How to Making Money

Harrisburg, Pennsylvania, is defaulting; Half Moon Bay, California, is disincorporating; and the City of Miami, Florida, declared a “state of fiscal urgency,” then broke contracts with workers. Yet, Pennsylvania, California, and Florida municipal bond funds managed by Blackrock are trading at or near 52-week highs.

Short sales look timely. Still, there are advantages to a buy side study. First, when the time comes, the opportunities will be broader. Second, the decision to buy will be more a case of negation than attraction. Ruling out unsavory bonds when selecting what to buy will often replicate the process of choosing what to short.

Looking through the wreckage of the 1930s and of the 1970s, there was probably more money lost by premature investments than made by those who waited. This was on the short and long side. New York City is a case in point. Its bust in the 1970s was expected. The stock market had tumbled, a commercial real estate binge of unparalleled excess had desecrated the skyline (new commercial space constructed between 1968 and 1970 exceeded 100% of the city’s commercial building between the World Wars), and – this is as predictable as night following day – from 1968 to 1970, 18 of the largest U.S. corporations left the city and 14 more announced their departure. These included American Can, PepsiCo, General Foods, U.S Tobacco and Shell Oil. Over 1.1 million New Yorkers emigrated from the city in the early and mid-1970s.

In other words, it was so obvious that New York City could not pay its bills that it was too obvious. Anecdotally, there were more investors who shorted New York City too early than those who waited and made money.

By the mid-1970s all New York City bonds were trading for approximately $25 ($100 being par). This was 1933 again, when all City of Miami bonds (yields ranged from 4-3/4% to 5-1/2%, maturities from 1935 to 1955) were quoted at $26. In both cases, the market sulked; yet, in both cases, there were bargains for those who were willing to read legal documents. One such case will be discussed below.

All finance is a reenactment. In his seminal study, Municipal Bonds: A Century of Experience (1936), A. M. Hillhouse wrote: “The major portion of over-bonding by municipalities arises out of real estate booms.” As precedent, Hillhouse quoted H. C. Adams, who wrote in 1890 (Public Debts): “he bonding of a town, and the expenditure of the money procured in showy works, is the occasion of gain to those who speculate in real estate….” Hillhouse, having quoted Adams’ observations of a previous property-boom, municipal-bond bust, should have known better than to write: “There will be no justification for a city [in the future to use] the excuse… that its tax revenues have dried up in times of falling property values.” So, if you miss this one, your children will have the same opportunity.

As for the current wasteland, revenue bonds are a choicer flock to choose from than general obligation bonds. The following distinction between the two is extracted from my seminal study (The Coming Collapse of the Municipal Bond Market ): “Revenue bonds are repaid using the revenue generated by the specific project the bonds are issued to fund (fees from a public parking garage, for example).” General obligation bonds are thought to be safer, at least they are advertised as such, because “they are backed by the full faith and credit of the issuing municipality. This means that the municipality commits its full resources to paying bondholders, including general taxation and the ability to raise more funds through credit. The ability to back up bond payments with tax funds is what makes general obligation bonds distinct from revenue bonds.”

However, it is not possible to draw blood from a stone and we will soon see municipalities that can not meet their bond commitments unless they discover an oil field larger than BP’s folly. Half Moon Bay, California, may already meet this ignoble state. From recent reports, the budget and books are so unintelligible that the city is disincorporating and may become an appendage to San Mateo County. Half Moon Bay’s bonds and yawning deficit will presumably be the burden of San Mateo County.

As a side note, the depth of incompetence on display in this instance would not be tolerated in a grammar school Citizenship Day. Given the state of the country, there will be even more amazing feats of fiscal suicide. Another participant is Standard & Poor’s, which stamped a AA- rating on $18 million of Half Moon Bay debt issued in 2009. Bondholders note: do not expect logic to guide negotiated workouts.

As for the bondholder, there are several difficulties here. Disincorporation has few if any legal precedents in California. (“It’s an option that hasn’t been tried in the state since 1972, when the tiny city of Cabazon (about 2,000 people) disincorporated.” – San Mateo County Times, August 27, 2010) The Cabazon precedent is not one to take on faith. Half Moon Bay and San Mateo County may have competing interests. A judge may have different ideas yet about how Half Moon Bay should resolve an $18 million lawsuit that the city lost related to development rights on a 24-acre property.

