Employee Stock Option Plans

ESOPs are another potential source of funding used by existing com­panies that have high confidence in the stability of their future earn­ings and cash flow. An ESOP is a program in which the employees become investors in the company, thereby creating an internal source of funding. An ESOP is a tax-qualified retirement benefit plan. In essence, an ESOP borrows money, usually from a bank or insurance company, and uses the cash proceeds to buy the company's stock (usu­ally from the owners or the treasury). The stock then becomes collat­eral for the bank note, while the owners or treasury have cash that can be used for a variety of purposes. For the lender, 50 percent of the inter­est earned on the loan to the ESOP is tax exempt. The company makes annual tax-deductible contributions - of both interest and principal - to the ESOP in an amount needed to service the bank loan. "The com­bination of being able to invest in employer stock and to benefit from its many tax advantages make the ESOP an attractive tool."24

Keeping Current About Capital Markets

One picture is vivid from all this: capital markets, especially for closely held, private companies right through the initial public offering, are dynamic, volatile, asymmetrical, and imperfect. Keeping abreast of what is happening in the capital markets in the six to twelve months prior to a major capital infusion can save invaluable time and hundreds of thou­sands, and occasionally millions, of dollars. Some of the best sources currently available to keep you informed include the following:

• National Venture Capital Association (nvca.org)

• Daniel R. Garner, Robert R. Owen, and Robert R. Conway, The Ernst & Young Guide to Raising Capital (New York: John Wiley & Sons, 1991)

• David Schutt, ed., Pratt's Guide to Venture Capital Sources (New York: Venture Economics Publishing, 2003)

• Venture Capital Journal (published monthly by Venture Economics Publishing)

• Venture Finance (IPO Reporter)

• Inc.

• Red Herring (a Silicon Valley magazine)

• Venture One (database and reports on venture capital from California)

Conclusion

Appreciating the capital markets as a food chain looking for companies to invest in is key to understanding their motivations and requirements. You have to determine the need and desire for outside investors and who they should be.

America's unique capital markets include a wide array of private investors, from angels to venture capitalists. The search for capital can be very time consuming, and whom you obtain money from is often more important than how much.

It is said that the only thing that is harder to get from a venture cap­italist than a "yes" is a "no." Fortunately for you, the booming rebirth of classic venture capital in the 1990s has raised the valuations and the sources available. Those small business owners who know what and whom to look for - and look out for - increase their odds for success.

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