Legal lessons: Shareholder Agreements

I had a meeting with a couple of our lawyers yesterday.

Always a bit scary, meeting with the lawyers.  I leave the meeting wondering how many hours I've just been billed. 

We're working with a couple of law firms right now.  Gowlings, headquartered in Ottawa, do our Canadian work, and Orrick out of San Francisco handles our American stuff.  Both excellent firms.  I know some of the Gowlings folks from university days, and Victoria impressed the Orrick judges at San Francisco's HYSTA business plan competition back in December with her winning presentation.  They've been on board ever since.

This time was with the Gowlings people.  We're moved past the basic incorporation stuff and now are talking shareholder agreements, partnership agreements and intellectual property protection.  

Oh -- one thing I've learned about good corporate lawyers: don't delay, get one.  I recommend both the firms that Moniker is working with.     

Shareholders' Agreement.  It's important to get this right, because circumstances change.  Right now, we've got a terrific, smooth-functioning team that runs mostly on common understanding and tacit agreement.  But what if one of us decides to quit?  Or dies?  Or wins the lottery?  A good shareholder agreement imagines the things that can happen, and specifies (in advance) how we'll deal with it if they do, in fact, happen.  It's about setting clear expectations so that we don't get into big fights later about who-said-what and well-I-thought-we-agreed...that sort of thing.  There is a standard template, but a good agreement must be a customized document that every shareholder has thought hard about and deems to be fair and appropriate.

Fairness.  That's a core principle for Moniker.

My executive team and I have been talking around a draft document for a few months now.  It keeps getting post-poned by the urgent to-do's of Moniker's birth, but I know I'll regret it one day if I don't push it through to some final document that we all sign.  The sooner, the better.

I think we're close.  I'm going to send what we've already got to our Gowlings people, let them have a look at it, and talk through any changes they recommend.  Once I've worked those through with my team, we'll get the lawyers to translate it into Greek.

(by which I mean, legalese.)

Now that I've been through the process, I'd say the big three questions that a good agreement needs to tackle are:

1. How big of a share does each shareholder begin with, and how is that share going to change as the business grows and new money (shareholders) comes in?
2. What are the rules about buying/selling shares?  If I want to sell some of my shares to a '3rd party', do the other shareholders have the chance to buy them first?  What happens to shares if somebody leaves Moniker or dies?
3. How do we decide how much shares are worth?  We decided that until we go IPO, we will set a share price at each annual board meeting and that that price will be in effect for the following year.  

If you can work out answers to these three questions that everybody agrees are fair, you've got a solid agreement on which you can build your company.  (I hope.)  

Moniker. The E! True Hollywood Story

I can't wait for the E! True Hollywood Story of how Moniker overtook the world of fashion is broadcast....

Cue deep voice-over guy:

"Four friends living in a van down by the river with only a dream of being fashion moguls to sustain them. Everyone said they couldn't do it, but from humble beginnings of twisting their own suit hangers, they managed to create an empire that's now a household name.

Join us on their journey of hope, joy, success, and an addiction that would threaten to destroy the entire company they worked so hard to create. Could they come together as a team to pull one of their own back from the brink? Tonight, in her first public interview since the near-scandal, Kristin Kutarna Gates speaks openly about her addiction to shoes and how it almost tore a company, and a family, apart.


Moniker, the E! true Hollywood Story."

Progress2Capital Business Plan Competition

I'm entering Moniker in a business plan competition in my home city of Regina.  The competition, Progress2Capital, should be a great way to get our name out among the local business (and investor) community.

You can take a look at the one-page brief for our entry on my personal blog.

The Origin Story (journal excerpt, 2006)

Every story has a beginning.  Here's Moniker's:

 

‘That was my MBA,’ concluded Mark, my once macro-economics professor at Oxford. 

 

‘Your MBA?’   

 

‘My Business Attempt,’ Mark laughed and rubbed a palm over his bald pate.  He has this self-deprecating sort of laugh that suits his soft voice perfectly.   

 

We were sitting in Mark’s office, catching up.  It had been a while.  He had a few more papers under his belt; I had just relocated to Beijing, where I was sort-of-writing a screenplay, sort-of learning Mandarin, sort-of doing a lot of things, I guess…and sort-of thinking about starting up a business.  A few months before, Mark had come out of some pretty serious surgery to have a tumor removed from his brain.  He had always been one to make the most out of life – now he just talked about it more.    He continued. 

