Great Ideas for your Small Business: Sell Stock in Yourself
Do your customers love your products? Then maybe they love your company enough to invest in it. Small companies with loyal customers and growing potential are likely candidates for an alternative form of financing called the direct public offering, or DPO. “Ninety-five percent of the people who invest in a DPO don’t have a broker and have never bought shares directly in a company,” says Drew Field, a San Francisco securities lawyer and certified public accountant who has helped clients raise more than $120 million since 1976. Through the years, he’s worked with a variety of companies from banks to a clothing manufacturer, pasta maker, and a homeopathic pharmacy.
Field, who charges a fee for his services rather than taking a piece of the deal, cautions that DPOs are not for start-ups; they work best for successful companies with devoted customers or “affinity groups,” as he calls them. Successful DPOs take about a year to complete and require an investment of time and money. Company owners and managers usually offer shares directly to customers, generally via direct mail.
Many successful DPOs are launched by companies involved in selling alternative products, such as natural foods and energy conservation products.
For example, a DPO launched by Annie’s Homegrown, a natural pasta maker based in Chelsea, Massachusetts, raised more than $1 million in 1996. The average stock purchase was about $580, said Field, who helped manage the deal. The company let its customers know about the stock offering by putting a coupon in the macaroni box.
This down-home approach works very well for companies with a strong commitment to customer service. “You can’t have a better customer than someone who owns the company,” says John Schaeffer, president and chief executive officer of Real Goods Trading Corp.
Schaeffer, who hired Field to help raise nearly $4 million via two DPOs in the 1990s, is a true believer in the process. The twelve-year-old Ukiah, California–based company sells energy and conservation products through catalogs and at a handful of retail stores.
In 1996 the company, which employs about 100 people, opened a twelve-acre Solar Living Center in Hopland, California, to demonstrate its products in action. The center has since become a major tourist attraction. In July 1996, Real Goods began selling its shares on the Nasdaq SmallCap Market—good news for investors seeking more liquidity for the stock.
Despite a few solid DPO successes, like Annie’s Home- grown and Real Goods, the market for DPOs remains limit- ed. “DPOs haven’t reached critical mass yet, because not enough people know about them to make a market,” said Tom Stewart-Gordon, publisher of the SCOR Report, a Dal- las-based newsletter that tracks small corporate offerings.
Figuring out exactly how much money is raised through these small offerings is tough, he said, because although companies file a form with the Securities and Exchange Commission, there is no agency or person tracking completed DPOs. Stewart-Gordon says the current best estimate is that 30 percent of DPOs are successful.
One of the smallest DPOs in history raised $470,000 for Hahnemann Laboratories Inc., a homeopathic pharma- cy in Albany, California. Founder and president Michael Quinn said he turned to his customers for help because he didn’t have the money needed to build an FDA-licensed laboratory. The company produces natural homeopathic remedies, which are considered an alternative to synthetic prescription drugs.
Quinn, a former hospital pharmacist, sent 30,000 letters to people on his mailing list. He followed up with a prospectus to 2,100 people who asked for more information. A total of 242 investors ended up investing just under $2,000 each.
The new lab in San Rafael cost about $250,000—money raised by the DPO. Quinn said legal, accounting, printing, and postage costs for the offering were about $103,000, but said it was money well spent. “It’s worth the time and money it takes if you are totally committed to the work you’re doing,” said Quinn.
If you are considering a direct public offering
SAN FRANCISCO ATTORNEY and DPO expert Drew Field has these tips for entrepreneurs considering selling stock directly to their customers.
Ask yourself these questions:
- Is my business profitable, and would it interest prospective investors?
- Can my business be understood by people who may have no experience buying stock?
- Does my company have affinity groups who would recognize our name and products?
- Can we obtain names, addresses, and phone numbers of people in our affinity groups?
- Can our management team devote time to the offering?
- Do we have audited financial reports for at least two fiscal years?
If the answer to most of these questions is yes, look further into DPOs. Also, read Field’s book, Direct Public Offerings: The New Method for Taking Your Company Public (Sourcebooks; 1997).