Just where do present circumstances leave the debt holder? That is, the owners of Half Moon Bay’s $18 million issue of Judgment Obligation bonds. And what of the free-for-all that follows? Propzero.com, jumping into the Half Moon Bay debate, suggests that disincorporation “may be the answer for many California cities struggling with too many spending commitments and not enough money. Digging out of budget holes may be harder than simply shutting things down.”

As goes Half Moon Bay, so goes the country, or so it seems. If San Mateo County is stuck with the Judgment Obligation bonds, and a large annual deficit, it is a sure bet the county will appeal to the state; Governor Schwarznegger will appeal to President Obama; and the president will appeal – to Congress?

It was easier to bottom fish among CDOs that were trading at $15 (as a group) in 2008 than to wager on these contingencies. Revenue bonds are comparatively easy to understand. In a large-scale, municipal-bond swoon, revenue bonds will sell off. That will be true even if these are water bonds, supported by the revenue that customers pay for services; even if these revenues cannot be touched by the grasping Yoga Instructors’ Union. (Half Moon Bay residents are distraught at the loss of municipal yoga instruction – San Mateo County Times.)

We return to New York City to note the lack of perceptiveness in a time of chaos. In April 1975, the city defaulted on a short-term note. It missed an interest payment (maybe more than one, it isn’t clear). The coupon was eventually paid, but the “New York City default” was highly publicized.

The Municipal Assistance Corporation (MAC) was formed. In The Bond Book, Annette Thau explained that MAC bonds were not obligations of New York City: “The revenues to pay debt service were backed, not by the taxing power of the city, but by the state of New York, and by a special lien on the city’s sales tax and… on a stock transfer tax.” These were revenue bonds that initially yielded “10% as compared to 8% for securities with comparable rating and maturity.”

Thau went on to tell her readers that the winning team does its homework: “This episode demonstrates why it pays, literally, to be very precise about exactly which revenue streams back debt service. In this instance, MAC bonds were tarred by the woes of the city, even though they were not obligations of the city….”

Revenues used to pay MAC bondholders could not flow to the city until the coupons were already met. This is true of services in different municipalities today. Utilities often fall in this category. Advanced critical reading skills are a prerequisite to distinguish a $25 from a $75 bond.

What of critical services in municipalities without predictable sources of revenue? In July, Indianapolis, Indiana, decided to sell its water and sewer utilities. In August, San Jose, California, discussed privatizing its water utility. There are many other such discussions. The media reported both the Indianapolis and San Jose decisions as sales. From precedent, the transactions may be more complicated than that.

It would be unusual for a local government to relinquish all control. There are many different possible arrangements with investors. At one end, there have been attempts to issue corporate stock in the municipality. This was proposed in Coral Gables, Florida, during the 1930s. It did not work but investment bankers are more inventive today. (Or, maybe not. Assets to be pledged by Coral Gables included “the municipal golf course and club house, the Venetian pool, the Coliseum….” Maybe not the one in Rome, but investment bankers are inventive.)

Probably the most likely arrangements are Public-Private Partnerships. In such partnerships, the investor, a “concessionaire,” steps in after bonds stand no chance of repayment. These might be for a vital service such as a water system, airport, or toll road. Concessionaires pay off all or a portion of the debt in exchange for the right to operate the asset for a negotiated return. Internal rates of return generally fall between 13% – 20%. This is a very simplified description.

There are many other investment approaches that haven’t been mentioned. Those mentioned are merely outlined. If it is not obvious, it must be emphasized how preliminary this discussion has been before making an investment. The most important advice here, on the short or long side, is to be patient, to understand the documents of the security, the laws and covenants that bind related parties, and to know the history of municipal bond defaults. This will open the investor’s imagination to the most improbable scenarios.

This series is supported by RingCentral, the leading business phone system designed for today’s small businesses, entrepreneurs, and mobile professionals. Visit RingCentral.com to learn more.

Finding the right workspace is like dating — the class='blippr-nobr'>Internetclass="blippr-nobr">Internet has made it a lot more complex. In essence, this means more options.

Whereas the traditional office once served as the default choice for effective communication and collaboration between coworkers, today’s businesses can be just as productive by collaborating on the web, with as little as $10 and a Google account. Entrepreneurs operate from coffee shops, kitchen tables, and coworking spaces in addition to the traditional office.