 

‘Everyone should do an MBA.  Everyone.  Not for fame or to get rich – those are pretty boring goals in the big picture – but so that you learn how to build “stuff” that lasts.  How do you take an idea – it’s just a thought in your head, and god knows where it came from – and turn it into real stuff, that people can see and play with and be affected by?’  ‘I can’t teach it to you.  You can’t learn it at business school.  You have to put your own money and your own security on the line.  It’s scary.  But if you get there…’ Mark was groping for the words to share his emotions.  ‘…It’s really cool.  Until you’ve experienced what it is to take economic risk and build capital, you’re missing out on one of the central ideas of our civilization.’   

 

He had me hooked.  Damn, but Mark knew how to hold his students’ attention.   

 

I laughed.  ‘I guess the biggest question—’ 

 

‘The only thing I would say,’ Mark’s mind, moving fast, was already onto my next question, ‘is this: aim for luxury.  That, and do something disruptive.  But aim for luxury.  Make something high quality, because that’s where the growth is.  Here’s the one macro-economic statistic that every entrepreneur, I mean every entrepreneur, needs to know:  real income in the average household is rising only about 1% per year, after inflation and all that.  But in the top 20 or 30 percent of houses, it’s like 4% a year.  It may not sound like a big deal, but over time, it’s a huge gap.  That one statistic totally shapes the spending habits of the Western world.  Why do you think BMW, organic foods, Starbucks…’ He rambled a long list I can’t remember them all, ‘are all doing so well?’

 

‘Maybe I can—‘ 

 

‘And now you’re living in China,’ Mark, half-rising, cut me off again.  ‘I mean, how cool is that?  It's the final stop in global manufacturing.  Every name that stands for quality, at some point in the process, is doing stuff in China.  Labor costs are low, logistics are world-class.  It’s a no-brainer.  My generation still has this outdated idea that China factories only churn out garbage.  I guess some still do.  But your generation knows better.  The good factories, the ones doing business for Intel and Apple and Armani, they’ve all flown in experts from the US and machines from Germany.  And now you’ve got this amazing tool called the Internet to fit it all together.  There’s a billion ways you can put it all together and do something really disruptive and useful and fun.  Wow.’ 

 

He slumped back in his chair.  An apostle of entrepreneurship exhausted by his latest revelation.  

 

Finally, he just nodded.  ‘Yeah.  Get your MBA.’ 

 

He glanced at his watch.  ‘Whoa, time’s up.’   

 

We shared a laugh.  Just like old times.    Mark was right.  It was time to catch my flight back to Beijing.  We stood up, shook hands. 

 

His eyes were still twinkling, excited about the maybe’s he’d just tossed up.    ‘See you ‘round, Mark.’ 

 

‘See you.  Good to catch up.’ 

 

‘Yeah.’  I stepped out into the hall, let his door close behind me.      

 

‘And don’t forget to write about it!’  He shouted through the wood.

 

Three-Legged Luxury: Part I - Full Canvas Forever

I spend a lot of time on a blog called English Cut.  The host, Thomas Mahon, is a Savile Row bespoke tailor whose clients include Prince Charles and John Vizzone (Ralph Lauren's chief designer).  Reading and contributing to his blog, along the way Thomas taught me the basics of what sets luxury apparel apart.  (By the way, we're now working with a bespoke tailor in Manhattan on development of a fully hand-made line of custom suits and shirts.  Without a bona-fide expert on board to consult, you can't make a credible claim to serving up luxury.  I think that line will be ready by Q3.)

If you're interested in this stuff, check out this explanation on Thomas' blog.  He explained to me that the most important variable in suit construction that determines quality and cost is the inner lining, also called the canvas.  The canvas gives the jacket its shape and body.  There are broadly three options.  The first is fused.  The fused lining for a jacket is a synthetic material cut to the appropriate size, placed between the jacket layers and heated to a high temperature, where it melts or fuses the layers of fabric together.  At the other end of the spectrum is floating canvas, where actual canvas cloth is cut to the required pattern and then stitched into the fabric layers.  

The difference between floating and fused is huge.  The time required to sew in a floating canvas can double construction time.  Floating canvas breathes better and gives a more natural movement, because sewn layers can move independently of one another.  Floating canvas also wears better over time.  When a fused canvas jacket gets wet or is dry-cleaned, the synthetic material tends to deteriorate over time, whereas the floating canvas is a hardy woven fabric with a wearable life that exceeds the outer jacket wool. 

