9. Subscription, and sale of stock.—Small com panies should, if possible, sell enough capital stock in the beginning to provide their entire capital, includ ing working capital. Control can be retained by the promoters, if minority stockholders, by dividing the stock into two classes, the preferred voting only when dividends are passed. For instance, a company re quiring $200,000 capital may incorporate for that amount, half common and half cumulative preferred stock at seven or eight per cent. The promoters, by reserving the voting power to common, and taking $51,000 of it, may retain control of the company.
If this plan is not sufficiently attractive to the pre ferred, the same amount of capital may be secured in another way, by a process of inflation or over-cap italization. In this case, the capitalization would be raised to $300,000, half common and half preferred. The promoters, for some patents, copyrights, etc., and $50,000 cash, would issue the entire common stock to themselves. The preferred would then be sold at par, accompanied by a bonus of one share of common for each two of preferred, and the cumula tive dividend rate on the preferred would be reduced to six or seven per cent, instead of seven or eight per cent. The motive behind this is to add the speculative element to the preferred, so that it may be more readily sold.
This amounts to the same thing, as far as the cor poration and the common stockholders are concerned, as selling the common stock at one-third and the pre ferred at five-sixths of its par value; and that is why the interest rate on the preferred is reduced one per cent. Each preferred stockholder, for $100 invested, receives: As we have seen in the chapter on Capitalization, the number of shares of common issued and the price at which it is sold make no difference, but any reduc tion in the price received for preferred stock or bonds cuts into the equity of the common stockholders. For this reason, in the second plan, the preferred dividend is cut one per cent per annum as an offset to the reduced rate at which preferred, in effect, is sold. In either event, the promoters control the company, because they own a majority of the outstanding com mon stock.
10. Promoter's share in the enterprise.—Stock may be sold to large investors, small investors, pro moters and employes. As a general rule, it is wise for the promoters, who are usually interested parties in the small corporation, to invest liberally in the enterprise themselves, and to control its operations for the first few years. This lends strength to their
appeal for funds. It shows their own confidence in the business, lessens the amount which will have to be secured from outsiders, and injects the necessary personal element into the solicitation for subscrip tions.
11. Selling stock locally.—If large local investors are to be interested, they should be approached first. Sometimes, capitalists will take a few shares merely to lend their names and good-will to the enterprise. Usually, however, such men are not interested unless they can control the enterprise. Whether the pro moters, owning a minority interest, are safer in the hands of a few large investors than in the hands of numerous smaller ones is doubtful. It depends upon the circumstances in each case. As a rule, the com pany will be much stronger with a few large stock holders, than with many small ones. If, however, it is strictly a local venture depending upon the good will of the public, the small stockholders may be pre ferable or even necessary.
We have already seen the dangers of the small com pany with many stockholders among employes. On the other hand, large controlling stockholders are likely to freeze out, in time, the practical minority who organized the company.
12. Circulating the subscription lists.—If a large number of small stockholders is desired, it is advis able to have several subscription lists, each beginning with a few well-known signatures. Some of the lists will be 'for large subscriptions, others for smaller ones. The organizers may have several lists circu lating at the same time. Subscriptions may be pay able in easy amounts, as ten per cent down and ten per cent each month. Certificates may be delivered for each payment when made, or may be withheld until the full payment of the subscription has been completed. In either case, the terms of payment should be clearly stated on the subscription list, and receipts should be issued for payments not evidenced by certificate. The easy payment plan has the merit of interesting many who could not otherwise sub scribe. The practice of withholding the certificates until the full subscription has been paid has, at least, the merit of forcing subscribers to a more careful ob servation of the terms of subscription.