How can I develop a business while employed?

Oct. 1, 2001
I have a new business idea that's somewhat related to my job. How do I find out from potential customers what the market potential is, without getting into trouble with my company?
1304qa Chang New
Q: I have a new business idea that's somewhat related to my job. How do I find out from potential customers what the market potential is, without getting into trouble with my company?A: What most people do is to talk in confidence to a few potential customers and friends they trust, and also research the market on the side, but this is not a good approach. If you ever developed this idea into a successful business, it can get ugly if your current employer ever decides to put a claim on its ownership. The discussions you are having, even though in secret, can be used to establish that your invention was made while still employed. If the case ever went to court, people you talked to would have little choice but to tell the truth once they were put on the witness stand.

Instead, I encourage you to get a release from the company as soon as possible. In most states, employees are allowed to work on projects unrelated to their jobs without incurring any obligation to the company, so long as they have not used company time or resources. Given that fact, and because the value of your idea is speculative at this stage, this is probably the most likely time company management would be willing to play fair with an employee. You may want to point out the aspects that make the idea unrelated to your job and at the same time promise that you would not allow these activities to interfere with your productivity. Given that you sounded a bit tentative about whether the idea does relate to your job, a little sharing on your part, like offering royalty to the company in exchange for some leeway, can go a long way toward avoiding hassles from your current company while pursuing your dream.

Q: What mechanisms can we use to buy out the passive owner of a small business we work for? We are considering listing it on regional stock exchanges, or building up the company to be acquired afterward.A: This question comes up often because the cottage-industry nature of our industry has produced many privately owned businesses with aging owners. Your question boils down to finding ways to finance the purchase, and that will depend on the growth and profitability potentials of the company. On the aggressive side, you can do a leveraged buyout: leveraging or borrowing against the assets of the company to buy out the owner. The risk here is your ability to service the debt with cash to be generated from the business. The other end of the risk spectrum is to have investors buy out the owner and give the management a piece of the action in the process. There you'll have to sell your vision to venture capitalists (VCs), and if you're successful you would be reporting to new owners who would likely have a short-term focus on results. Being bought is easier said than done, because "companies are bought, not sold." Listing on a small regional stock exchange, in my opinion, is the worst of all worlds. In reality, you don't have liquidity, but you do have all the legal and accounting issues and the expenses of being a public company. Several laser companies tried that years ago and did not fare very well.

What makes sense to me is for you to negotiate with the current owner to allow the management to increase their ownership over time by meeting certain performance goals. The owner would have a motivated team working hard for him to grow the business and everyone gets to share a piece of the up side. In this case, changes are minimal and no one has to deal with the risks of big unknowns.

Q: What is going to happen to VCs who have incurred big losses in the telecom bubble?A: Venture capitalists can live off the funds they have raised unless they choose not to. Most VC's funds are ten-year partnerships with investors committed to invest a fixed amount of money during that period. As VCs make investments, they make capital calls. Investors also have to pay a percentage of their committed capital for operating expenses no matter how poorly the fund is performing. When the partnership ends, typically 20% to 25% of the profits go to the VC, and that's the big payday VCs look forward to. A VC in a loss position is better off abandoning the fund to start fresh without having to build profit from a negative position. If they choose to walk, investors will lose a portion of their initial investments, but there would be no more capital calls. Given that there is lost confidence, that's probably what investors would like to see happen as well. In the coming months, many of the high-profile, high-valuation startups are going to be shut down, and we can expect many funds to end as well.
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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