We asked three entrepreneurs with drastically different office strategies for their advice on choosing a workspace. Read on for their tips and add your own in the comments below.

What Kind of Office is Best to Start In?

“When you’re starting out, you should absolutely not be spending money on rent,” says Jason Fried, the founder of web-based software company 37signals. “It’s a huge waste of money.”

After Fried started 37signals, he and the other two employees working for the company at the time shared a room with another business. “Basically we had a corner of a desk,” he jokes. Assuming you can find another company that is willing to share, teaming up on a space saves cash while still providing a place to work away from the distractions of home.

Others see value in setting up their own offices from the get-go. After a brief stint at the virtual office, Anthony Franco chose a house in Denver to set up his company, EffectiveUI. It wasn’t an ideal workspace, but he got a deal on the rent. New employees were often greeted on their first day with an Allen wrench, to be used for assembling their own desks.

“We started at home, but if we were going to handle demand, we needed to have a place where we could come and work,” Franco said. He added that the extra value of being able to work as a team (in person) more than made up for the cost of an office.

While the lease route worked out well for EffectiveUI, there’s a certain amount of risk involved with jumping into your own space too soon.

“Most commercial leases are for three to four years, and so if you’re small and you’re starting out and you’ve got a couple people, you’re making way too much of a commitment,” Fried argues. “You don’t know where you’re going to be in three years.”

Is Coworking Right for Your Business?

One modern compromise between working completely virtually and committing to a lease is working at a coworking space. These office spaces provide a work environment and an alternative to coffee shops for independent workers.

Campbell McKellar discovered the value of coworking spaces when the company she worked for left their expensive traditional office and started working virtually. The move allowed her to work from anywhere, and she chose Maine. “I was trying to do work in a cottage with family members and dogs running around,” she said. “I loved being fully mobile and independent, but I also wanted to have a platform to do my work.”

LooseCubes, the company McKellar founded in May, runs a website that matches independent workers with coworking spaces and spare desks in other companies. Quite appropriately, it’s currently being run out of a coworking space. McKellar says that working from the space has helped her launch.

“Especially if you’re in a creative business, the best way to get ideas is to meet new people,” she says. “You can get stale by talking to the same five people every day.”

Coworking allows McKellar to “unintentionally network” with the other people in the space, to seek advice from other entrepreneurs, and to host meetings and work with her team at a place that isn’t her living room.

On the other hand, coworking has its challenges and might not be a great fit for every company. Coworking spaces can be distracting, and most of them are set up in a way that requires people making phone calls to seek silence in the hallway.

“For us, quiet and privacy is very important,” Fried says. “So, coworking spaces and coffee shops don’t work for us.”

McKellar admits that on days when she’s “under the gun,” she chooses to work at home. And there is a point at which a company outgrows a coworking space. LooseCubes, for instance, plans to move to its own office space sometime in the next three months.

When Should a Company Transition to a Traditional Office?

“We need to be in a room with a whiteboard that isn’t erased every day, where we can have a conference call in an open environment,” McKellar says of her hopes for transitioning to an office space. Before she commits, however, she wants to wait to see how her site’s public launch goes. In the meantime, she’s renting a room at a Manhattan coworking space called New Work City.

All companies should do something along these lines before committing to a lease, Fried says. “You don’t know if you’re going to be successful,” he says. “And if you are, you might need more space than you have right now…You don’t want to lock yourself into anything when you’re getting started. You want to be as flexible as you possibly can.”

For some people, this means staying virtual for as long as possible. For others like McKellar, it means launching from a coworking space. For Fried’s 37signals, which is based in Chicago but has employees in 11 cities, it meant working from a variety of shared office spaces for about ten years before finally opting for an office of its own in August.

But how do you know when it’s time to make the switch?

One obvious factor is space: “We were only able to rent five or six desks in our last office,” Fried says. “We had nine people in Chicago. We were out of desks at six. So everyone couldn’t come in at the same time, and that was problem.”

Another factor is work environment. If the space you are working in is interfering with your work, it might also be time to opt for an environment you can control. “We work very quietly,” explains Fried. “So our whole thing is be as quiet as possible, don’t talk throughout the day, just have a very quiet setting like a library…You can’t impose those kinds of rules on another company, especially if it’s the other company’s space.”

What are the Benefits of a Traditional Office?

