Financing an enterprise

Front matter

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Preface

Under proper conditions it should be possible to finance any really good enterprise. As a matter of fact numerous enterprises are financed that cannot be designated as "good," and many are financed that are not only destitute of merit but absolutely fraudulent.

While all this is true, failures to finance enterprises are constantly occurring even where the enterprises have real merit and the conditions are fairly favorable. Such failures can be ascribed only to a disregard or ignorance of the principles and procedure of successful financing. The object of the present work is to set forth these principles as clearly as may be, to outline the requirements of a successful enterprise, to suggest methods of procedure, and to point out the mistakes more commonly made.

All this, while naturally applicable to the financings or refinancings of the larger and more stable undertakings, is not primarily intended for their use. Such enterprises can employ the services of technical experts in every line and command the attention of investment bankers. But the great multitude of enterprises to be financed are neither large nor stable. On the contrary they are small, undeveloped, or speculative — they lack the funds to employ experts and the qualities to attract investment bankers, and it is for such enterprises that the present work has been written.

The author must confess to much sympathy with these lesser enterprises whose promotion is so frequently undertaken by men unskilled in financial matters; by men of little experience; by men greatly in need of money — those enterprises unable to secure the able, expert advice and assistance which smooth the financial way of the better established or more fortunate undertakings. These small financings are, in fact, quite as important to the future wel-

VI PREFACE

fare of the country as those of greater immediate moment, for they make up in number what they lack in individual amount, and it is from these small and often doubtful beginnings that the great enterprises grow.

Standard Oil was at one time a struggling enterprise — struggling, it is true, to strangle its competitors, but nevertheless struggling; the Bell Telephone, one of the great commercial organizations of the country, was at its inception smaU, scorned by the business man, and of dubious future; the National City Bank, one of the great financial institutions of the world, was in its early history comparatively unimportant. To smn up the matter briefly, we must have the acorn before we can have the oak.

As the effective presentation and successful financing of an enterprise are not possible unless the points of view of both the man with the enterprise and the man with the money are known, the present volume treats its subject, so far as may be, from the standpoint — often widely divergent — of both parties. At the same time the work is written for the use of the man with the enterprise, and is neither designed nor intended to serve as an investor's manual.

When any practical work is pubHshed, and especially one on a financial subject, those who use the book naturally and rightly wish to know from what knowledge or experience it has been written. In response to this demand the author may say that for some fifteen years he was engaged in legal work coimected more or less directly with the financing of enterprises — work which brought him in contact with a very wide variety of promotions, with almost every phase of promotion procedure, and with all the ordinary — and some very extraordinary — methods of raising money. Since then, though not connected with promotion work, he has maintained his interest in current financing. From this general knowledge he has written.

When the first edition of " Financing an Enterprise" was pub- Hshed in 1907 it was, for business reasons, jssued under the name

PREFACE vu

'lE rancis Cooper." The reasons that required this nom de plume — for nom de plume it was — no longer exist, and the author, under his own name, very willingly assumes the responsibilities that such authorship involves. The fact that a work on practical finance has achieved a fair publishing success under the heavy handicap of anonymous authorship seems to indicate that it does meet some need.

The author trusts that these gleanings from experience will prove helpful to those into whose hands these volumes may come and save some of them at least from the costly and disastrous mistakes so common when enterprises are to be financed. He may add in conclusion that while he is not now engaged in promotion work, either directly or indirectly, he is still much interested in promotion problems and is desirous of making the present volumes of the greatest possible assistance to those who must solve these problems. He will therefore greatly appreciate any criticisms, suggestions, or experiences from those "in the field" which may help to make future editions more complete and more generally useful.

Hugh R. Conyngton.

New York City, May 15, 1921.

VOLUME I— THE ENTERPRISE

Part I — Conditions and Methods of Financing I Introductory 3

Status and Requirements of Financing Fraudulent Financing Stock-Selling Swindlers The Speculative Investment "Scotching" the Swindling Stock Salesman The Enterprise and Its Promoter What Enterprises Can Be Financed Requisites of Successful Financing

