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Harris & Harris Group, Inc. Message Board

  • stevepearson70 stevepearson70 Nov 12, 2007 5:07 PM Flag

    Tiny Management Compensation

    In 2006 TINY board of directors abandoned the profit-sharing plan in favor of a stock options based plan. As the SEC filing stated this was done to better align interests of management and shareholders. In fact, the opposite is true.

    In a typical VC company the management (partners) receive a share of the fund profits. The fund is usually a long-term (say 7 years) venture. The partners are interested in the long term future of the portfolio companies and will make money ONLY if the portfolio companies succeed and the fund has a positive return.

    Initially TINY had a profit-sharing plan. This meant that in order for TINY management to make money TINY had to make a profit, which could happen only after TINY portfolio companies would succeed long term. This is exactly what was needed to align interests of TINY shareholders and management.

    The problem for the TINY management was that the profit sharing plan did not work for them since TINY portfolio companies never had any financial success. In 2006 the TINY management abandoned the plan altogether and switched to a stock option-based compensation a regular VC fund would never use. Instead of going for the long term with the profit sharing plan they issued to themselves a huge amount of stock options at $10,1. The stock options were front loaded, meaning that a significant portion vested within 6 month - 1 year. If TINY had an independent board of directors this kind of a compensation would never be adopted, since it removes any long term financial interest whatsoever for the management to make portfolio companies a success.

    After the stock-option plan was adopted, the total annual compensation of TINY management skyrocketed. Mr. Harris alone made close to $3M in 2007 only, with other VPs making close to $1M each. If one takes a look at the insider transactions in 2007, you see a clear pattern of TINY management dumping shares immediately after the stock options vest, provided that the share price is more than $10.1. With TINY management still holding huge amounts of stock options at $10.1 one can bet that the price of the stock will not go significantly higher than $10.1.

    What you see from this is that TINY is simply not a good long term investment since the management has no interest in the long term value of the stock. It is critical for the management though to keep the stock above $10 at any means, since if it drops below $10, TINY will not be able to keep the pyramid running by issuing more and more shares - institutional investors will not buy it. This is why you see the huge unsubstantiated PR machine (Motley Fool) trying to keep the bubble from bursting.

    As other people mentioned here, if you take a look at the trading patterns for the last week, you see the stock naturally drifting below $10, then somebody magically coming and buying until the stock goes above $10. Today was a good example where the stock dropped way below $10 in the morning and then magically closed at $10.01. This game can not go forever though since the institutional investors probably already noticed this alarming pattern and will want to get rid of the stock simply because the risk of a collapse is huge if the price goes below $10.

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    • Lets see this is about the third time I've read the same exact post from you. Next time I would suggest to at least change a few words around then maybe you could fool a few people.

      My take is that in '08 TINY will take off. With all the insider buying this week something is up.


    • What I am saying is that it is inappropriate for them to have huge short-term incentives - like stock options which vest in 6 months. They should vest in 6 years, not 6 months

    • I have a very tiny penis that i show to puppies

    • Amusing statistics from the recent letter to shareholder:

      Spending per quarter:

      Investments into portfolio companies: about $5M
      Salaries of officers and other internal expenses: $4M

      Not bad! For each dollar they spend on a portfolio company, they take one dollar for themselves

      • 1 Reply to stevep_x3
      • Sadly since I own the stock, you seem to be on target with the compensation issue. What incentive does the management team have to perform? Just because they 'fund' nanotek companies doesn't mean that their investmets will perform as companies with stock value. VERY disturbing cash flow analysis with a huge percentage going to the mis-management team instead of being used to bring new technologies to market or fund new opportunities.

    • Some people here expressed views, that shorting a stock or qualifying is as "strong sell" hurts other investors. In fact, this is not true. Multiple studies show that shorts and people who express negative views play important function in the market.

      When I search for a "strong sell" stock I usually look for companies which have bubble or pyramid qualities in them and which are not likely to exist in the long run. In other words, I am not looking for good companies which are overpriced. This would be too risky. I am looking for a company which in my view has the intrinsic value of $0 per share, and, therefore, will not make it in the long run.
      When I invest I invest long term..

      Many on this message board are technology enthusiasts. The very same is true about me. The difference is that I am trying to use my knowledge of technology and people to differentiate technology companies with a solid business model and future from companies build on hype.

      In the case of TINY I reviewed a large number of stocks, classifying them based on the technology, market potential, people, management, execution, finances etc. When I performed this analysis of many different stocks adding various factors, TINY came on top of the list as a company having the intrinsic value of $0 per share. I then tried to dig as much more on TINY as possible. This more detailed analysis again brought me to the same conclusion. If anybody has questions as to this analysis I will be more then happy to answer them here.

    • You are an IMPOSTER. I have been long TINY for over three years. Most investors are aware executives sell shares on a regular bases. Bill Gates has been selling shares since they started Microsoft. TINY is a great long term investment so stop pretending to be me.

    • Steve,
      That is probably one of the best posts I have ever read. Senior management in Corporate America seem to have figured out how to "Pay themselves first' no mater how well (or poorly) they perform. And the BOD's who are paid to protect the interests of the shareholders are obviously in bed with management. Whores, all of them.

    • cpb38,
      Please go back to the beginning and re-read the posts (assuming you did read them in the first place)
      You have completely missed the point.

      Do you think that senior management, who supposedly have their interests aligned with that of the shareholders, should be given HUGE performance bonus, while the stock has Under performed and Shareholders interests have decreased?
      Just wondering .... which one of the senior managers is your Daddy?

    • I will cover at 6.50

    • So true. Management has fattened their pockets while the stock has dropped. Have they lost confidence in themselves and in the tech? Have they realized that their companies are years away from actually making any money? I believe that they have and will stay short until we get into the 6's. That, I believe, is a safe bet with TINY. After that, I just dont know but for this to trade at twice its NAV is not justified. I didnt realize this before but the charts dont lie and management isnt betting with longs are they? Nope, they sure arent. Sorry guys but this just isnt happening.

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