For EffectiveUI, the traditional office was always a great fit. Having grown from a couple of founders to 100 employees since 2005, the company long ago left its house-office behind. They now work from a 12,000-square-foot office space.

But both spaces fulfilled the same requirements: “Whiteboarding, talking with each other and eating lunch together: It’s part of the team culture,” Franco says.

The more traditional office, however, has given him some additional perks. “We have clients come to visit us. We’re able to brand the building and the space, and when people come they can see we’re a real business,” he says.

A lot of people associate traditional offices with being trapped in a cubicle, but Franco maintains that it doesn’t have to be that way. “Just get creative and make it fun, but also give everyone a place to go,” he says.

Can I Have an Untraditional Traditional Office?

Fried thinks of his new office as more of a home base than a traditional office. Employees are free to work at home whenever they want, and half of the company still works in other cities.

“We feel that a combination of both is the best route,” Fried says. “Because we all do want to get together occasionally, and sometimes small teams of five or six people want to get together for a while.”

The home base strategy combines the benefits of virtual and traditional workspaces. When people want to work from another city or find they work better in their pajamas, they can stay home. When they need to collaborate or want to get out of the house, they have a great place to work.

“Our office is highly customized for the way we work,” says Fried. For instance, it has soundproof walls, phone booths for people to make uninterrupted calls, and rooms for small teams.

Most employees who work from Chicago come into the new office about three or four days a week. “We want people to work wherever they work best,” Fried says.

What are your tips for choosing a workspace? Add them in the comments below.

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Eric Boehlert: Fox <b>News</b> Has a Christine O&#39;Donnell Problem

Why? Because now Fox News has to explain to viewers why O'Donnell is ready to serve in the US Senate even though she's not ready to appear on Fox News Sunday. Awkward.

Bad <b>News</b> for Feingold

"There are a lot of blogs and news sites claiming to understand politics, but only a few actually do. Political Wire is one of them." -- Chuck Todd, NBC News political director "Concise. Relevant. To the point. Political Wire is the ...

Small Business <b>News</b>: Social Media and the Entrepreneur

Social media and entrepreneurship represent the perfect partnership in today's small business world. Free and easy to operate social media tools have made it.

robert shumake

Eric Boehlert: Fox <b>News</b> Has a Christine O&#39;Donnell Problem

Why? Because now Fox News has to explain to viewers why O'Donnell is ready to serve in the US Senate even though she's not ready to appear on Fox News Sunday. Awkward.

Bad <b>News</b> for Feingold

"There are a lot of blogs and news sites claiming to understand politics, but only a few actually do. Political Wire is one of them." -- Chuck Todd, NBC News political director "Concise. Relevant. To the point. Political Wire is the ...

Small Business <b>News</b>: Social Media and the Entrepreneur

Social media and entrepreneurship represent the perfect partnership in today's small business world. Free and easy to operate social media tools have made it.

Harrisburg, Pennsylvania, is defaulting; Half Moon Bay, California, is disincorporating; and the City of Miami, Florida, declared a “state of fiscal urgency,” then broke contracts with workers. Yet, Pennsylvania, California, and Florida municipal bond funds managed by Blackrock are trading at or near 52-week highs.

Short sales look timely. Still, there are advantages to a buy side study. First, when the time comes, the opportunities will be broader. Second, the decision to buy will be more a case of negation than attraction. Ruling out unsavory bonds when selecting what to buy will often replicate the process of choosing what to short.

Looking through the wreckage of the 1930s and of the 1970s, there was probably more money lost by premature investments than made by those who waited. This was on the short and long side. New York City is a case in point. Its bust in the 1970s was expected. The stock market had tumbled, a commercial real estate binge of unparalleled excess had desecrated the skyline (new commercial space constructed between 1968 and 1970 exceeded 100% of the city’s commercial building between the World Wars), and – this is as predictable as night following day – from 1968 to 1970, 18 of the largest U.S. corporations left the city and 14 more announced their departure. These included American Can, PepsiCo, General Foods, U.S Tobacco and Shell Oil. Over 1.1 million New Yorkers emigrated from the city in the early and mid-1970s.

In other words, it was so obvious that New York City could not pay its bills that it was too obvious. Anecdotally, there were more investors who shorted New York City too early than those who waited and made money.