II Conditions of Financing

The Work of Financing — Conditions vs. Theory

When Financing Is Easy

When Financing Is Difficult

The Opportunity for the Good Enterprise

Reputation as a Basis for Financing

Ideal Conditions for Financing

III Methods or Financing i8

The Gradual Development Method

Objections to the Plan of Self- Development

A Successful Self-Development Venture

Making a Start

The "Help Yourself" Booth

Expansion of the Business

A Wrong Financial Plan

Side-Line Development

A Successful Side-Line Effort

Modifications of the Side-Line Plan

Advantages and Limitations of Side-Line Development

Borrowed Capital

Dangers of Borrowed Capital

Financing by Means of Credit

Moneyed Partners

Usual Plan of Financing

X CONTENTS

Part n — ^The Enterprise

IV A Sound Enterprise 35

Requisites of Success

An Unsound Enterprise

Legitimate Speculative Development

The Wayside Inn

An Unsound Quarry Proposition

An Ailing Sanitarium

A Useless Railroad

Why Unsound Enterprises Are Selected for Financing

Results of Financing Unsound Enterprises

Enterprises Dependent Upon Public Favor for Success

Floating a Breakfast Food

Forcing a Breakfast Food on the Public

Testing the Enterprise

V Efficient Management 46

Importance of Efficient Management

A Socialistic Experiment

Intellect vs. Organization

Inefficiency of Unorganized Effort

Requirements of Good Management

Unseen Losses of Inefficient Management

A Valuation of Good Management

A Case of Bad Management

Good vs. Bad Management

Good Management in the Newspaper Field

Difficulty of Securing Good Management

Self-Confessed Managers

Methods of Securing Managers

Financing Value of Good Management

VI Sufficient Capital 62

Results of Inadequate Capital

Reasons for Inadequate Capital — Deficient Estimates

Estimating Capital Requirements

Failure of Capital "en Route"

Providing for Adequate Capital

Secondary Financing — Cost

Providing Capital for Expansion

Meeting Increased Capital Requirements

VII Relative Status of Undertaking, Management,

AND Capital 73

Good Management Capital and the Undertaking The Capitalistic Position The Capitalistic Demands

CONTENTS XI

Part III — Investigation of an Enterprise VIII Importance of Investigation 8i

Wm it Pay?

For Whom Investigation is Important

Reasons for Inadequate Investigation

Results of Inadequate Investigation

A Loss that Should Have Been Avoided

Investigation Prevented by Conditions

When Investigation is Refused

Investment as a Gamble

"Grub-Staking" Investments — The Keely Motor

Keely's Demonstrations

Keely Motor Financing

Financing a Swindle — The Sea Water Gold Process

IX Investigation or an Unincorporated Enterprise. 95

Scope and Purpose of an Investigation Fundamental Features of an Enterprise

1. Basis of Enterprise

2. Title

3. Output

4. Environment and Conditions of Operation

X Investigation or an Incorporated Enterprise —

The Investor's Questions 109

Purpose of the Investor's Questions Outline of Investor's Questions The Financial Statement

XI Investigation of Non-Speculative Enterprises . 120

Speculative and Non-Speculative Enterprises Investigation of a Store Location Investigating the Transmutation of Metals An Asphalt Development Investigation of a Fire-Brick Property

XII Investigation op Speculative Enterprises . . 134

Speculative and Semispeculative Enterprises

The Paige Typesetting Machine

The Linotype

The Uncertain Element in Tj^jesetting Machinery

Mining Prospects — Speculative Possibilities

Valuation of Mining Prospects

Investigation of Mining Prospects xii CONTENTS

Speculative PossibiKties of Oil Investigating an Oil Property Statement of Conditions Estimating the Value

XIII Investigation op Speculative Enterprises — Inventions 147

Speculative Possibilities of Inventions

Speculative Features of the Telephone

Speculative Features of the Phonograph

Inventor's Estimates

Financing an Inventor's Estimates

Result of Financing an Inventor's Estimates

How the Invention Should Have Been Handled

Investigation of Inventions

The Question of Demand

The Question of Efficiency

The Question of Workability

The Question of Patent Protection

The Final Decision

Part IV — ^Protection of an Enterprise XIV Necessity and Methods of Protection . . . 165

The Competition of Business

Why Protective Measures are Necessary

Methods of Protecting Business Interests

Purpose of Protective Measures

Selection of Protective Methods

Special Methods of Protection

Efficiency as a Building and Protective Measure

Taking Advantage of Opportunity

XV Monopolies 172

Creation of a Monopoly

The Kimberley Diamond Fields

The Kimberley Monopoly

Regulating Diamond Prices

The Asphalt Monopoly

Building up the Asphalt Monopoly

Monopolizing an Open Market

The Standard Oil Monopoly

Standard Oil Methods

The German Chemical Companies Monopoly

The Up-Building of the German Chemical Companies

Quantity Production — "Dmnping"

