"Let’s review the employment contract first, shall we?” continued Tishman. “A five-year deal with a Year One base of 200,000 increasing to 400,000 in Years Two and Three, and 550,000 in Years Four and Five.”
Victor hesitated as if to feign concern. “Franklin, I’ve been thinking about the proposed Year One base. If it were just me, I could live with it. I understand the long-term rewards. But, as you know, we’ve got a bit of a complication, it’s called Sandra. You saw how we live, what she expects. I think she’d make me bail on the deal rather than permit me to take such a salary cut.”
“I understand,” said Franklin, annoyed but not showing it. “But you’re being granted twenty million founder shares.” Victor had no idea that Franklin had five times that number plus an equal number of options. “Do you have any idea what that’s going to be worth?” continued Franklin. “Assume our stock rises to fifty dollars a share within five years, maybe less. I’ve done that before.”
“Victor, I can appreciate Sandra’s position,” chimed in Tishman, putting on his sincere face. “I’ve been married twice myself.” Victor didn’t know Tishman turned gay after his second wife left for a younger woman. “You must realize that in transactions of this nature, the investing public’s perception of the deal is critically important.
“It’s in the best interest of everybody, particularly you and Franklin as the primary founders, have to be perceived as a frugal management team who understands building shareholder value comes first, personal reward second, particularly in the start-up phase. I might also point out that you do have a generous performance-based annual bonus provision, which will amount to hundreds of thousands per annum.”
“Agreed,” said Victor, getting ready to play cards he didn’t have. “I’ve always believed in delivering first, getting rewarded second. But I’ve been around the block; bonuses are discretionary. Franklin, you understand my dilemma...”
“Okay, okay,” Franklin jumped in. “Let’s not cause Sandra to fret. Bump Victor’s Year One base to $250,000 and adjust the Year Two to Five numbers proportionately.”
~
That settled, Tishman pressed forward. “Let’s move on to the earn-out provision of the contract. Per our previous conversations, your annual bonus will be equal to three percent of the company’s after-tax profits during the duration of your five-year employment contract. The bonus will be payable in ITI stock pegged at the then market price.”
Victor again surprised the boys. “Can somebody explain why Franklin’s bonus formula is completely different?”
“I beg your pardon?” said Tishman, sensing he under-estimated Victor.
“Franklin’s number is five percent. That seems like an appropriate spread between the number-one and number-two guys. But why is his five percent before tax and my 3 percent after-tax?”
“Allyn, is Victor correct?” asked Ryman theatrically. “If he is, that’s not fair.”
Tishman got the message. “I misunderstood the deal. I’ll revise that section.”
“And what about the loan documents?” asked Victor.
Tishman glared at Ryman. “What loan papers?”
“It never occurred to me we needed papers. My word is my bond,” responded Franklin.
“I know that Franklin, but this is about providing our mutual friend the comfort she needs.”
“Gentlemen, will you please explain what’s going on,” said Tishman, flabbergasted at Ryman’s largess. He knew a tax-free loan if audited, would not pass the IRS smell test.
Diamond was also concerned. How was the cash-strapped Ryman going to come up with a quarter of a million dollars in the next thirty to sixty days? “Would you fellows mind if we take a break?” asked Diamond. “Nature calls.” Franklin got the signal. He followed Diamond into the bathroom.
“Franklin, where is this $250,000 pre-offering loan coming from?”
“You.”
“Me? Hardly.”
“Martin, this is not a discussion. I’ve made you millions. I covered your ass during those SEC inquiries. You owe me.”
“And if I refuse?”
“Your ITI founder stock goes back to the treasury, and I blow the whistle and take you down.”
“You wouldn’t.”
“Try me, motherfucker.”
~
“Boys, now that we’ve wrapped up the nickel and dime haggling, I’ve got some real news on the financing front. The Penny Boys love Martin’s subject-to acquisition strategy.”
“Sorry," Victor cut in. “Why’s that?”
“Simple, my boy,” sighed Diamond as he glanced at the ceiling. “We get the money first and buy the companies later. And, avoid those costly SEC cover-your-ass acquisition guidelines.”
“Sounds like we’re buying a car or a house with no money down,” joked Victor. Nobody laughed.
Chapter 14
600,000,000 Shares
Creating value out of thin air is a talent reserved for perverted minds.
“Gentlemen, as I was saying before I was so rudely interrupted,” continued Ryman. “Recently, I was introduced to one of the penny stock market’s leading underwriters, Norwest Securities, just across the river in Hoboken.
“I’m pretty confident they have the potential to raise larger sums. They have a state-of-the-art trading room and a good track record in completing IPOs and performing the post-IPO market-maker function, which, as you can appreciate, is critically important to our ongoing acquisition strategy. But most of all, they have a database of investors who lost their shirts iduring the last few years when the Dow went on a roller-coaster ride.”
Franklin decided to throw Victor an “ethical” bone. “First, let me say these are not people you and I would ever willingly invite to lunch, but I’d make a deal with the devil if it got us where we wanted to go.” Franklin then pulled a little red devil out of his pocket. “Say hello to my friend, Satan Jones.” They all laughed, but Franklin wasn’t kidding. “Seriously, once we’ve completed the first round of financing and get a collection of ‘subject-to’ acquisitions under our belt, we’ll be ready for the prime-time investment bankers. The market will be on the mend, and we’ll have an attractive enough Pro-forma revenue base and an operating history to negotiate pretty favorable terms with the big boys.”
Diamond continued. “Our goal is to use Norwest to help us raise ten million and make a market in the stock during the critical first year. Franklin and I have developed a rationale to value the company at sixty million, so we only have to offer about fifteen percent to the public for ten million.”
“Martin, do you feel Norwest can put away an offering with such a high start-up evaluation?” asked Victor, to the surprise of everyone in the room.
“What I love about penny stock investors is that they take the long view. They all want to discover the next Microsoft so that they can make 50 and 100 times their investment. They’re comfortable taking a little more risk. They love the action. ITI is the perfect fit for that mindset. Do you realize Gates and Microsoft began as a penny stock? I think it was like nine cents.
“Norwest