By the mid-1970s all New York City bonds were trading for approximately $25 ($100 being par). This was 1933 again, when all City of Miami bonds (yields ranged from 4-3/4% to 5-1/2%, maturities from 1935 to 1955) were quoted at $26. In both cases, the market sulked; yet, in both cases, there were bargains for those who were willing to read legal documents. One such case will be discussed below.

All finance is a reenactment. In his seminal study, Municipal Bonds: A Century of Experience (1936), A. M. Hillhouse wrote: “The major portion of over-bonding by municipalities arises out of real estate booms.” As precedent, Hillhouse quoted H. C. Adams, who wrote in 1890 (Public Debts): “he bonding of a town, and the expenditure of the money procured in showy works, is the occasion of gain to those who speculate in real estate….” Hillhouse, having quoted Adams’ observations of a previous property-boom, municipal-bond bust, should have known better than to write: “There will be no justification for a city [in the future to use] the excuse… that its tax revenues have dried up in times of falling property values.” So, if you miss this one, your children will have the same opportunity.

As for the current wasteland, revenue bonds are a choicer flock to choose from than general obligation bonds. The following distinction between the two is extracted from my seminal study (The Coming Collapse of the Municipal Bond Market ): “Revenue bonds are repaid using the revenue generated by the specific project the bonds are issued to fund (fees from a public parking garage, for example).” General obligation bonds are thought to be safer, at least they are advertised as such, because “they are backed by the full faith and credit of the issuing municipality. This means that the municipality commits its full resources to paying bondholders, including general taxation and the ability to raise more funds through credit. The ability to back up bond payments with tax funds is what makes general obligation bonds distinct from revenue bonds.”

However, it is not possible to draw blood from a stone and we will soon see municipalities that can not meet their bond commitments unless they discover an oil field larger than BP’s folly. Half Moon Bay, California, may already meet this ignoble state. From recent reports, the budget and books are so unintelligible that the city is disincorporating and may become an appendage to San Mateo County. Half Moon Bay’s bonds and yawning deficit will presumably be the burden of San Mateo County.

As a side note, the depth of incompetence on display in this instance would not be tolerated in a grammar school Citizenship Day. Given the state of the country, there will be even more amazing feats of fiscal suicide. Another participant is Standard & Poor’s, which stamped a AA- rating on $18 million of Half Moon Bay debt issued in 2009. Bondholders note: do not expect logic to guide negotiated workouts.

As for the bondholder, there are several difficulties here. Disincorporation has few if any legal precedents in California. (“It’s an option that hasn’t been tried in the state since 1972, when the tiny city of Cabazon (about 2,000 people) disincorporated.” – San Mateo County Times, August 27, 2010) The Cabazon precedent is not one to take on faith. Half Moon Bay and San Mateo County may have competing interests. A judge may have different ideas yet about how Half Moon Bay should resolve an $18 million lawsuit that the city lost related to development rights on a 24-acre property.

Just where do present circumstances leave the debt holder? That is, the owners of Half Moon Bay’s $18 million issue of Judgment Obligation bonds. And what of the free-for-all that follows? Propzero.com, jumping into the Half Moon Bay debate, suggests that disincorporation “may be the answer for many California cities struggling with too many spending commitments and not enough money. Digging out of budget holes may be harder than simply shutting things down.”

As goes Half Moon Bay, so goes the country, or so it seems. If San Mateo County is stuck with the Judgment Obligation bonds, and a large annual deficit, it is a sure bet the county will appeal to the state; Governor Schwarznegger will appeal to President Obama; and the president will appeal – to Congress?

It was easier to bottom fish among CDOs that were trading at $15 (as a group) in 2008 than to wager on these contingencies. Revenue bonds are comparatively easy to understand. In a large-scale, municipal-bond swoon, revenue bonds will sell off. That will be true even if these are water bonds, supported by the revenue that customers pay for services; even if these revenues cannot be touched by the grasping Yoga Instructors’ Union. (Half Moon Bay residents are distraught at the loss of municipal yoga instruction – San Mateo County Times.)

We return to New York City to note the lack of perceptiveness in a time of chaos. In April 1975, the city defaulted on a short-term note. It missed an interest payment (maybe more than one, it isn’t clear). The coupon was eventually paid, but the “New York City default” was highly publicized.