Price Manipulation

Patent Protection for German Products

Buying Their Way

Propaganda to Discourage Competition The End of the German Chemical Monopoly Conditions Permitting Monopolistic Control Non-Monopolistic Undertakings

XlU Page

XVI Patents

Nature of Letters Patent

Patent Requirements

Amateur Patent Applications

Patent Procedure

Delays in Patent Application

Drafting the Patent Application

Character of Patents

Multiclaims and Multitudinous Patents

"Follow-Up" Patents

Nature and Limitations of the Patent

Attacks on Patents

Patent Litigation — The Goodwin Film

Patent Litigation — ^The Selden Patent

XVII Trade-Marks, Trade-Names, AND Copyrights . . Trade-Marks Definition

Nature of the Trade-Mark Selecting a Trade-Mark Registering a Trade-Mark Importance of Registration Term of a Trade-Mark Establishing a Trade-Mark Value of Trade-Marks Persistence of a Trade-Mark Patents vs. Trade-Marks

Trade-Names

The Trade-Name and its Protection

Trade-Names as Trade-Marks — Protection of a Product

"Lost" Trade-Names

Unfair Competition

Copyrights Nature of the Copyright

XVIII Protecting a Process 221

Patent vs. Secret Process

DiflBculty of Defending Process Patents

Balancing the Probabilities

Trade-Mark Protection for Process Products

Patent vs. Secret Process — Determining Conditions

Combining Patent and Secret Process

XIV CONTENTS

VOLUME n— THE ORGANIZATION

Part V — Shaping up the Enterprise XIX Experimental Work and Model-Making . . . 231

Utility of Experimental Work Experimental Work and Patent Applications Cost of Experimental Work Paige Typesetting Machine Dishonest Machinists Charges for Experimental Work Experimental Work by Contract Experimental Work When Funds are Limited Selection of a Machinist Scale of Experimental Work Extravagance in Experimental Work Edison's Experimental Work The Liberty Motor

XX Expert Assistance — ^Technical 247

Place of the Expert

The Technical Expert

Practical Value of Expert Assistance

When Expert Assistance is Necessary

Cost of Expert Assistance

Selecting the Expert

The Expert's Examination

The Expert's Report

Arrangement of Report

Reliability of Expert Reports »

Conservatism of Expert Reports

The Technical Expert as a Promoter

XXI Expert Assistance — Accountants 264

The Accountant in Financing Functions of Accounting Recording Functions of Accounting Accounts as the Executive's Guide Accounting for the Smaller Undertaking The Accountant as an Investigator Scope of the Accountant's Investigation Accountant's Charges Trading on the Accountant's Reputation The Auditor's Report

XXII Expert Assistance — Attorneys ...... 273

When the Attorney Is Needed Why the Attorney Is Needed The Attorney in Negotiations Using the Other Man's Lawyer

XV

Using the Other Man's Lawyei^-A Promoter's Contract

Using the Other Man's Lawyer — An Inventor's Contract

When an Attorney Is Not Needed

Selecting an Attorney

Selecting a Patent Attorney

Attorneys' Fees

The Lawyer's Work

Relations Between Attorney and Client

Page

XXIII The Corporate System

Forms of Business Organization

Variation of Corporation Laws

Formation of a Corporation

Nature of the Corporation

Management of the Corporate Aflfairs

Authorized Capital Stock

Shares of Stock

Stockholders

Relation of Stockholders to Directors

Common Stock — Preferred Stock

Cumulative and Non-Cumulative Dividends

Stock Certificates

Payment for Stock — Liability on Unpaid Stock

Treasury Stock

Corporate Bonds

Majority Control

General Advantages of the Corporate Form

Part VI — Capitalization of an Enterprise XXIV Laws Apfecting Corporate Capitalization

Nature of Capitalization

Laws Limiting Capitalization

Laws Requiring Payment of Stock

Organization and Franchise Taxes

Federal Tax Laws

General Effect of Laws Bearing on Capitalization

XXV Conditions Affecting Capitalization ....

Functions of Capitalization

The "Value Idea" in Capitalization

Effect of the "Value Idea" in Capitalization

Value Variations Between Capital Stock and Corporate

Assets Inaccuracies in Value Capitalization Value as a "Building" Basis Increasing Capitalization to Attract Capital Increasing Capitalization to Provide for Contingencies Sales Requirements as a Basis of Capitalization Classification of Capitalization

XVI

Chapter XXVI

XXVII

Capitalization Not Based on Value ....