That noted, virtually every suit offered for sale inside big brand menswear stores today, even Zegna and Boss, is made with a fused canvas.  It takes several days more manual work to make a suit with a floating canvas instead of a fused one, so most mass-produced, off-the-peg suits are likely to be fused.

There is an intermediate step between these two: half-canvas.  Our plan will be to only manufacture full-floating canvas jackets.  (With the exception that some summer suits may be half-canvas, because the end result is lighter.)

Sunday morning conference calls...

I had an early morning conference call with my supply chain partner.  His schedule is crazy, in part because of his success.  With almost 20 years of menswear industry experience behind him, over the past 7 years he's built one of the world's most profitable custom clothing operations.  When he's not overseas, he's zigzagging across the US meeting his suppliers and partners and clients.  So I managed to nail him down 6:00 am to 7:30 am, Sunday morning.  He had a couple free hours before heading off to church.

We worked out a bunch of details.  We talked packaging.  Focus on hangers, is his advice:  it's the one piece of packaging that the customer actually holds onto.  I was thinking about designing some nifty bags and boxes.  'You could do that,' he said, in the amused tone of one who's been down this road before, 'but really your customers will say 'mmm, nice box,' and then throw it away.

A couple years ago, he spent almost $10,000 on some nifty fabric boxes for his wholesale clients.  He spent a ton of time developing them into nice-looking and convenient storage and display devices.  None of his clients used them.  In the end, he trashed them all because they were taking up needed space in his warehouse.  

But hangers.  Give your customers a good hanger they can appreciate, and you'll have an advertisement in their closet forever.  In the US, the two best hanger suppliers to the clothing industry apparently are Beverly Hangers and Robert Carlton.  (This is why it's great to have an experienced sourcing partner.  They have all this essential industry awareness floating around in their brains, and I can just skim it up fast, for free.)  Beverly has the pre-eminent reputation, but his experience is Robert Carlton offers better service.  So we'll start there.

For suit bags he's putting me in touch with Basic Bags, a Manhattan manufacturer.  They're so specialist, I can't even find the website.  

One minor snag we've hit is shirt fabrics.  He was expecting to have a large inventory of shirt fabrics for me by now.  But it turned out that one of his suppliers gave him a bad shipment and the cottons were 'defective'.  

I didn't know that cotton fabric can be 'defective'.  It seems like the function of a piece of cloth is pretty hard to get wrong.  I don't think I could tell the difference between cloth that works and cloth that doesn't.  

Again, that's why he's the perfect partner.  Because his wholesale clients CAN tell the difference, and because they expect his garments to meet a luxury standard, he has to protect his supply chain against just these sorts of quality issues.  It's one of the free benefits of partnering with someone who already has a large and demanding client base.

He didn't go into specifics about the problem, but he didn't have to.  'Basically, it's not up to the standard that we require,' he summarized.  

So we're looking at a couple short-term solutions.  He'll be in Manhattan next week, and one of his suppliers there has an extensive inventory of 500 or so high-grade shirt fabrics.  That will give Moniker something to work with while he works out a more permanent solution.  

The web is your catalogue.

That's Moniker's vision.  That's what 'clothing without compromise' should be.

I like this suit Barack Obama's wearing.  And William Shatner as Denny Crane.  That's a good one.  Or maybe I'll try and pull off the Brad Pitt look.  (Victoria, quit laughing at me!)  

It's not just about taking measurements and getting a good fit.  It's about closing the gap between what I want and what I can get, until there is no gap anymore.  All I need to do is 'click', and what I see on the web becomes something real in my closet, made just for me, just my size.

That's what I want.  

We dress up our models and photograph them and build style books and all that stuff and it's great.  It's important -- we need to see a style to understand it.  And a lot of people (I'm one of them) need to be presented with good, clear options.

But surely, in the $300 billion global menswear industry, those options are already on display.  

Why should I be presented with a sub-set, when the whole set is right there, right here, every day presenting me with the things you want?  

Sadly, menswear (maybe the fashion industry in general) is behind the Web 2.0 times.  It's myspace.  Youtube.  We create the content.  

That's why Moniker's 'About' page says "This is your DESIGN STUDIO."  That's the goal.  To give us all the tools to translate the world we see into the clothes we wear.

Of course, the task is huge.  That's why most don't try.  But we're on our way.  Our production house is the clothing industry's global leader in custom clothing.  We have the platform to recreate, not all, but a lot of the menswear world -- on demand.  Every fashion season we're bringing over 600 new fabrics into our inventory.  In the world of the 80/20 rule, we've got the 80 covered.