The Municipal Assistance Corporation (MAC) was formed. In The Bond Book, Annette Thau explained that MAC bonds were not obligations of New York City: “The revenues to pay debt service were backed, not by the taxing power of the city, but by the state of New York, and by a special lien on the city’s sales tax and… on a stock transfer tax.” These were revenue bonds that initially yielded “10% as compared to 8% for securities with comparable rating and maturity.”

Thau went on to tell her readers that the winning team does its homework: “This episode demonstrates why it pays, literally, to be very precise about exactly which revenue streams back debt service. In this instance, MAC bonds were tarred by the woes of the city, even though they were not obligations of the city….”

Revenues used to pay MAC bondholders could not flow to the city until the coupons were already met. This is true of services in different municipalities today. Utilities often fall in this category. Advanced critical reading skills are a prerequisite to distinguish a $25 from a $75 bond.

What of critical services in municipalities without predictable sources of revenue? In July, Indianapolis, Indiana, decided to sell its water and sewer utilities. In August, San Jose, California, discussed privatizing its water utility. There are many other such discussions. The media reported both the Indianapolis and San Jose decisions as sales. From precedent, the transactions may be more complicated than that.

It would be unusual for a local government to relinquish all control. There are many different possible arrangements with investors. At one end, there have been attempts to issue corporate stock in the municipality. This was proposed in Coral Gables, Florida, during the 1930s. It did not work but investment bankers are more inventive today. (Or, maybe not. Assets to be pledged by Coral Gables included “the municipal golf course and club house, the Venetian pool, the Coliseum….” Maybe not the one in Rome, but investment bankers are inventive.)

Probably the most likely arrangements are Public-Private Partnerships. In such partnerships, the investor, a “concessionaire,” steps in after bonds stand no chance of repayment. These might be for a vital service such as a water system, airport, or toll road. Concessionaires pay off all or a portion of the debt in exchange for the right to operate the asset for a negotiated return. Internal rates of return generally fall between 13% – 20%. This is a very simplified description.

There are many other investment approaches that haven’t been mentioned. Those mentioned are merely outlined. If it is not obvious, it must be emphasized how preliminary this discussion has been before making an investment. The most important advice here, on the short or long side, is to be patient, to understand the documents of the security, the laws and covenants that bind related parties, and to know the history of municipal bond defaults. This will open the investor’s imagination to the most improbable scenarios.

This series is supported by RingCentral, the leading business phone system designed for today’s small businesses, entrepreneurs, and mobile professionals. Visit RingCentral.com to learn more.

Finding the right workspace is like dating — the class='blippr-nobr'>Internetclass="blippr-nobr">Internet has made it a lot more complex. In essence, this means more options.

Whereas the traditional office once served as the default choice for effective communication and collaboration between coworkers, today’s businesses can be just as productive by collaborating on the web, with as little as $10 and a Google account. Entrepreneurs operate from coffee shops, kitchen tables, and coworking spaces in addition to the traditional office.

We asked three entrepreneurs with drastically different office strategies for their advice on choosing a workspace. Read on for their tips and add your own in the comments below.

What Kind of Office is Best to Start In?

“When you’re starting out, you should absolutely not be spending money on rent,” says Jason Fried, the founder of web-based software company 37signals. “It’s a huge waste of money.”

After Fried started 37signals, he and the other two employees working for the company at the time shared a room with another business. “Basically we had a corner of a desk,” he jokes. Assuming you can find another company that is willing to share, teaming up on a space saves cash while still providing a place to work away from the distractions of home.

Others see value in setting up their own offices from the get-go. After a brief stint at the virtual office, Anthony Franco chose a house in Denver to set up his company, EffectiveUI. It wasn’t an ideal workspace, but he got a deal on the rent. New employees were often greeted on their first day with an Allen wrench, to be used for assembling their own desks.

“We started at home, but if we were going to handle demand, we needed to have a place where we could come and work,” Franco said. He added that the extra value of being able to work as a team (in person) more than made up for the cost of an office.

While the lease route worked out well for EffectiveUI, there’s a certain amount of risk involved with jumping into your own space too soon.

“Most commercial leases are for three to four years, and so if you’re small and you’re starting out and you’ve got a couple people, you’re making way too much of a commitment,” Fried argues. “You don’t know where you’re going to be in three years.”

Is Coworking Right for Your Business?

One modern compromise between working completely virtually and committing to a lease is working at a coworking space. These office spaces provide a work environment and an alternative to coffee shops for independent workers.

