(Word
version)
| Who | Cash stock |
Hard asset shares @$14 / share |
Goodwill (from Kala Puaa*) | Goodwill from Hana Hui**
| Total goodwill stock | Goodwill shares @$14 / share
| Total stock | Total stock as percent of total stock
| Total Shares |
| Guy | $5,000 | 357.14 | $400 | $33 | $433 | 30.90 | $5,433 | 38.80% | 388.04 |
| Ray | $1,000 | 71.43 | $100 | $1,066 | $1,166 | 83.27 | $2,166 | 15.47% | 154.70 |
| Jim | $5,000 | 357.14 | $500 | $100 | $600 | 42.86 | $5,600 | 40.00% | 400.00 |
| Rest*** | $0 | 0.00 | $0 | $802 | $802 | 57.26 | $802 | 5.73% | 57.26 |
| Total | $11,000 | 785.71 | $1,000 | $2,000 | $3,000 | 214.29 | $14,000 | 100.00% | 1000.00 |
|
| | |
| | | |
| |
| Guys $5K is to cover 3.33 initial investment, .67 for part of what he has paid in taxes so
far, and 1 new investment. Rays 1 is to go to bank. Jims 5 is new investment. |
|
| |
| | |
| | |
| |
| * Kala Puaa Hui is the group of capitalist pigs putting in cash.
| | |
| |
| ** Hana Hui is the original group of working stiffs/surf bums who surveyed, cleared and planted
the land. |
| ** based on total value for Hana Hui as set in this scenario, = |
| | $2,000 | |
|
(Peoples percents
as in |
| Guy | |
| 1.63%
| $33
| |
| 8/21/98 Ownership Shares |
| Ray | |
| 53.29%
| $1,066
| |
| for Hana Hui) |
| | Jim | |
| 5.00% | $100 |
|
| |
| | | Subtotal | |
| 59.92%
| $1,198
| |
| ***Rest=rest of Hana Hui | | Rest | |
| 40.08%
| $802
| |
| |
| | | |
| | | |
|
Total shares sold so far:
1,000 shares at $14 each.
Shares still
owned by company: 99,000 shares
Total shares issued: 100,000
shares
The stock has zero
par value, which makes the accounting more understandable:
Book value $
11,000 (This is our only real money, the cash used to buy the land,
pay taxes, and set up cash balance. This is also called paid in capital.)
Goodwill 3,000 (Our people are our real future and value)
Total 14,000
BALANCE SHEET
Kipuka Wai Hui
August 25, 1998
Company Assets:
1. All rights to the piece of land we have called the swamp,
which is Hawaii Tax Map Key (1) 6-6-009-011. It is a little less than a half-acre
of old taro land in Haleiwa.
2. Cash of $1,000 to open our company accounts. (Some of this will be spent recording
deeds and other incidentals.)
Company Liabilities:
1. None at start up.
Exclusions: These items are what the company does not own nor expect to own and are the
private property of the company people (owners, managers, and employees) or others. Specifically not included in company
assets are any claims on:
Any other land or assets of the company people. For example, historically we have used Rays truck (now sold) and
tools (sprayer, etc., still owned but may be gone someday) to maintain the property. And the Mountain House as a staging
area/surf shop. We may well have to manage without those things (the Mountain House is for sale).
Any contract
for any services from any of the company people. All company people may resign at any time for any reason. People can move
to distant places with either no water (Iowa) or cold water (San Francisco), and do nothing to the property for eons. It
is hoped the CEO will at least pay our taxes and otherwise defend our title, and put out a scroungy report from time to time,
but nothing is promised.
Any legal access to the land. We have always been in a semi-trespassing mode to get there, but with Lennys tacit
permission. Others who seem to be there only on weekend afternoons have given us specific notices not to cross their land.
This situation could easily deteriorate into helicopter only access. PS: we do not have a helicopter.
STOCKHOLDERS AGREEMENT
(This agreement is our corporations bylaws, and we will all agree to operate like this until changed by a majority
of shares. Read this and sign the last page.)
