Shotgun Stocks

From out of the west in a cloud of dust and sweating horsehide comes the great equalizer, the shotgun stock.

Basically, shotgun stock is stock that is covered by a legally binding agreement that prevents the owners of the shares from selling the stock to the public without first offering to buy out the other shareholders in the company at a specific price offered by the shareholder who wants to sell. If those shareholders decide not to sell, they are required, under the shotgun clause, to offer to buy the first stockholder out at the specified price.

Sound complicated? Well it's not really. Just think of it as the reverse of a shotgun wedding, in other words, a shotgun divorce. All the shotgun clause does is provide a way for shareholders in small corporations to keep outside investors from entering the private domain of their boardroom.

Needless to say, every deal has its winners and the winners of transactions triggered (pardon the pun) by a shotgun clause tend to be people with cash in their fists because such clauses usually contain a very short timeline with specific dates upon which things have to happen. This time compression can make finding financing for exercising shotgun clause options difficult, thus aiding the partner with the deepest pockets.

Shotgun clauses also frequently benefit those shareholders with the most ability to manage the company. Or at least that's the theory, which is based on the highly debatable proposition that a partner or shareholder capable of taking over as the CEO/President and CFO would be able to offer to buy out the other shareholders at a low price.

Why is that common theory debatable? Because it requires that the owners sell out at bargain basement prices to some guy who they believe is good enough to take their piddling little company and turn it into a Fortune 500 superstar. Would you want to give up shares in a company with that destiny for next to nothing? Would anyone?

Far better really, to tell the genius to stuff his shotgun offer and sign on as CEO a nice salary and a big bunch of stock options. That's far more of a win-win approach. The "operator" eventually gets more shares and more control than the other shareholders, and they, in turn, get to share in the future prosperity of the company.