Campbell McKellar discovered the value of coworking spaces when the company she worked for left their expensive traditional office and started working virtually. The move allowed her to work from anywhere, and she chose Maine. “I was trying to do work in a cottage with family members and dogs running around,” she said. “I loved being fully mobile and independent, but I also wanted to have a platform to do my work.”

LooseCubes, the company McKellar founded in May, runs a website that matches independent workers with coworking spaces and spare desks in other companies. Quite appropriately, it’s currently being run out of a coworking space. McKellar says that working from the space has helped her launch.

“Especially if you’re in a creative business, the best way to get ideas is to meet new people,” she says. “You can get stale by talking to the same five people every day.”

Coworking allows McKellar to “unintentionally network” with the other people in the space, to seek advice from other entrepreneurs, and to host meetings and work with her team at a place that isn’t her living room.

On the other hand, coworking has its challenges and might not be a great fit for every company. Coworking spaces can be distracting, and most of them are set up in a way that requires people making phone calls to seek silence in the hallway.

“For us, quiet and privacy is very important,” Fried says. “So, coworking spaces and coffee shops don’t work for us.”

McKellar admits that on days when she’s “under the gun,” she chooses to work at home. And there is a point at which a company outgrows a coworking space. LooseCubes, for instance, plans to move to its own office space sometime in the next three months.

When Should a Company Transition to a Traditional Office?

“We need to be in a room with a whiteboard that isn’t erased every day, where we can have a conference call in an open environment,” McKellar says of her hopes for transitioning to an office space. Before she commits, however, she wants to wait to see how her site’s public launch goes. In the meantime, she’s renting a room at a Manhattan coworking space called New Work City.

All companies should do something along these lines before committing to a lease, Fried says. “You don’t know if you’re going to be successful,” he says. “And if you are, you might need more space than you have right now…You don’t want to lock yourself into anything when you’re getting started. You want to be as flexible as you possibly can.”

For some people, this means staying virtual for as long as possible. For others like McKellar, it means launching from a coworking space. For Fried’s 37signals, which is based in Chicago but has employees in 11 cities, it meant working from a variety of shared office spaces for about ten years before finally opting for an office of its own in August.

But how do you know when it’s time to make the switch?

One obvious factor is space: “We were only able to rent five or six desks in our last office,” Fried says. “We had nine people in Chicago. We were out of desks at six. So everyone couldn’t come in at the same time, and that was problem.”

Another factor is work environment. If the space you are working in is interfering with your work, it might also be time to opt for an environment you can control. “We work very quietly,” explains Fried. “So our whole thing is be as quiet as possible, don’t talk throughout the day, just have a very quiet setting like a library…You can’t impose those kinds of rules on another company, especially if it’s the other company’s space.”

What are the Benefits of a Traditional Office?

For EffectiveUI, the traditional office was always a great fit. Having grown from a couple of founders to 100 employees since 2005, the company long ago left its house-office behind. They now work from a 12,000-square-foot office space.

But both spaces fulfilled the same requirements: “Whiteboarding, talking with each other and eating lunch together: It’s part of the team culture,” Franco says.

The more traditional office, however, has given him some additional perks. “We have clients come to visit us. We’re able to brand the building and the space, and when people come they can see we’re a real business,” he says.

A lot of people associate traditional offices with being trapped in a cubicle, but Franco maintains that it doesn’t have to be that way. “Just get creative and make it fun, but also give everyone a place to go,” he says.

Can I Have an Untraditional Traditional Office?

Fried thinks of his new office as more of a home base than a traditional office. Employees are free to work at home whenever they want, and half of the company still works in other cities.

“We feel that a combination of both is the best route,” Fried says. “Because we all do want to get together occasionally, and sometimes small teams of five or six people want to get together for a while.”

The home base strategy combines the benefits of virtual and traditional workspaces. When people want to work from another city or find they work better in their pajamas, they can stay home. When they need to collaborate or want to get out of the house, they have a great place to work.

“Our office is highly customized for the way we work,” says Fried. For instance, it has soundproof walls, phone booths for people to make uninterrupted calls, and rooms for small teams.

Most employees who work from Chicago come into the new office about three or four days a week. “We want people to work wherever they work best,” Fried says.

What are your tips for choosing a workspace? Add them in the comments below.

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