All the stock was originally issued to the two pro moters in exchange for the full right to the process, names, designs, etc., under which the product would be produced. The $300,000 preferred stock would finance sales up to $1,500,000, on which the normal gross profits to the company were expected to be $300,000. Out of this profit were to be paid divi dends on the preferred, the cost of selling introduc tory orders, and administration expenses. It was cal culated that $100,000 would remain, half for divi dends on common, and half as cash capital donated by the common stockholders to finance the business. By the time the preferred stock would become exhausted, the business would be established on a profitable basis, they calculated, leaving the company free to increase the capitalization or change the form of their selling contracts, which expired annually. This idea was drawn from the somewhat similar scheme of financing cooperative drug houses, and at last reports was op erating successfully.
Customers can seldom be relied upon, however, to finance a business unless it begins operation as a purely cooperative company, as in the case of coop erative jobbing houses owned by retail associations, such as are found thruout the United States.
7. When employes own the stock.—There are a number of small cooperative companies which are financed largely thru the sale of stock to prospective employees, who cooperate in the establishment of a local business in which they will be workers and also desire a proprietary interest. Few people realize how many small companies are partially or wholly financed in this way. A skilled artisan who owns his home and has a small bank account is interested in securing permanent employment near his residence and in sharing the profit and prestige which his for mer employers in the same community have reaped. He feels that his knowledge of the business enables him to invest in it intelligently and that his employ ment will be more interesting and secure when he is associated with the enterprise as part owner. He may become a foreman, or even a director. Pride plays no little part in the transaction.
Great care is required in organizing new concerns under such conditions, to prevent their foundering upon the rock of mutual jealousy and distrust. Ordi narily, there must be some one man at the head of the undertaking who has the confidence of all concerned and whose past experience and ability will insure a continuous and successful management. The repu tation of this man is often the greatest single factor in the success of the company, especially in obtaining trade credit and the confidence of customers. One
man can usually manage a company better than a dozen men can. Too many fingers spoil the pie. An actual instance will serve to illustrate the organiz ing of such a company and the dangers of decentral ized authority which beset it.
8. Dangers of large stock ownership among em ployes.—Beginning with $500 borrowed capital, a successful lithographer had built his business up un aided in a few years, and enjoyed the highest reputa tion in the trade. He then sold his business to a com bination in New York for nearly three-quarters of a million dollars in stocks, bonds and cash.
The new managers ran the business into the ground in a very few years. Meanwhile its founder, in other ventures, succeeded in losing the fortune derived from the sale of the enterprise. Former employes now suggested a new company in the same city, where most of them owned homes which they did not care to leave. In this way, they sought to profit from the experience and ability of their former employer. It was understood that they would take stock on the same basis as himself and that as much stock as neces sary should be sold to outsiders to complete a capital ization of $100,000.
The new company began operations with its capi tal partly paid and with great enthusiasm pervading the working force. Credit was generously extended to it on the reputation of the manager, and the first year's operations showed a small profit. Meanwhile, discontent had arisen when many of the new stock holders found that they had no more direct authority in the business than employees who did not own stock. Apparently each of them had expected to share di rectly in framing the policy of the company, not realizing his limited authority as stockholder. The manager, who did not control the stock, and who was devoting his time to the business instead of to cor porate politics, was suddenly voted out of office by an organized opposition.
The men who bad sought and obtained control now quickly discovered that they did not know how to ex ercise it. Within three weeks the credit of the con cern had been vitally injured with the trade, disci pline had deteriorated in the plant, and almost every thing went wrong in the new company that possibly could. In self-defense, some of the larger stock holders then banded themselves together and re instated the old manager with full powers. At the present writing, this little company is still suffering from a certain degree of divided authority, altho en joying a labored success. Had the manager owned control, it would, without question, have reached twice its present size and earnings by this time.