The Fairshare Model A Performance-Based Capital Structure for Companies Seeking Venture Capital via a CrowdFunded Initial Public Offering (IPO)

Transcription

1 The Fairshare Model A Performance-Based Capital Structure for Companies Seeking Venture Capital via a CrowdFunded Initial Public Offering (IPO) The Nuts & Bolts slide deck for experts in capital structures & accounting The subject of a book-in-progress by Karl M Sjogren For more information, visit or karl@fairsharemodel.com

2 Welcome! I m working on a book to promote the use of a performance-based capital structure (The Fairshare Model) by companies that seek to raise venture capital via a public offering (via an SEC registration statement). This summary describes key concepts for those familiar with capital formation issues. I welcome critical review and commentary as I work through the process. Karl M Sjogren The Fairshare Model By Karl M Sjogren 2

3 Goals A capital structure that enables small investors to make venture capital investments on terms similar to those sophisticated investors obtain. Expand the availability of low-cost equity capital to new and emerging companies. The Fairshare Model By Karl M Sjogren 3

4 Objectives 1. A capital structure that aligns and balances the interests of investors and the entrepreneurial team. 2. Make it attractive for a venture-stage company (that is confident of its ability to perform) to offer public investors: a deal with low valuations, and protections comparable to what a VC fund might get. 3. A capital structure that provides a competitive advantage for attracting and managing employees. The Fairshare Model By Karl M Sjogren 4

5 Why It Could Happen Capital formation is inefficient for private companies and unfair for public investors Angel Investor-backed companies need more options Model is disruptive innovation: valuation-aware public investors will assess conventional deals differently Improving access to capital for young companies has Main Street support Power of social networking The Fairshare Model By Karl M Sjogren 5

6 Fairshare Model Basics Two classes of stock-- Investor Stock & Performance Stock. Investor Stock is tradable in the market. It is issued for capital. Performance Stock is not tradable. Its issued to employees and consultants as incentive stock. Like a voting stock option that vests with performance, not the passage of time. It can convert to Investor Stock based upon performance over many years. Criteria for performance Likely performance measures: revenue, earnings, raises of capital (e.g., a secondary offering) and the market appreciation of Investor Stock. Measures will be relevant to the issuer and its industry. Initial criteria: adopted by shareholders and described in offering documents Changes to criteria: requires approval of majority of each class of stock Performance is measured quarterly. Both classes of stock vote equally as a class, so control is shared equally. The Fairshare Model by Karl M Sjogren 6

7 % Ownership Dilution If measured on a percentage basis, the original Investor Stock is subject to heavy ownership dilution over a period of years. Its holders begin with 100% of the tradable stock but as performance stock converts, the original Investor Stock represents a smaller proportion of the total. The Fairshare Model By Karl M Sjogren 7

8 Economic Dilution On an economic basis, the original Investor Stock should experience no dilution. The performance that caused conversion should increase the value of company. The value of the the company, measured by the market value of Investor Stock (pre vs post conversion). The Fairshare Model By Karl M Sjogren 8

9 Which Is Relevant? Venture capitalists often say "I'd rather own a small share of a big company than a big share of a small one." This is what happens in the Fairshare Model, except that unlike an investment in a private company, Investor Stock may be publicly traded. The Fairshare Model By Karl M Sjogren 9

10 Fairshare Model v Conventional Model The Fairshare Model adapts standard VC deal terms to work in the public markets. adds a new twist and substance to the phrase "public venture capital", which is sometimes used to encourage interest in early stage IPOs. The Fairshare Model By Karl M Sjogren 10

11 Conventional Model Investors buy preferred stock, which has better investor protections than common stock. Preferred shareholders usually control the board of directors and otherwise control the company. Preferred shareholders have a "liquidation preference" to the proceeds from the sale of the company or key assets. Insiders get common stock and/or options to purchase common stock at FMV for past and future performance. Shares vest over time. Upon an IPO, preferred stock converts into common stock. Company now only has common stock Issued to founders and employees, Converted preferred stock, and Stock issued in the IPO. The Fairshare Model By Karl M Sjogren 11

12 Ideas to Explore Use of model by a blind pool company Business incubator-directed seed or 1 st round investments: some companies may have an IPO Regional focus (e.g., invest in Detroit-area companies) University affiliation Public Limited Partners of group that co-invests with Angel Investor groups Affinity group marketing Regional University affiliation Industry focus (e.g., food, environmental, social media, games) The Fairshare Model By Karl M Sjogren 12

13 To Be Determined: #1 of #2 Gain from conversion of Performance Stock to Investor Stock: Cap Gain or Ordinary Income? When recognized? Capital gain Short term or long term? Define holding period. Cap gain treatment energizes Fairshare Model. Best case: No gain on conversion; total gain = cap gain that is recognized when Investor Stock sold. May work if Performance Stock is senior to Investor Stock. Ordinary Income Discourages reliance on Performance Stock as compensation for early players; they will prefer comp based on Investor Stock. The Fairshare Model By Karl M Sjogren 13

14 To Be Determined: #2 of #2 Stock-based compensation expense may be expensive (in cash) to measure. Losers the issuer and its shareholders Winners - valuation and accounting experts Stock-based comp expense will be enormous! Issuers will need to explain why Readers of financial statements disregard it anyway I would like to talk with parties who find the stock comp expense useful for their purposes! A company that performs really well has no hope of being profitable on a GAAP basis Does NASDAQ exclude stock comp expense when evaluating a company for being listed? The Fairshare Model By Karl M Sjogren 14

15 A Pitch for Help If you have expertise in areas the Fairshare Model needs to address, please share your thoughts with me Angel investors Companies that you back are likely Early Adopters. Issues? Attorneys Performance Stock administration is unexplored territory. Accountants & valuation experts There are tax and accounting matters Broker-Dealers Might your clients be interested in deals with this model? Potential Adopters What concerns do you have? The Fairshare Model By Karl M Sjogren 15

16 My Plan 1. Work on book 2. Solicit feedback on key concepts 3. Write articles to publicize concept before book published 4. Publish & promote!! Engage the public and critics in discussion. 5. Use to gauge interest. 6. If interest is significant, write how-to book The Fairshare Model By Karl M Sjogren 16