Preamble
Please keep the following in mind:
We are limited to 25 stockholders before we start
getting into regulations that require expensive audits. We do not want to approach that limitation until we are ready to
go into whatever is the next major step in our financing. (We treat groups such as the Hana Hui and the Tantog family as
a single stockholder in the same sense we would if Bishop Estate or Amfac was a stockholder.)
The other limitations are common sense, that no
one should risk anything unless they can well afford to lose it and all stockholders should have a good understanding of
what we are doing.
All stockholders should understand the following three concepts:
1.
The value of a land owning company is based almost solely
on the enjoyment of the land. It is hard to buy land, improve it, and sell it at a profit under any conditions. Think of
it as buying and enjoying a toy.
2. If a land company does get lucky and finds itself owning land that is suddenly far more valuable than the price
paid, it is common to either miss the opportunity to sell, or to spend so much time and money selling that it becomes unprofitable
to sell.
3. The valuation of any company, any time, is a very inexact process. If you let it, it can also be a very time
consuming and expensive process. Most stock systems have several layers of agents, regulators, and specialists between the
stockholder and the company. The system I use has none of that, and none of the costs or benefits either.
Please understand
the rules, and how they would affect you in good times and in bad times. In any land venture the chances of getting back
absolutely nothing far overwhelm the chances of making a profit. In this particular venture, all we have is a piece of swampland
that is virtually inaccessible in a legal sense. We are also in a tsunami zone (the salt water from a tsunami would probably
kill our cypress trees, which is our only chance of rising above the swamp). We are only a few feet above sea level in an
era when many expect sea levels to be rising. Our CEO is aged far past his prime, may be losing his mind, and is way too
far away to be of any help anyway. There are many, many reasons why it will be very difficult to make money in the swamp
business.
The essence of
the stock plan is as follows:
Start-up. We all make contributions[1]
that start the company. The CEO will give these a value as they are put in. Then we add up all the contributions for the
total value of our shared equity. All contributors own whatever share they put in, and, as we start, the value of those
shares is the original value.
As we get going. What ever we do together as a company will change the
value of our total, and therefore the values of the individual shares. The CEO will set a price for shares, and the rest
of us may buy and sell shares at that price. For fairness, the CEO must offer to either buy or sell at the same price.
HOW THE STOCK PLAN WORKS
Ownership. All stockholders[2] must be approved by the CEO.
You may own as much or as little as you like. Shares may be divided down to an even dollars worth. The CEO will keep track
of who owns what, which will be published in the stockholders reports along with all stock trades.
Reports. All stockholders
will receive all reports[3]. Access to company records
will be allowed with a little notice. If anything really big (good or bad) happens, no one will be allowed to buy or sell
stock until a good effort has been made to let all stockholders know.
The Stock Market. Shares of stock may be traded among approved owners for
any price they agree on as long as the CEO is notified of the trade. The usual way stock will be bought and sold will be
through the CEO. He/she will be responsible to keep personal liquid reserves[4]
for about 10% of the outstanding stock value and be
prepared to buy or place the remainder over approximately six months. Having said this, no investors should place themselves
in such a position that they would suffer if their stock were not as liquid as this seems. Chances are, if something
really bad happened to the company as a whole or to the CEO, you would be stuck.
Price of the stock. Given normal conditions, the CEO
will always quote a price per share at which he/she will personally[5] either buy or sell
one share. This is the most important feature of the plan. The easiest way to think of it is that it is like two kids
splitting a candy bar: the first one splits the bar, the second one chooses. In this case, I am the one who splits the bar,
and you choose. In other words, I set a price on the share, and you decide to buy it, sell it, or do nothing. (If you want,
we may reverse the roles. You set a price and I will buy one of your shares, sell you one of my shares, or do nothing. Either
way, all three options must be open, and for only one share.) The advantages of this system are that it 1) forces fairness
in the stock price, and 2) keeps the value current. It also helps to keep your shares liquid, at least much more so than
any other small equity plan I have ever seen. The one share provision limits the CEOs exposure to a single transaction at
any one time. Then the CEO can move the price up or down for the next share. Typically, when someone wants to buy or sell
more than one share, a trade is made on a block basis, at an average price, and the trade goes like this: I would like to
buy 10 shares, how much? I quote a price and the deal is done[6]. But, all I am committed
to trade at a time is the one share and I will invoke that rule if I get boxed in. I will also close down the market[7] if things get too tricky, and notify all the owners before resuming trading. (If not much is happening, the price of the stock
only gets set when I make a report.)