When Value Is Unknown

A Bridging Capitalization

Changing Capitalization to Meet Conditions

Temporary Capitalizations

Capitalization of Close Corporations

Capitalization to Conceal Profits

Capitalization Based on Policy or Expediency

Capitalization Based on Present Values — New Enterprises

Capitalization in Ordinary Lines of Business

Stock Salaries and Allotments

Capitalization of a Purchased Business

Capitalization with Promoter's Profits Included

Capitalization for Future Needs

Capitalization with Payment to Promoter Included

Concealing Payments to Promoters

Allocation of Stock Between the Enterprise and Capital

Promoters' Demands

Capitalization as Affected by Method of Financing

Capitalization in Established Lines — a Coal Company

Capitalization of a Contract

Page . 318

XXVIII Capitalization Based on Present Values — Good- Will 340

Nature of Good- Will

Personal Good- Will

Professional Good- Will

Commercial Good- Will

Evanescent Good- Will

Trade-Mark and Trade-Nama Good- Will

Establishing and Transferring Trade-Mark Good- Will

Capitalization of Good- Will

XXIX Capitalization Based on Present Values — Good- Will (Continued) 349

Court Appraisals of Good- Will Calculation of Good- Will Capitalization of Good- Will — Methods Capitalization of an Incorporated Partnership Good- Will Represented by Common Stock Capitalization of Anticipated Good- Will

XXX Capitalization Based on Profit Probabilities

Nature of Profit Probabilities

Effect of Capitalizing Profit Probabilities xvu

XXXI

Page

Stock Prices as Affected by Capitalization Earning Power of Inventions Capitalization of Franchises

Capitalization Based on Profit Possibilities

Profit Possibilities

Profit Possibility Capitalizations

Capitalization of Oil Possibilities

Capitalization of Mining Possibilities

Large Capitalizations — Selling Appeal

Capitalization of General Speculative Possibilities

Discoveries in Unknown Fields

XXXII Excessive Capitalization 376

Evils of Excessive Capitalization Causes of Overcapitalization

1. Fraudulent Overcapitalizations

2. Capitalization to Meet Promotion Requirements

3. Overestimates of Value

4. Avaricious Overcapitalization

Part VII — Special Corporate Adjustments XXXIII Shares Without Par Value

XXXIV

Capitalization as an Apportionment of Interest Capital Stock as a Measure of Corporate Values History of Shares Without Par Value Nature of Shares Without Par Value Preferred Stock in No-Par- Value Capitalization Text of Law Permitting Shares Without Par Value Foreign Corporations with Shares of No Par Value Advantages of No-Par- Value Shares Disadvantages of No-Par- Value Shares A Working Opinion of Shares Without Par Value Fixing the No-Par- Value Capitalization No-Par-Value Capitalization Determined by Sales

Requirements Capitalizing an Oil Company Valuing No-Par- Value Shares

Special Adaptations of Corporate Mechanism — Preferred Stocks and Bonds; Protection of Minority 401

Problems of Business Organization

Preferred Stocks and Bonds Preferred Stock in Corporate Adjustments Dividends Voting Rights

XVIU

Page

XXXV

Protection of Principal

Redemption

Loan with Bonus

Bonds with Special Rights

Bonds and Notes with Stock Conversion Privilege

Protection of Minority Majority Rule

Minority Representation on Board of Directors Minority Representation — The Voting Trust Classification of Stock Equal Control by Means of Classified Stock Cumulative Voting Specified Majorities Specified Majorities for Board Actions Stock Not Full Paid

Special Adaptations or Corporate Mechanism- Protection OF AN Inventor

The Inventor's Problems

The Close Corporation

Capitalization for Exploitation

Pull Payment of Stock

Stock Control

Equality of Control

Maintaining an Equality of Control

A Preferred Stock Proposition

Preferred Stock Conditions

Preferred Stock with a Bonus of Common Stock

Preferred Stock vs. Bonds

Methods of Maintaining Company Control

Assignment of Patent to Trustee

Reservation of Royalties

Contract Provisions

Shares without Par Value

VOLUME m— THE FINANCING Part VIII — Preliminary to Presentation XXXVI Preparation for Presentation .

