When I was a young man of 34, with limitless dreams but a small bank account, I founded my mutual-funds company with a personal investment of just $2,000. Today, 41 years later, the value of my investment in American Century Companies, the management company of American Century Mutual Funds, has grown to more than $1 billion.

This fantastic appreciation came about mainly because of the way the company was initially financed. Decisions you make while establishing a venture or when seeking early financing will have long-term ramifications on your personal wealth. I can offer today’s beginning entrepreneurs no better counsel than to describe how I did it.

IDEAS TO PONDER

First, let me give you some ideas to ponder: Why give away half or more of your company to get financing from investors? You are going to work day and night to make the business succeed, so you deserve to own the biggest part of the company.

As you struggle to find financing, you may be tempted to accept the terms proposed by would-be investors, but why not resist those terms and structure the financing to satisfy your own long-term needs, both for the business and for you personally?

Although we did not realize it at the time, my wife and I found that the initial financing plan became a key component in building our personal net worth to a level where we are now able to create and endow a major medical research center. The success of our first dream is making our second dream possible.

SMART FINANCING

Back in 1958, a smart lawyer–and a smart mother–saw to it that my partner and I started on a firm financial footing. When we decided to launch the company, my mother impressed upon us the need to have the best and brightest lawyer we could find. She sent us to a lawyer she knew, but he had too much work, so he passed us to his brother, Irving Kuraner. Irving was a graduate of Columbia University Law School and member of Phi Beta Kappa, who had worked a year for Sullivan and Cromwell on Wall Street before returning to Kansas City to go into practice.

After Irving did the legal work to form the company, we turned to the question of how to obtain our startup financing. Irving came up with the concept that has been critical to our success and for which I have always been grateful. He told us that if we sold only common stock to others in order to obtain our initial financing, we would greatly dilute our own interest in the company. Instead, Irving suggested that we consider using primarily preferred stock, along with a little common stock, to obtain the initial operating capital.

PUTTING IT TOGETHER

The idea intrigued us. Irving asked how much of the common stock we each wanted to own. I wanted one half, and my partner, a CPA, asked for one fourth. Irving then suggested that the company take the following steps:

1.  Authorize 400,000 shares of common stock at 1 cent par value for $4,000 and…
2.  Authorize 1,000 shares of 5 percent Non Cumulative Preferred stock at $100 par for $100,000. The preferred stick wouldn’t pay a cash dividend but the value of the preferred stock would increase each year by 5 percent until the company repurchased the stock.

Then, I would buy 200,000 shares of the common stock for $2,000, equivalent to half of the company. My partner would buy 100,000 shares of common stock for $1,000, equivalent to one fourth of the company. We would offer each other investor 10,000 shares of common stock for $100, as well as 50 shares of the five percent Non Cumulative Preferred stock for $5,000. These outside investors could not buy the common stock, with its potential for great rewards later, unless they bought the preferred stock. The preferred stock would give us our operating capital.

FINDING INVESTORS

To find outside investors, I turned to people in a field that I knew well–medical doctors. I had gone to medical school before choosing investments as my career, and my wife, Virginia, was a registered nurse. The first doctor I tried to interest said we had the investment plan backwards. He said that management–my partner and I–should limit ourselves to 25 percent of the common stock and let the outside investors, those putting up the most money, take 75 percent. To which I replied: “No way. We are taking the 75 percent, because we are investing our time to make the company a success. Time is money.”

This man didn’t invest, but nine other people–six of them MDs–invested when we made our initial offering. Each bought 10,000 shares of common for $100 and 50 shares of preferred for $5,000. Subsequent transactions brought in more capital. Over the years, my wife and I increased our share of the ownership, such as when my partner and some early investors wanted to sell their stock.

INVESTING IN ENTREPRENEURS

A lot of venture capitalists, both then and now, would agree with the doctor who thought my partner and I should take the minority stake. But entrepreneurs need to understand that if they are going to have to sell the dream, people must believe in you, believe in your dream and invest in a company. The person doing the work must have an incentive to do a good job and to be successful.

If you are going into business, you must believe that you have the ability to make your dream happen. I sincerely believe I could accomplish the same thing today.

In 1980, 22 years after the initial financing, the company was able to buy back all of the preferred stock. Each investor received $16,100 for the preferred stock purchased in 1958 for $5,000, a long-term profit of $11,100. Each investor still held 10,000 shares of common stock.

CREATING WEALTH

About that time, the company really began to prosper, and many stock splits followed. The wisdom of the investment became spectacularly clear in 1998, 40 years after the initial financing, when American Century agreed to sell a large minority stake to J.P. Morgan for $900 million. By then, the common stock for which each investor had paid just $100 in 1958 was worth more than $60 million each!

Not a bad investment. Some investors sold at that time. Most important to me, there had been little dilution in the original financing, meaning I was able to benefit from the fruits of my labor and use the wealth I had created for my family and for society.

INVESTING IN THE FUTURE

Several investors, including doctors who were then retired or thinking of retirement, used a portion of their riches to endow chairs at the universities they had attended and to create foundations to make gifts to other worthy causes.

As for my wife and me, we are busy investing in our new dream, the biomedical research facility in Kansas City called the Stowers Institute. We have given assets that are today worth $340 million, and when we die, the remainder of our estate–about $1 billion–will go to the Institute.

We are giving back something more valuable than money to the millions of people who made our success possible. We want to improve the quality of everyone’s life.

CONTRIBUTOR(S): James E. Stowers, Jr., Chairman, American Century Investments