How I set the price of the stock. It
is just my net opinion about the general future of the company. If things are improving, and particularly if everyone seems
to think so and is buying shares, I will be raising the price. Or if the opposite is true, and people are selling shares,
then I will be lowering the price. Stockholders other than the CEO are welcome to play the market, as this is good for us
as long as it does not become a distraction. The CEO does not profiteer in any way in the market, and in particular does
not exploit the fact that he or she will obviously know more about what is happening than the average stockholder. Also,
there are no fees or commissions on stock trades. (A small part of the CEOs salary is for running the market.) We all benefit
from a healthy stock market, especially the CEO who owns plenty of stock.
Elections. (This only concerns voting stock if we set up two classes; all
shares issued so far are voting shares.) The CEO will be elected more or less once a year, just for drill, and certainly
any reasonable time a stockholder requests it. A simple majority of shares may replace the CEO on the spot. The three biggest
stockholders are automatically candidates for CEO[8].
Any other stockholder may run. All candidates may put a reasonable amount of campaign notes, propaganda, etc.[9] in the company reports. The way people vote also goes in the reports so everyone can see it[10].
Each share of stock gets a first choice and a second choice vote. The majority of first choices wins. The purpose of the second choice is to express confidence in other,
perhaps future, leaders. Up to 25% of our votes may be assigned by the CEO to outside interests[11], such as our largest customers, suppliers, and employees. These interests
are critical to our company as a whole, and they should have a specific voice in our affairs.
COMPANY ORGANIZATION
The CEO (Chief Executive Officer) will be elected directly by the stockholders and
will then manage the company as he or she decides. All other officers, directors, and managers will be appointed by the
CEO and will serve at his or her pleasure. The CEO will be responsible for fulfilling all government obligations. In the
event of incapacitation of the CEO, the vice-president will assume immediate responsibility.
Our officers are:
Ray Grogan,
2464 Halelaau Pl.
President (CEO) Honolulu, HI 96816
and Director
(808) 732-7476 (or)
2608 East Court St.
Iowa City, IA 52245
(319) 358-8605
fax c/o Mary Spreen) (319) 335-3604
ralgrogan@sprynet.com
Jim Hayes
Vice President and Director 1082 Ashbury
San Francisco, CA 94117
(415) 731-4760
wk (415) 495-7110
fax (415) 495-7107
Guy Miller
Director 59-240 Pupukea
Rd.
Haleiwa, HI 96712
(808) 638-7895
ACCOUNTING SYSTEM
A few notes
about stock and taxes. The initial shares that are given to you for
goodwill are not taxable until you sell them. When
you do sell them, they are taxable for the full sale price[12].
Work and taxes and stock. Once
you start actually performing services for the company in exchange for stock, it is clearly income. Here is how we will
be handling these issues now with our beginning system and low cash reserves.
If you just go
out to the swamp because you want to, and do a little spraying or fertilizing, and take home some taro, just keep track
of your hours. Do not do it in expectation of getting more stock. The CEO may or may not give out more stock. If you want
to work in expectation of stock, you have to go through the payroll procedure below, and you have to finance it yourself,
and you must have the CEOs OK.
Payroll (Look in the yellow pages
for a payroll service, they will do all this for about 1/3 of the paycheck.)
So if you are due a paycheck of $1800, here is
how it would work: You want to get credit for stock. You have to pay, with your own reserves, about $600 with your timecard
to get your paycheck for about $1500. You get stock credit for contributing both your net paycheck (1500) and the 600 cash.
(You may also later get some of your withholding back in your normal tax return.) So you put in a lot of work, plus $600
in cash, and get back stock that is (allegedly) worth $2100.
