Presentation on The Fairshare Model made on June 19, 2019 in San Francisco by Karl Sjogren to a cohort of visitors from HWZ Zurich University of Applied Sciences in Business Administration.
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Fairshare Model HWZ Swiss presentation 6.19.19
1. The Fairshare Model:
A Performance-Based
Capital Structure
for Venture-Stage
Initial Public Offerings
(Published April 2019)
Karl Sjögren
HWZ University of Applied Sciences
In Business Administration—Zurich
19 June 2019
San Francisco, CA USA presentation
2. My Background
• BA and MBA (Michigan State University)
• CPA (inactive)
• Established manufacturing companies, startups and turnarounds
• >30 years as consulting CFO/Controller in SF Bay Area
• Co-founder & CEO of Fairshare, Inc.
3. Fairshare, Inc. (1996-2001)
• Formed an online community of investors interested in “Direct Public
Offerings” (IPOs sold without a broker-dealer).
• Fairshare offered:
• Education on valuation and deal structures
• Member interaction (message boards, chat rooms)
• Once we had a critical mass of members, we planned to provide free
access to companies to pitch their DPOs, if they:
• Had a legal offering
• Passed a due diligence review
• Used the Fairshare Model deal structure
• Allowed Fairshare members to invest as little as $100
• Model: a “buyers cooperative.” Revenue from membership fees and
advertising. Charge no commission and don’t hold anyone’s stock or
money.
4. What Happened?
Fairshare concept was too early
• We underestimated the time and expense of dealing with
the concerns of securities regulators
• Dotcom and telecom busts undermined investor interest in
venture stage IPOs.
Accomplishments:
• 16,000 opt-in members (and many more visitors)
• 2/3rds joined as free member
• 1/3rd joined as paid member ($50 or $100)
• I learned to write about capital structures for people who
are new to them!
No offerings presented to Fairshare members.
5. 2013—I Resurrect the Idea (Partially)
• Environment had evolved over two decades:
• Entrepreneurship is “cool,” and even a college major,
• more people curious about valuations, and
• regulators more receptive to innovation (e.g., JOBS Act of 2011 & Fintech).
• Plan:
• Promote Fairshare Model deal structure via a book (i.e., unregulated),
• encourage funding portals, offering platforms & BDs to implement, and
• make the Fairshare Model to capital structures, what LINUX is to computer
operating systems (i.e., an open system).
6. If the Fairshare Model is a book, what’s the story?
• Protagonist (Hero) – the Middle Class (average investors & employees)
• Antagonist (Villain) –The-Way-Things-Are Done-Now (a conventional
capital structure)
• Inspiration for the hero—Accredited investors, who use a modified
conventional capital structure to reduce valuation risk.
• Conflict—anxiety about the future; “Can the benefits of capitalism be
more fairly realized?”
• Challenge:
• Hero must recognize his latent power to shape markets by asserting his interests.
• Hero must develop new skills.
8. Vision and Goal
Vision
Average investors can invest in the IPOs of venture-stage companies…
on terms comparable to those that venture capitalists get in a private
offering.
Goal
1. IPO investors: Reduce valuation risk.
2. Companies: Attractive alternative to a VC round
9. What is a “Venture-Stage” IPO?
An IPO for a company with these risk factors:
• Market for its products/services is uncertain
• Unproven business model
• Uncertain timeline to profitable operations
• Negative cash flow from operations
• It requires investor cash to operate
• Little or no sustainable competitive advantage
• Execution risk; team may not build value for investors
Many public companies list such risk factors in their disclosure documents.
10. Three Views of “Venture Capital”
1. Traditional view
2. Silicon Valley view
3. Fairshare Model view
14. The 2:3 Paradigm for Venture-Stage Investors
2 Venture-Stage Investor Risks
1. Failure risk
2. Valuation risk
3 Equity Capital Structures
1. Conventional
2. Modified Conventional
3. Fairshare Model
* Fraud = [Failure Risk + Valuation Risk] X False and/or Inadequate Disclosure
*
15. A Conventional Capital Structure
Used in most IPOs & in private offerings with relatively unsophisticated investors.
• Single class of stock (All for one and one for all)
• Issuer sets value for future performance when new stock is sold.
• If I sell you half of my new company for EUR 1.00, we agree my future performance is worth EUR 1.00.
My idea (EUR 1.00) + Your money (EUR 1.00) = Value of the company after you invest (EUR 2.00)
or
My share (50%) + Your share (50%) = Total ownership (100%)
Valuation risk
Is my idea worth
EUR 1.00?
16. Modified Conventional Capital Structure
Used by sophisticated private investors (especially VC, private equity). Hence, it is the “VC Model.”
• “Conventional” because issuer sets a value for future performance when new stock sold.
• “Modified” because of “price protection”—deal terms that protect investors from overvaluation.
• Enabler: a multi-class capital structure (Some shareholders are “more equal” than others)
• price ratchet,
• liquidation preference,
• redemption rights, etc.
