first thought, both looked like only examples of the balance of dependence<\/a> principle and a company valuation problem.\u00a0 It also looked like a great way to finance company growth.\u00a0 The problem was that the companies “sold” permanently and forever essential sales territories.\u00a0 This created massive limitations on their flexibility and agility.\u00a0 In the global technology world, there are few things more valuable than flexibility and agility.\u00a0 When licenses are pre-sold and the sales agents are acting independently, it is very difficult to diagnose a global sales problems — each territory owner will typically wait for another to fix the problem first.\u00a0 Additionally, if the business should be adapted to a completely different sales approach, pricing, or business model, then each investor\/sales entity must consent to arrangements that may make their other local sales interments worthless.\u00a0 More likely, the group of companies will continue with the \u201cwrong\u201d approach that was originally envisaged in the contracts between each other.<\/p>\n

Joint venture sales\/commercial companies are limited in other ways.\u00a0 The smallest strategic initiative change requires that both the regional commercial offices the corporate office both benefit if it is going to be constructive.\u00a0 For example, cutting back on corporate testing and quality in one company I was involved with had only long term consequences to the corporate office, while regional sales offices had strong and immediate hits to their bottom line.\u00a0 Similar effects happen with new product entries, price discounting, and new delivery models.\u00a0 The lack of agility, the cost of negotiation, the balancing of the competing motivations, and the costs of administering the system are often not worth the potential benefits, especially when the company is small.\u00a0 In fact, I would argue that “hard laws” (rigid legal contracts of indefinite nature) are what often make large company non-competitive and targets for more agile start-ups.\u00a0 For the small company, the consequences of extreme creativity in financing and in corporate structures will likely, at some time in the near future, lead to severe limitations on their flexibility and agility.<\/p>\n","protected":false},"excerpt":{"rendered":"

If you use flexibility in financing, legal structure, and corporate structure, you trade off flexibility in adapting to the market. <\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[6,4,11],"class_list":["post-562","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-current-environment","tag-managing","tag-strategy"],"_links":{"self":[{"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/posts\/562","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/comments?post=562"}],"version-history":[{"count":17,"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/posts\/562\/revisions"}],"predecessor-version":[{"id":617,"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/posts\/562\/revisions\/617"}],"wp:attachment":[{"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/media?parent=562"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/categories?post=562"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/tags?post=562"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}