The companys total cost is the total, $2100. Our
accounting would look something like this:
(assume we have a balance of at least 1500)
from you + 600
to payroll service - 2100
redeposit your paycheck + 1500
(which is now company
money in
exchange for
your stock)
(the other transaction is a stock trade of 2100 from the company to you.)
(You can see how
this little merry-go-round could quickly eat up our limited working capital even if we all worked for stock, but did not
also provide the withholding.)
Once we start any accounting whatsoever, we will put out a stockholders report. Everything
that is relevant to our internal balance is included, including pay rates.
Expenses. In the early phases it will be easier to just pay for small expense
out of our own pockets, let the CEO know, and maybe get a little goodwill stock for it. Once again, you can not do it in
expectation of stock because the CEO may or may not give you more stock for covering these items. However, expenses are
no big deal accounting-wise. Bigger ticket items can be paid for and turned in for stock (or cash refund once we have any
cash). For a budget let us use $200 / director / year limit for now, unless okayed by the CEO.
EVOLUTION OF BYLAWS
As we grow and
prosper many things will change, maybe very quickly. There may be a gradual shift to a traditional corporate structure.
The major changes you should be ready for are:
The stockholders electing a board of directors
(BOD), which in turn elects the CEO and corporate officers.
The BOD will in effect take over many of the current
functions of the CEO, or at least supervise them, because the BOD can fire the CEO.
Generally, this
change will occur as
1.
We develop a team of directors. Please nominate candidates.
2. We develop ways to have meetings that do not cost a fortune
in time on the part of the directors. Even a coordinated conference call would be a serious commitment. For starters we
might try a letter like this one, with room for comments. We can respond with either a new letter, or make written comments.
Then we need to figure out a way to get the comments around to everyone, and get some kind of give and take.
3. We develop a business size that justifies the management
time and effort a more traditional structure requires. We should certainly re-evaluate our structure if we pass any of these
milestones:
Sales of over $1 million per year.
Profits of over $100,000 per year.
Outside equity
contributions of over $200,000. (People other than the CEO putting in equity other than goodwill.)
Company assets
of over $500,000
Ownership becomes so dispersed that a meeting is necessary to include a majority of shares.
4. We are forced to in order to merge with a major corporation.
They will probably not want to be bothered with having to learn a new set of rules. They are quite happy with the standard
method, which is to give minority shareholders statutory minimum rights (that is what standard bylaws are), and, guess who
gets to be the majority shareholder. A major challenge we will face will be to convince them that we will both be far better
off with our system, but that may be impossible. We almost have to be allied with some other landowner to get a legal right
of way. It may be a simple one-time payment to Lennys family, but it could be as complex as a merger with a corporation
that owns the shopping center on Kam Hwy (or all the landlocked landowners plus one with access). You may see this whole
stock plan go poof right before your eyes. And you may have the pleasure of watching me eat my words and say being a minority
stockholder under a standard format is not that bad!
CHANGES IN THIS UNANIMOUS STOCKHOLDERS AGREEMENT
This agreement may be changed at any
time by a simple majority of shares. However, the worst the changes can be will be to the statutory minimum (standard bylaws).
Changes do not have to be recorded here in any special way. Most changes would just be noted in the next stockholders report.
CONSENT
OF STOCKHOLDER
I consent to this stockholders agreement.
I fully realize that there are several provisions that give me less rights than a standard stockholders agreement, and they are listed below. I specifically agree to these provisions,
in consideration for the other benefits of our agreement.
1.
To dispense with a required annual stockholders meeting.
We may or may not have a stockholders meeting, but it is not required, nor is it required to get my permission each year
not to have the meeting.
2. To dispense with
a required annual stockholders election, as above.
3. To empower the CEO to perform all duties normally performed
by a board of directors, specifically:
declaring
dividends or other distributions,
making recommendations to stockholders,
nominating and appointing corporate officers,
amending bylaws,
approving a plan of merger,
selling the remainder of the companys start-up stock shares, and
any other issues authorized by a majority of shares,
buying and selling the CEOs personal stock,
functioning as a stock market for our shares,
and in general having the power to set values on just about everything we each put into or take out of the company.