Of course, the other 20 is the hard part.  :P

My Vicuna Moment (July, 2007)

There’s a kind of hubris that besets the aspiring entrepreneur, a veil of supposed omniscience that clouds the perception of one’s own stupidity.  

(Or maybe it’s just me?)

But I think it’s a general phenomenon.  Necessary, even.  The more I think about starting up Moniker, the more essential a willingness to act on pure optimism seems to be.  The information I want isn’t available.  I have no experience in the ventures I’m contemplating.  If I were to sit down with a psychologist and really pick apart the roots of whatever confidence I feel in one idea or the other (an appealing mental picture here, a wisp of logic there), I’d probably voluntarily commit myself.  And yet, I’m willing to stake my livelihood on the possibility of commercial succ—I was going to say success, but maybe that’s too far out.  I’m willing to stake my livelihood on the possibility that I won’t lose my shirt in the attempt.  

So I tell myself that I can do it – that somehow, in the black box of reality behind my rosy spreadsheets, it’ll all work out somehow. 

It’s not a bad starting point, blind faith.  But along the path from ‘hey, that’s a neat idea’ to ‘what’s our share price doing today?’ I think there comes a moment when reality pierces that ego-sized bubble – when the entrepreneur realizes, “Shit, I have no idea what I’m doing.”

I’m there.  Now.

I call it ‘the vicuna moment’. 

Here’s how it happened for me:  I flew down to Shanghai to meet with two men, business partners who since the day China joined the WTO have been working to establish a global luxury menswear production chain to serve up-market  independent menswear shops (how I met them is a long story – I’ll get around to telling it someday).  I’ve got an inkling of an idea (let’s call it a ‘squib’ – more on that later) to find a reliable, high quality tailoring source and do something over the web.

I met them for lunch at Malone’s, a Shanghainese sports bar that the New York Times rates “hit or miss.  If the waitstaff has any experience, they're careful not to show it.”  (ouch) 

Lunch was pleasant, if a bit vague.  I’m prowling in general terms, and I don’t really know how to get into specifics on my idea.  Anyway, we get the bill, fight over it in the customary Chinese way – they won – and pack up our conversation.  On the way out, one of the business partners asks me, “We’re going to stop by the fabric market.  Do you want to come along?”

Sure.  Anything to build a potentially useful relationship.

And that’s how I found myself browsing through stall after stall, bolt after bolt, with two of Shanghai’s most experienced and enthusiastic menswear fashionistas.  The more time I spent with these two guys – here, in the innermost sanctum of their specialty, a fabric market – the more I came to know how little I know about their art.

“Look at the lines on this lapel.  It’s really quite good.”  One would say, peering over a display suit. 

“Would you like to make a suit?” the shop-keeper asks, fishing for a sale, not realizing his could-be-customer amasses a fortune daily in the menswear industry.

We walked into a shop upstairs that sells velvet.  I didn’t ask them to put words to the expression on both their faces, but if I had they’d probably have told me “This is better than sex.” 

“Check out this fabric,” one says to the other, fingering a bolt of cloth. 

He does.  “Yeah.  Yeah, this is cool.  If you’re not buying it, I am.”

“No way I’m letting you hog it all.”

“Okay, we share.”

“Yeah, okay.”

I wander over to the object of their fuss – honestly, I thought that was a color you’d use only for drapery.  Or maybe to re-upholster a Louis XIV chaise.   

I finger it, struggling to gain their appreciation for it.  “What is this color?  I guess you’d say it’s…gold.”

They both frowned, brows furrowed, discerning.  “No…no…I’d say it’s—” and then, with eerie timing, they together solved the riddle simultaneously:

“Vicuna.”

Whoa, check out the Corduroy!

The Moniker team has put together the first swatch books for our style consultants.  The rest are coming on Monday (I hope!!).  This page is from the trouser book.  (Some of them are actually meant for Fall/Winter...we're still getting up to speed.  If the fashion cycle would just PLEASE STOP for ONE DAY please STOP please ONE DAY okay?)

I confess, I'm not a corduroy man.  Well, maybe I am but I just don't know how to wear it.  That's why I don't select the fabrics.  But my sister swears corduroy still matters.  Okay.  But orange?  Is that just me, or is there an ORANGE corduroy fabric in that set?  