17. The Fairshare Model Applies
the Idea of Price Protection to an IPO
• Multi-class stock structure
• Deal terms
18. Put another way, the Big Idea is…
…to replicate the VC Model for investors in a public offering—one open to any investor.
20. Fairshare Model Structure
• Two classes of stock:
• Investor Stock (common stock) issued for money or delivered performance
• Performance Stock (preferred stock) for future performance
• Both vote, only Investor Stock can trade
• Performance Stock can never trade
• Based on milestones, Performance Stock converts to Investor Stock
Approval from each class required for:
• Board member election
• Change to conversion criteria
• Compensation plans involving Investor Stock
• Changes to capital structure
• Acquisition matters
21. Conversion Criteria
• Set by company, described in offering documents
• Modified by agreement of both classes of stock
• There will be variation based on:
• Industry
• Stage of development
• Geographic location
• Personalities
• Likely criteria:
• Rise in market cap (Investor Stock shares X market price)
• Developmental achievements
• Financial (sales, profit)
• Eventual acquisition price (if applicable)
• If applicable—measures of social good
22. Implications for Fairshare Model Issuers
• Incentive to offer IPO investors a really low pre-money valuation
• Market capitalization likely to be a measure of performance
• Issuer has competitive advantage in recruiting and motivating employees
• Salary and benefits
• Options on Investor Stock
• Participation in Performance Stock pool
23. Incentives to Support Adoption of the Fairshare Model Employees
IPO
investor
Pre-IPO
investor
IPO investors have less valuation risk X
Valuation decoupled from voting power X X X
Employees can earn more wealth than VC would allow X
Avoid squeeze from new VC investor X X
Liquidity option X X X
Secondary market likely to bid-up Investor Stock X X X
Powerful motivation for employees to perform well X X X
IPO shares can be distributed to achieve marketing goals that
would normally require company to spend capital
X X X
24.
25.
26. How does the Fairshare Model story end?
• Challenges
1. A critical mass of investor support for it must be apparent.
2. That will motivate experts in securities, tax and accounting, governance and
others in the capital eco-system to assess how to implement the Fairshare
Model.
3. Time and experience: companies that use it, must like it.
• Yet to be written.
• It’s just an idea now
• Chicken vs. egg
28. The Concept Gap
Hofstadter’s Law
It always takes longer than you expect, even when
you take into account Hofstadter’s Law.
Fairshare, Inc.
Fairshare Model book
29. Want More Food for Thought?
• Check out my April 2019 book, The
Fairshare Model: A Performance-Based
Capital Structure for Venture-Stage Initial
Public Offerings.
• It reimagines capitalism at the DNA level—
where ownership interests are set.
• It is available from Amazon, bookstores
and many e-book distributors, including
Apple Books, Barnes & Noble, Kobo.
30. The Fairshare Model table of contents
Foreword
Introduction
Section 1: Fairshare Model
Overview
• Chap. 1: The Fairshare Model
• Chap. 2: The Big Idea and Thesis
• Chap. 3: Orientation
• Chap. 4: Fairshare Model Q&A
• Chap. 5: The Problem with a
Conventional Capital Structure
• Chap. 6: Crowdfunding and the
Fairshare Model
• Chap. 7: Target Companies for the
Fairshare Model
• Chap. 8: The Tao of the Fairshare
Model
• Chap. 9: Fairshare Model History
& the Future
Section 2: Context for the Fairshare
Model
• Chap. 10: The Macroeconomic
Context—Growth
• Chap. 11: The Macroeconomic
Context—Income Inequality
• Chap. 12: Cooperation as the New
Tool for Competition
Section 3: Valuation
• Chap. 13: Valuation Concepts
• Chap. 14: Calculating Valuation
• Chap. 15: Evaluating Valuation
• Chap. 16: Valuation Disclosure
Section 4: Investor Loss
• Chap. 17: Causes of Investor Loss: Fraud,
Overpayment, and Failure
• Chap. 18: Failure
• Chap. 19: Other Objections to Public Venture
Capital
Section 5: Advanced Topics
• Chap. 20: Investor Risk in Venture-Stage
Companies
• Chap. 21: Game Theory
• Chap. 22: Blockchain and Initial Coin Offerings
Epilogue
Appendix: Pre-Money Valuation Tables
31. “An important work.”
—Ken Wilcox, Chairman Emeritus, Silicon Valley Bank
“Why not reimagine the relationship between investors and
company employees to be one that is fairer and benefits both?”
—Po-Chi Wu, Senior Partner, Futurelab Consulting
“It’s time to reassess the alignment of interests in early-stage
companies. How do you get everyday people to share in the
benefits of capitalism? How do you avoid insane valuations of
companies going public? I may be time to look at the ideas set
out in The Fairshare Model.”
—Sara Hanks, Managing Partner, CrowdCheck Law
“I highly recommend [The Fairshare Model] for entrepreneurs,
practitioners, academics and investors who are committed to
the common good for all.”
—Gregory Wendt, Stakeholders Capital
Advance Praise