4. To empower the CEO to perform all duties normally performed
by an individual landowner, specifically:
selling, leasing, and/or
renting our land,
signing deeds, leases, etc. in behalf of our corporation
signing mortgages and otherwise borrowing money in behalf of our corporation
Check to release CEO of stock liquidity requirements for your shares.
Check to vote for
Ray as CEO. Or
Check to vote for Guy as CEO. Or
Check to vote for Jim as CEO. Or
Check to vote for
someone else as CEO:
Signed and dated by stockholder
(and joint tenant if owned jointly)
STOCKHOLDERS RIGHTS
To a large degree, by signing this
unanimous agreement we are giving up the traditional rights of minority stockholders. I would like to make the case that
in exchange we are getting a far better system, and, therefore, greater rights.
This should already
be quite clear from everything you have seen so far. If you are not 100% sure that this system is the best for you and for
all of us together, please tell me now. If you need outside advice, you might first try your library, or better, a university
bookstore that has business courses. Another source is friends or relatives with business experience. It is OK to show others
our business plans and other confidential items if there is good reason. If you have a good attorney or CPA who helps you
with business, ask them. Another interesting source might be your local business arbitration council. They deal with after-the-fact
horror stories daily.
Traditional rights. I do not think any of us would have to look far in our circle of friends or family
to find someone who has been shafted as a traditional minority stockholder in a small business. The fundamental problem
is that once your money is in, you can not get it back without expensive court proceedings. Given this, all of your other
rights are meaningless. The only rights you had anyway were the right to elect directors, and to have an annual meeting.
Since the majority of shares elects the majority of the directors who in turn rule the company, this right is pointless.
Since the meeting may be either canceled or reduced to you sitting across the table from a bored CEO with a stack of proxies
that outvote you, this is equally pointless. Not only do minority shares get shafted for the entire course of the company,
but also when a company with this system is sold, it is common to give one price for the majority shares and a lower price
for the minority shares. This system is so bad I would have a real hard time asking you to take such a position. I have
never known a soul who had a good outcome as a pure minority stockholder in a small everyday business. (Of course I have
seen it work out fine to be primarily an employee and also get a few shares as a benefit. And of course, if the business
takes off like a rocket things go fine for all.)
The biggest disadvantage
of the standard format is that it encourages brain drain. Many small companies never grow because their equity system is
so inflexible and exploitative that potentially great partners are lost.
Your rights
in my system. Let us face
it, with one percent of my company you are not going to run the company in this system either. However, the primary difference
is that if you do not like the way things are being run you can sell out, very easily, and with no penalty, and at a price
that is as fair as possible. That one right, even though it is limited in many ways, is more meaningful than any other minority
right.
I also like our election system far more than just electing a board or voting by proxy.
I think we would all enjoy a board
meeting, and we would actually get a lot done. As soon as it is reasonable we will do so, and all of us will be welcome to
attend, of course. My only problem is with requiring it, every year, with all the quorums, proxies, etc, just to keep on
doing what we are doing. It can make simple corporate housekeeping a major trouble and expense, and we just do not need it.
I am interested
in your comments about our stock plan or anything else.
Ray
REFERENCES AND OTHER ENDNOTES
[1]
Justification for goodwill
Goodwill defined. Goodwill is used to describe a value that is real in an accounting sense, but cannot
be described in normal accounting terms. If you look in accounting or financial textbooks, such as Brighams Financial Management(1st
ed.), page 752, you will see it used when someone buys a company for more than its book value: Goodwill represents the excess
paid for a firm over and above the appraised value of the physical assets purchased. Goodwill represents payment both for
intangibles such as patents and also for organization value that might arise [for example] from having an effective sales
force. We will be using it to describe the value of having a person in our organization. Bear in mind that we are starting
from essentially nothing in a book value sense - just a patch of swamp land, a few cypress trees, and very little commitment
to do much besides watching the trees grow. This is why the values are as low as they are.
Ray Grogan. (Thats me.) I have my share of the goodwill because of, um, my great vision to plant
the cypress trees as a potential building foundation. Another value that I bring to the group is a fair training in science
and business (BS in tropical ag, MBA in finance). I designed this stock plan. I have a fair amount of drive to see this project
through, and tend to get up there and take care of those trees more than anyone else does. Hey, and do not forget the truck.
