Stock
options
Raising fund for financing a company's operation
is a complex decision as it not only encompasses
consideration for current financing but also in
the future. For an entrepreneurship, seed money
is crucial for start ups. However, in the long
run as the company expands cash flow tend to dwindle
and the most crucial question that the entrepreneur
is faced with whether to go public or not. Weighing
the pros and cons of private ownership versus
public is not merely about funding from banks
or from the public. In fact the answer to go public
or not depend on the operations, strategic plans,
business expansion plans as well as the growth
performance of the company. Stock options therefore
are a good source for funding an enterprise that
is in dire need of cash for working capital for
the current term as well as for the future without
debt obligations. Within this dimension the entrepreneur
also has the choice to go entirely public or issue
shares to private investors only.
According to Sean P. Melvin (2002) entrepreneur
reap the best benefits when they issue shares
to private investors. Not only would they enjoy
the benefit of having liquidity without debt responsibilities
but they are also assured of the people they are
dealing with. However, most of the entrepreneurs
face dire consequences of going public of handing
and reporting business operations and decisions
to the investors. At times investors are so keen
on taking part in the day to day operations that
they tend to become a hindrance rather than help
for the company. On the other hand, others are
of the opinion that in going public and issuing
shares privately allows expertise to pour in and
help the company to shape up financially (if it
is in dire financial situation). Alternatively,
private issuance to executives and employees are
perhaps the most feasible as it allows the ownership
to stay within the company, active participation
in decision making and expert knowledge from individuals
who are aware of the business. Stock options for
employees not only help the company to expand
financially but also to enhance performance according
to the strategic plan of the company.
Despite these facts, it must be noted that stock
options vary from industry to industry and from
firm to firm. For example in the case of Internet
Securities, Inc. it is a technology company that
is offering online services to multitude users.
The viability of a company depends on the industry
to which it belongs. ISI belongs to the technology
industry which is considered to be one of the
most vulnerable industries at the moment. With
the stock exchange crisis during the 1990s, investors
are not only justified in refusing to invest in
tech IPOs and floated shares but they are also
cautious in investing in private issuance. They
are of the opinion that tech shares are risky
and the high returns on the shares does not justify
for the risks involved. For this reason investors
and employees would think twice before they subscribe
to ISI's shares.
Muller’s dilemma
Before ISI decides to go for IPO or private issuance,
Muller must consider the type of returns, the
timeline for performance as well as the intended
use for the funds generated. These must be clearly
stated in the report for the investors. Apart
from that Muller needs to understand the legalities
of issuing private shares or even an IPO so that
once the price is set, there are no confusions
regarding rights to sell assets, agreements to
inspect books and records as well as election
of director for the firm. Thus as Melvin (2002)
states, the bottom-line is whether the company
in question is willing to give up control for
equity. Issuance oaf stocks thus sheds responsibilities
from the owner and transfer it to the shareholders,
and for this reason shareholders tend to take
control of the company in the interest of their
returns in the future. Planning and growth progression
must therefore be clearly identified so as to
clear any doubts or reservations that investors
have regarding the company or the industry.
Given the above brief overview of stock options,
the author is of the opinion that ISI should opt
for private issuance rather than go for IPO. Apart
from the above reasons it must be noted that IPO
amidst a shaky economy is not a feasible which
does not guarantee growth either for the industry
or the company alike. However, ISI is unique in
its own market in that it provides information
pertaining to emerging markets. From the case,
one learns that ISI specialize in information
of far off countries where corporate information
of local companies is rare. Exhibit 11 shows that
ISI have high ratings in India, Brazil, North
America, Russia, Hungary, European countries and
Czech Republic. Apart from North America the rest
of the countries are considered to be closed where
business enterprise and investment information
is concerned. ISI has created a niche for itself
in these markets.
Another aspect that is of importance to ISI's
financial future is that the company has been
operating on seed money and angel funds (Exhibit
14). It has only been recently that the company
decided to formalize its management and financial
status. Reorganization coupled with economic disparity
contributed to the loss of income, and not sales
in itself. This is evidence in the financial statements
provided. Hence the strategic business plan has
been effective but fund utilization has not been
efficient. To revive the company, Muller has to
reorganize the organizational structure so that
it decreases its vertical integration and instead
concentrate on horizontal integration. Not only
this would allow the company to broaden the scope
and span of its operational costs but it would
also ensure there is less consumption of investment
fund on overheads. Instead the investment fund
generated through share issuance should be utilized
in creating niche business strategies and forming
alliances with strategic partners.
Some of the partners for consideration include
Bloomberg, Reuters and Dow Jones as these are
the companies that provide financial information
to companies, investors, government and the public.
Although they do not specifically specialize in
emerging markets, ISI's portfolio would complement
their businesses and likewise they would complement
ISI's business structure. On the other hand, ISI
would be hard pressed to compete against BradyNet,
Emerging Markets Companion, and Bridge Information
Systems. These companies are not only well established
in the field of information and technology but
they also have the client base to generate revenue
to cover their expenses and provide for working
capital. In the case of ISI on the other hand
though the company generates adequate revenue
nevertheless it does not cover for overheads (Exhibit
8) less provides for working capital. The major
expenditure, that is operating activities and
expenses absorb most of the capital and revenue.
Other than that the company's business avenues,
scope for expansion as well as future is bright.
Conclusion
To resolve the author is of the opinion
that ISI should revise is financial plans so that
it resolve these issues. Muller should consider
private share issuance so that it would allow
him to have expert opinions from the private investors
as well as from his employees (through stock options).
Furthermore, efforts towards revising the financial
plans such as cutting down of administrative overheads,
consolidation of operations, and dissemination
of administrative cost of global branches to the
local partners all would enable the company to
provide a positive picture for investors. Similarly,
forming strategic alliances would also back up
the company's position for investors to consider
it as a viable private investment company.
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