Things a Founding Business Owner May Not Want to Do Once Investors Have Been Sold Stock in the Company

Create highly favorable executive employment and benefit plans.

Fly First Class on commercial airlines or charter flights.

Have spouse or others not directly employed by the company accompany on company paid business trips.

Buy or lease expensive cars for executive use.

Attend theatrical, cultural or sports events alone or with others at company expense.

Set terms of transactions with friends or affiliated parties on more favorable terms than normal customers.*

Hire friends and family members when not as appropriate as others or on more favorable terms.

Have company acquire intellectual and other property from friends or affiliated parties on overly favorable terms.

Situate and furnish the company in offices convenient for executives but more expensive than necessary.

At company expense enjoy club and other organization membership absent demonstrable business purpose.

Use the services of attorneys and others paid by the company for personal related assignments and projects.

Charge the company for family’s travel related expenses when accompanying an executive on a business trip.

Pay extremely generous bonuses to executives and other staff members in periods of high profitability.

The above and many other actions can be taken as prerogatives by successful business founders before becoming fiduciaries for investors having bought stock in the company. Of course, if the perks are found to be unwarranted or excessive by taxing authorities there may be fines and penalties as the true reported profitability of the company will have been reduced and that which should have been income or benefit to the recipients increased.

Investors having acquired a royalty from the company are only interested in revenues and revenue growth and therefore would only be possibly concerned by 1 of the 13 items listed.

The sale of products or services to a friend or affiliate of the founder is possibly concerning as it is related to revenues and marked with an asterisk at the end of the sentence. If the unusually favorable terms related to the timing of payment (giving of credit more generously than to other customers) the royalty investor would have no basis for concern as eventually there would be revenues.

There is great satisfaction and benefit in owning a successful company and this is why I believe the royalties are both the best ways of investing in and financing of privately-owned companies. Royalties do not vote and have no ownership interest in the royalty issuing company.

Arthur Lipper, Chairman, British Far East Holdings Ltd.

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