Jim Hayes. Jim helped with the original survey and cypress planting. He found the cattail area
and cleared / planted it while the rest of us were squandering time out in the California grass trying to find property
corners. Jim has helped the longest / steadiest, albeit with some gaps while off-island. Jim greatly enlarged the surf club
and surf skills of the members, which made possible a steady stream of helpers on post-surfing swamp forays. Jim has also
shaped / made most of the surfboards, which made it possible to come to our current level of mastery of the waves at Haleiwa
Alii beach, which made trips to the swamp fun and feasible.
Guy Miller. It was Guy who found this fine opportunity in the first place, organized the survey trip, and gave us surf
bums a chance to jump in. Guy held all of the real estate and financial ends together over the years. He followed through
with his original verbal promise of the Hana Hui getting up to 20% of his original third. Guy got and deserved a few extra
percentage points in the set up for being old money and long money.
[2]
Corporate owners.
If a company owns our stock, the CEO will treat whomever it is we deal with as if they were the owner. We will assume this person is empowered by their own company to be buying and selling in behalf of their company. If our company owns stock of other companies, our CEO will act in our behalf.
[3] Reports to lost stockholders, etc. If you havent gotten
a stockholders report, you should ask. If you do not keep the CEO posted on your mailing address, it may be tough toodles.
We wont jerk your stock away just because we lose track of you for a few years, but if something is finalized without
you, then you do miss out. The obvious example is if we sell the property and distribute all the money. If you show up after
its all gone you do not get your share. Another reports issue is these bylaws. No way am I going to print up copies for
everyone and mail them out at company expense. Most people just get a little mumbo-jumbo in my noisy truck on the way to
surf at 4 AM. (However, you are welcome to a copy if you ask and buy me a beer for postage.) Now, even though you do not
usually get a copy of the bylaws, it is still your responsibility to keep up with how our stupid little rules affect you.
A similar issue is the stock clubs. Generally if youre just a member of a stock club like the Hana Hui, youll just get Hana
Hui reports, which will be little summaries.
[4] Liquid reserves for stock
market. By shares outstanding I mean shares that I do not own. In
the present case, this would be:
Total shares sold now:
1,000
Less my shares 155
Shares outstanding 845
@
$14 per share $11,830
10% of this is $ 1,183
That is too much
for me to handle, so I asked Guy and Jim to release me from this provision for their shares:
Shares outstanding 845
Less Guys shares -388
Less Jims shares -400
Shares outstanding
now 57 (ie, the
rest of the Hana Hui)
@ $14 per share
$802
10% of this is $ 80 (about 5 shares)
So I am required
to maintain $ 80 of my own instantly
liquid reserves to buy back shares. This may be in cash, cash equivalents like CDs or securities, or in an unused line of
credit such as a home equity account.
I may ask large, independently wealthy, stockholders to
release me from this requirement for their shares.
[5] Shares
that are traded. By personally I mean my own shares, not company
shares, and with my own money, not company money. The whole point of this rule is to force me to put my money where my mouth
is. The exception to this is when we have a large block of company owned stock such as right now. In this case I will be
selling company shares instead of my own. Indeed, I may be buying them myself for either personal investment or if the company
needs the money. (My purchases will be at the same price as everyone elses; see the discussions below about insider trading.)
However, the CEO can never sell his or her shares to the company, nor have the company buy shares from others. (Well,
there might be some reason, so lets say never without the express permission of the majority of shares other
than his or her own shares.)
[6]
Oral instructions.
Note that we will buy and sell stock with nothing more than a conversation. I will write a note for my accounting. If you
want a written receipt I will gladly give you one. We do not have printed stock certificates, etc. Your next stockholders
report will list what you bought or sold, and what you now own, and that is your record. If you see I made a mistake, I
will correct it if I have some memory or record of it. Please help me by keeping your own records and by letting me know
if the report is wrong.
[7] Trading of stock when it
is apparent something is brewing. Lets first use an example from
my fantasies. Lets say Lennys family gives us a right of way for $3K. And, lets say our test build goes fine (the cypress
trees along the creek get to be 6in diameter fairly soon, we build a platform bridge there, and it is solid 5 years later).