Sorry, 'Rust'.  In fact, from L to R: Tan/Olive, Chamois, Khaki, Mocha, Chocolate, Olive, Rust, Cadet Blue, Navy, Black.  I know what navy and black are: they are two colours I cannot distinguish.  The scary thing is that to people like my sister, all these words all actually mean something.  

That reminds me of an entry from my journal last year...I wonder if I can find it.

A New Menswear Season and 600 New Fabrics...

The fashion cycle for menswear -- including custom suits and shirts -- is punishingly quick.  As soon as Fall/Winter begins, it's time to start planning Spring/Summer.  New York's Spring Fashion Week is in September.  The European runways spill into October.  And by November, we and everybody else in the business of cutting cloth must start developing patterns and buying the fabrics to match.

Although we've barely begun sales, there's no way to slow down the fashion cycle.  On February 25th, we close our Spring/Summer fabric picking.  We've got nearly 600 new fabrics in stock for Spring/Summer 2008, from Zegna to Loro Piani to Dormeuil.  (Side note: Why is it that the world's famous fabric mills all have crappy websites?)

As soon as we get the monikerwear.com community up-and-running, we're hoping to get our friends involved in picking from that stock the best fabrics for each style in the gallery -- and helping us design the Fall/Winter 2008/2009 styles, which needs to start...yesterday.

Eek.     

(War Stories) Production houses we rejected - part 5

After the inspection-that-yielded-no-insights, we all sat together around a conference table.  This, I gradually came to understand, was the forum for announcing my impression of the factory and its wares, make polite noises, and initiate some sort of trial run.  Of course, with no prototype and no specs, there could be no trial run.  We all knew that.  And yet, as if the routine had been indelibly carved into the factory rep’s head by the countless procession of prior would-be clients who knew the drill, we marched right into that conference room anyway.  Factory after factory.  (We stopped for coffee at - yep.  Even in Ningbo...) 

And if there was torture, these conference rooms were it.  See me sitting with (poor!) Linda and a handful of factory people, as well as the ever-helpful Ms Fan, groping for something – anything! – halfway intelligent to say rather than sit in painful, prolonged silence.  ‘How many garments do you produce in a year?’  I was more journalist than businessman.  Sometimes the strain was too much, and I blithely turned things over to Linda while I made some show of jotting important-looking scribbles into my notebook. 

And yet, for all that, not a moment was wasted.  I learned a ton. 

I have to start somewhere.  Might as well be in the basement.

(War Stories) Production houses we rejected - part 4

(Ms Fan’s dashboard)

Okay, back to my factory tours.

I mentioned a “tortuous” experience.  I have to be careful what I write in this blog. I keep forgetting that my mom reads it, and she has a tendency to take my editorials literally.  So, to alleviate any concerns out there and dampen the Ningbo mobilization of any human rights activists who are RSS subscribers to my monologue: I neither witnessed nor was subjected to nor committed any acts of torture during my factory tours. 

That said, it was tortuous.  I mentioned a couple days ago my strategy: to go in with inquisitive eyes and a learner’s mindset, to admit honestly how little I understand about the industry and grab every opportunity to find out how the whole thing works.  (There’s no mystery to manufacturing clothing, I’m sure – once it’s been demystified.) 

What I didn’t consider, at all, is just how alien this approach is to the people who run these production shops.  The garment industry has a well-developed script for factory visits from would-be clients.  The client brings along a prototype garment and a detailed spec sheet for how that garment is constructed (there are literally hundreds of options, and they all impact cost, complexity and quality).  The factory representative studies these items, comments on his workshop’s capabilities vis a vis the client’s requirements, and then leads the client on a tour to see for himself.  If the client likes what he sees, he may leave the prototype with the factory and order a trial run of 100 garments.  Upon delivery and inspection of the trial run, if the client still likes what he sees, he’ll start talking serious numbers. 

My own factory visits all went a bit differently.

‘Have you brought a prototype with you?’

‘No.  Actually, I was hoping I could maybe see some of your samples.’ 

‘Certainly.  Did you bring along a list of specs?'

‘Uh...no.’

So they would guide me to their showroom, full of (no surprise there) garments, lead me over to, say, a suit – and stand there, expectantly.  I got the hint and made some show of inspecting its quality, but (and this is now first on my learning list) other than fabric quality I had a hard time seeing much difference between one suit and the other.  (I did learn, later in the day, that most of the difference is in the inner construction…more on that later.  Turns out (a) it’s significant to the quality, feel and life of the suit and (b) the suit I wore today, brand name notwithstanding, isn’t half as good as it could be.)