Is this a smart stock deal?

Dec. 1, 1996
Q: I recently joined a small university faculty. A local company wants to give me substantial shares of stock to have me work on a project I initiated elsewhere as a post doc. How should I handle this?
1304qa Chang New

Q: I recently joined a small university faculty. A local company wants to give me substantial shares of stock to have me work on a project I initiated elsewhere as a post doc. How should I handle this?

A: First of all, congratulations! The issues you need to look at are potential conflict of interest with your university, expectations of the company, and the value of the stock. Questions to ask about sources of potential conflict are who will own the intellectual property on work done from this point forward, how might this relationship bias your research focus, how will university property and students be used, and how much time will you spend on this project. Conflicts are unavoidable, but they can be dealt with through total disclosure. That means you should define the project in detail so everyone can agree up front. For sure you must have an attitude of openness and fair dealing if this is going to work. When in doubt, discuss the issues and get written understanding.

Generally inventions are licensed, rarely paid for by shares of stock. Either the company is very generous, it expects a lot from you, or the stock isn`t worth very much. Get some clear definition before you jump at this opportunity. Have fun!

Q: I want to start a company. Should I incorporate? If so, should I consider a C or S corporation?

A: Yes, you should definitely incorporate if you want to protect your personal assets from potential law suits resulting from your business activities. If you operate as a sole proprietorship or partnership, all the assets you and your partners own are at risk.

Incorporating creates a legal entity, and you effectively become an employee of the corporation. Employees can`t legally be sued for company matters. The downside of incorporating comes from the IRS. The most common type of corporation is the C corp., which is taxed as an entity. That means you cannot use company losses as deductions against your personal income. And if you ever take money out of the corporation, you`d have to pay taxes on what is essentially a dividend.

The S corp., and more recently the limited liability company (LLC), are there to get around this double-taxation problem. They provide you with liability protection like a C corp. but are taxed like a partnership. The LLC is preferred now because it eliminates some of the restrictions of the S corp. such as not allowing corporate investors. The LLC is practical only when you have a small number of shareholders such as in a closely held company.

Before deciding how you want to incorporate, establish a long-term vision for your company. Changing from one form to another is equivalent to passing an assets from one entity to another, making it a taxable event. The legal system is fascinatingly logical. It`s hard to win `em all, isn`t it? The LLC is very new. Most lawyers and accountants are still sorting through its requirements. So please get expert advice before proceeding.

Q: My new company is ready to ramp up production quickly. How do I go about finding good manufacturing people?

A: Assuming you are a hot company, first find a vice president of manufacturing. He or she can help you recruit and train staff and build an organization. It is not uncommon to go to recruiters for senior executives in this area. This tactic is likely to yield you a much broader search base. A good recruiter also has the experience to understand the personality fit and specific business needs that will better define the right candidate. Another very important role recruiters perform is to present both sides in their best light to start the relationship down a successful path.

There is a shortage of good people in manufacturing and operations. That`s why I keep encouraging engineers to consider this as a career option. Our industry can certainly benefit from raising our sophistication in this area. I hope your question will stimulate input from knowledgeable manufacturing executives. Also, I`ll pass on the names if anyone wants to get in touch with you.

Q: I have an opportunity to cash in on some stock options. The stock price has recovered some from recent drops but is substantially below the high. Should I sell?

A: It is always easier to make a decision to buy than to sell. That`s human nature, not letting go. In reality, the money you don`t make won`t hurt you. The best advice I`ve learned is to ask yourself if you would buy the stock. If you wouldn`t, then you must have the discipline to sell. Investing is a defensive game. Making money is not the main focus, preserving capital is. I don`t have enough information to give you good advice. But when in doubt, sell!

About the Author

Milton Chang

MILTON CHANG of Incubic Management was president of Newport and New Focus. He is currently director of mBio Diagnostics and Aurrion; a trustee of Caltech; a member of the SEC Advisory Committee on Small and Emerging Companies; and serves on advisory boards and mentors entrepreneurs. Chang is a Fellow of IEEE, OSA, and LIA. Direct your business, management, and career questions to him at [email protected], and check out his book Toward Entrepreneurship at www.miltonchang.com.

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