And, hell, lets say by then the main house trees are a foot around at the base. Its to the point that it is obvious that
we could really build some kind of house there, and park a car there. And get utilities. And the Haleiwa real estate market
has taken off. And taro land is king. The rest of the swamp is beautiful green taro leaves. No mosquitoes, no California
grass. We have trails and bridges down to the beach. Tourists are taking canoe rides through the canals lined with cypress
trees. Did I leave out anything? During this slow growth phase, there may have been some stock bought and sold. Lets say
our stock is trading at about $30 a share (i.e., our original valuation of $14 has more than doubled). But then we get to
something that qualifies as something big enough to close the stock market. We make a deal to build and rent out a pretty
nice house, and we think we will have an income of $12,000 per year net. (If we have 1,000 shares, thats $12/share income;
at a 20% return, that income is worth about $60/share.) The closing of this deal is of course major news, and the market
would be closed while everyone was notified. Let us presume many of us decide to purchase more shares ourselves because
of this good news. I would take all of the buy orders and treat them equally and sell them all at the same price, lets say
$40 a share, and then reopen the market at that price. If some people continued to want to buy shares, and our forecasts
looked reasonable, I would keep raising the price per share, and keep the market open as long as the blocks were of reasonable
size. We could even go above about $60 a share. These later stock trades would not be considered unusual, and would just
be reported in the regular monthly stockholders report.
Now lets use an example of bad times. Things are not going great and we are all low
on funds and confidence. Salt has killed the trees, the roots are rotting and wont make a foundation; we still have no access.
Our stock price is actually still fairly high, because we are all sort of bravely hanging on. (The price usually doesnt change
unless someone wants to buy or sell, and usually in this situation no one wants to make things worse by selling, and certainly
no one wants to buy.) I am so low on funds I can barely cover the 10% liquidity rule. All of a sudden one of us has an emergency
that requires him to sell a big chunk of stock, that would wipe out my reserves. I would have to close the market and do
something. The guy that had to sell would get a very low price per share for his block. I would have to make the price low
enough to reflect how bad things were going already, and to some degree reflecting the fact that the rest of us would be
stuck with stock that no longer had any liquidity. If the lack of liquidity spooked others into selling, the price per share
could be as low as the reserves divided by all the shares for sale. If all shares outstanding were to be sold, that would
be about ten cents on the dollar. The owners of the big blocks of shares that released the CEO from the liquidity rule (Guy
and Jim) are essentially in the same boat as the CEO, you can not sell out under the liquidity rule. However, that is not
to say they will not have made some stock sales as we neared the bottom. It is up to the CEO to give some balance to keeping
the market alive for the small stockholders versus some kind of fairness to the people who are doing the most to keep the
project going. The CEO may decide to throw them into the final bottom feeding stock sale. Then we could end up with $80 to
cover about 850 shares (all the stock except the CEOs, who cant sell out). That works out to less that a dime for stock
we now say is worth $14. I hope it is clear that if things go bad we all lose everything. (You would think that surely we
could liquidate the whole project and get more than $80, but that is not always true. For example, I didnt go into an example
with a credit problem, but we could stupidly borrow money on the land, then squander it, and end up owing more than the
property is worth. People do it all the time.)
The main point of these examples is that the rules are set up such that nobody gets
special privileges to buy or sell large blocks unfairly.
[8] Yikes, responsibility! (Big stockholders automatically
being candidates for CEO.) If you are one of these, you can weasel out of this, and the next guy down gets on the hot seat.
The point of this rule is not to terrorize everyone with a lot of responsibility they do not want, although it may seem
that way. The idea is to make it painless to run against even a well-entrenched CEO, and that has a multitude of advantages.
First of all, it will tend to keep the CEO from making the salary and perks excessively lucrative. It also gives us, at
least in this case, two very reasonable candidates who could do a splendid job of running our company.
[9] Propaganda in reports. In our free press you can also
just express dissident views. The reports will also note all requests for an election, even if there was not enough support
for one.