Financing as Affected by Stage of Development

Problems of Patent Protection

Problems of Mechanical Development

Manufacturing Problems

Marketing Problems

Financing an Undeveloped Enterprise

Financing a Partially Developed Enterprise

Financing a Commercial Proposition

Commercial Development of Invention by Inventor

The Financing Point

XIX

Page

XXXVII

Presentation Conditions

Importance of Proper Preparation

Physical Conditions

Preparing an Invention for Presentation

Preparing a Mine for Presentation

Most Effective Preparation for Presentation

Overpreparation — False Representations

The Proposition — Promoters' Profits ....

Nature of the Proposition

The Owner's Proposition

The Proposition as Affected by the Plan of Presentation

Proposition Details

Promoters' Profits Propriety of Promoters' Profits Promoters' Relation to Corporation Promoters' Improper Profits General Doctrine as to Promoters' Profits Methods of Concealing Profits — Protection by Owner The Double Option Fictitious Options A Case of Concealed Profits

45°

XXXVIII Commissions and Bonuses

To Whom Commissions Are Payable

1. Commissions on Sales of Property

2. Commissions on Sales of Stock or Interest

3. Payment for Indirect Financing

4. Payments for Introductions Amount of Commission

The Flat Price Promoter vs. Financier Commission Agreements Bonuses

XXXIX Underwriting

Nature and Purpose of Underwriting Advantages of Underwriting Underwriting vs. Direct Sale Underwriting Procediu-e Underwriters' Compensation Profits of Underwriting Requirements of Successful Underwriting Underwriting Agreements Status of Underwriting

Part IX — ^Private Presentation of an Enterprise

XL Presentation — ^Among Friends Methods of Presentation Private or Public Presentation?

XX CONTENTS

Private Presentation — Friends or Strangers?

Precautions to be Observed in Dealing with Friends

Advantages of Financing Among Friends

When Financing Among Friends Is Difl&cult

Financing Among Friends — Methods

The Basis of Appeal — Local Interest

The Basis of Appeal — Individual Interest

The Basis of Appeal — the Co-operative Idea

Breaking the Ice

Requirements of a Friendly Presentation

XLI Presentation — ^Among Strangers 498

When Financing Must be Done Among Strangers

Presentation by Letter

The Letter Presentation in Operation

Requirements of Letter Presentation

Problems of Financing Among Strangers — A New York

Presentation Provision for Personal Expenses Requirements of a New York Presentation "Placing" the Promoter New York Conditions Letters of Introduction

XLII Presentation — ^Among Strangers (Continued) . . 510

Advertising for Capital

Financial Agents and Their Methods

Reaching the Stranger by Letter

Reaching the Stranger by Personal Visit

Possibilities of the " Unintroduced " Presentation

Promoters and Their Methods

Finding a Reliable Promoter

Bankers and Brokers as Promoters

Professional Men as Promoters

Arrangements with Promoters

What the Promoter Does

Part X — Public Presentation of an Enterprise XLIII General Conditions 523

Public Presentation as a Means of Selling Stock

Nature of the Small Investor Demand

The Small-Investor Appeal

The Small-Investor Appeal in Operation

Restrictions on Public Presentation

Blue Sky Laws

Methods of Public Presentation

General Cost of Raising Money by Public Presentation

I. Cost of Raising Money by Canvassing

XXI

Page

2. Cost of Raising Money by Newspaper and Magazine Advertising

3. Cost of Raising Money by Mail Order Methods How the High Cost Works Out

Why the Method is Used Who Pays the Piper?

XLIV Stock Salesmen 538

The Work of the Swindler

How It Is Done

The Oil Swindle

Selling Stock by Telephone

Legitimate Salesmanship

Selling Methods

Stock-Selling Organizations — For Single Enterprises

Stock-Selling Organizations — Permanent

Contracts for Sales of Stock

XLV Newspaper and Magazine Advertising . . . $53

Present Conditions

General Requirements of an Advertising Campaign

The Advertising Campaign

Cost of Starting an Advertising Campaign

Advertising Campaign Procedure

Inducements to Secure Names

Handling "Prospects"

FoUow-Ups

"Clinching" Devices

XLVI Mail Order Methods . . . 562

Nature of the Mail Order Appeal

Possibilities of Mail Order Work

The Small Investor

Advantages of Mail Order Methods

Mail Order Procedure

The Circular Letter

Follow-up Letters

Subscription Helps

Mailing Lists

Resume