[10] The votes are reported. Hardly a secret ballot, which
does have advantages, but here is why. We can all see who is voting for whom, which will tell us if anyone is dissatisfied
with the CEO, which could be very important information. Also, if you are the dissatisfied voter, you really get to express
yourself, and perhaps even find kindred spirits. You can also check for accuracy, cheaply, whereas secret ballots would require
more elaborate measures to prevent rigging. This system may need a little more evolution; perhaps each vote could also have
a rating, say 1 to 10, so you could still vote for the guy but express room for improvement. Comments?
[11] Votes for outside interests. This may seem like a highly unusual provision, but it is similar to getting endorsements,
etc., just more direct. It is also similar to many companies that are owned in part by employee groups. If you have business
experience, I think you will see what I am driving at by giving these outside interests voting power. All three of these,
employees, customers, and suppliers, are absolutely critical to the company. (For our land venture, these groups may include
the neighbors who give us right of way, the renters in whatever we build, and the people doing the work.) Every move the
CEO makes affects the balance between all interests. If the CEO is not being reasonable to these groups, in the long run
we will pay for that. We should see it, in the form of losing votes, if there is some imbalance festering. For example,
if the employees are being shafted, then they can vote against the CEO. Since the votes are recorded, this will be as plain
as day in the election report.
Here is how the mechanics go: We now
have 1,000 shares, or votes. We could create say 300 extra votes and still be within the 25% rule. (300/1300 = 23%). So
we do it something like this:
employees: 100 votes
(Then this gets further divided, like to the three biggest employees according to number of hours, or paychecks or
something.)
renters or neighbors: 100 votes (Same thing, say
divided amongst the 3 room mates or taro farmers.)
right-of-way owners: 100 votes (These might be
divided amongst the members of the Tantog family, to include even the guys that most want to exclude us. The idea is to
give them some control over us.)
[12]
Taxes. The goodwill
shares are called section 351 shares. The reason there is no tax when you get them is because nothing taxable has occurred.
It is the same as if you incorporated yourself and declared your corporation to be worth a million dollars. However, once
you sell or otherwise realize this income, it is reportable and taxable then. From the companys point of view, it is the
same. If we turn around and sell the land for a million, we will have to pay taxes on the full amount (well, less our meager
cash basis). If you (or your accountant) would like a more detailed explanation, see Federal Taxation of Corporations, Kramer
1989, Prentice-Hall, chapter 2, esp. pages 32 and 37. I can also show you the income tax returns from a similar corporation,
which have been accepted by the IRS and State of HI since 1990 without grief.
CONSENT OF STOCKHOLDER (Repeated from above. I have not asked people to do this yet, but someday please print
out, sign, and return)
I consent to this
stockholders agreement. I fully realize that there are several provisions that give me less rights than a standard stockholders
agreement, and they are listed below. I specifically agree to these provisions, in consideration for the other benefits of
our agreement.
1. To dispense with a required annual stockholders meeting. We may or may not have a stockholders meeting, but
it is not required, nor is it required to get my permission each year not to have the meeting.
2. To dispense with a required annual stockholders election, as above.
3. To empower the CEO to perform all duties normally performed
by a board of directors, specifically:
declaring
dividends or other distributions,
making recommendations to stockholders,
nominating and appointing corporate officers,
amending bylaws,
approving a plan of merger,
selling the remainder of the companys start-up stock shares, and any other issues authorized by a majority of shares,
buying and selling the
CEOs personal stock,
functioning as a stock market for our shares,
and in general having the power to set values on just about everything we each put into or take out of the company.
4. To empower the CEO to perform all duties normally performed
by an individual landowner, specifically:
selling, leasing, and/or
renting our land,
signing deeds, leases, etc. in behalf of our corporation
signing mortgages and otherwise borrowing money in behalf of our corporation
Check to release
CEO of stock liquidity requirements for your shares.
Check to vote for Ray as CEO. Or
Check to vote for Guy as CEO. Or
Check to vote for
Jim as CEO. Or
Check to vote for someone else as CEO:
Signed and dated
by stockholder
(and joint tenant if owned jointly)
