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The Fairshare Model:
A Performance-Based
Capital Structure
for Venture-Stage
Initial Public Offerings
(Published April 2019)
By Karl Sjogren
SVE Demo Night @ Google
F50 Elevate Accelerator Program
30 July 2019
Sunnyvale, CA USA presentation
My Background
• BA and MBA (Michigan State University)
• CPA (inactive)
• Established companies, startups and turnarounds
• > 30 years as consulting CFO/Controller in SF Bay Area
• Co-founder & CEO of Fairshare, Inc. (1996-2001)
Setting: the 1990s
• Browsers introduced → modern internet
• “Crowdfunding” not yet a term
• Dawn of regulatory adaption to the
Internet Age
• Regulatory mindset
+ Small Companies
+ Internet
+ Average Investors
= Something Bad
— Our 1996 Plan
• Form an online community of investors interested in “Direct Public
Offerings” (IPOs sold without a broker-dealer).
• Provide education on valuation and deal structures, plus interaction.
• Once we have a critical mass of members, offer free access to companies
to pitch their DPOs, if they:
• Have a legal offering
• Pass due diligence review
• Use the Fairshare Model deal structure
• Allow members to invest as little as $100
• Business Model: a “buyers cooperative.”
• Revenue from membership fees and advertising (i.e., no commission)
• Do not handle anyone’s money or stocks.
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.
2013—I Resurrect the Idea (Partially)
• Environment had evolved
• Entrepreneurship is “cool,” and even a college major!
• More people curious about valuations
• Regulators more receptive to innovation (e.g., JOBS Act of 2011 & Fintech).
• New Plan:
• Promote Fairshare Model deal structure via a book (i.e., free speech)
• Encourage funding portals, offering platforms & broker-dealers to implement
• Make the Fairshare Model to capital structures, what LINUX is to computer
operating systems (i.e., an open system).
If the Fairshare Model is a book, what’s the story?
• Protagonist (Hero) – average investors & employees.
• Antagonist (Villain) –The-Way-Things-Are Done-Now: a conventional capital
structure.
• Hero’s inspiration—VCs because they have found a solution: a modified
conventional capital structure.
• Conflict—anxiety about the future
• Can the benefits of capitalism be more fairly realized, and by more people?
• Hero’s challenge:
• Recognize his latent power to shape markets by asserting his interests.
• Develop new skills.
The Key—a Unique Perspective
Vision
Average investors can invest in venture-stage companies on terms
comparable to those that venture capitalists get in a private offering.
Goal
1. For IPO investors: Reduce valuation risk.
2. For companies: An attractive alternative to a VC round.
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.
Different Perspectives on “Venture Capital”
1. Traditional view
2. Silicon Valley view
3. Fairshare Model view
Fairshare Model presentation for F50's SVE Demo Night @ Google
Fairshare Model presentation for F50's SVE Demo Night @ Google
Fairshare Model presentation for F50's SVE Demo Night @ Google
2:3 Paradigm for Venture-Stage Investors
Two Fundamental Risks
1. Failure risk
• Hard to control
2. Valuation risk
• Controllable
Three Equity Capital Structures
1. Conventional
2. Modified Conventional
3. Fairshare Model
* Fraud = [Failure Risk + Valuation Risk] X False and/or Inadequate Disclosure
*
A Conventional Capital Structure
Used in IPOs and in private offerings with unsophisticated investors.
• Single class of stock—All for one and one for all.
• Issuer sets value for future performance when new stock is sold.
• I sell half of my startup for $1.00 → my future performance is worth $1.00.
My idea ($1.00) + Your money ($1.00) = Value of the company after you invest ($2.00)
or
My share (50%) + Your share (50%) = Total ownership (100%)
Valuation risk
Is my idea
worth $1.00?
A Conventional Capital Structure is a
Little Shop of Horrors
FEED ME A
VALUATION
SEYMOUR!
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.
Pre-Money
Valuation
Fairshare Model = Price Protection for IPO
• Multi-class stock structure
• Deal terms
Put another way, the Big Idea is…
…to replicate the VC Model for investors in a public offering—one open to any investor.
Comparative Valuation Risk
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
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 (# of Investor Stock shares X market price)
• Developmental achievements
• Operational financials (sales, profit)
• Eventual acquisition price (if applicable)
• Measures of social good
Implications for Fairshare Model Issuers
1. Incentive to offer IPO investors a really, really low pre-money valuation
• If market capitalization a measure of performance.
2. Competitive advantage in recruiting and motivating employees.
Other
Companies
Fairshare
Model
Company
Salary X X
Benefits X X
Options on tradable stock X X
Performance Stock participation X
Incentives to Support Use of the Fairshare Model Employees IPO investor
Pre-IPO
investor
Less valuation risk for IPO investors X
Voting power decoupled from valuation X X X
Employees can earn more than VCs would allow X
Avoid equity 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
Interests aligned and balanced. Long-term perspective promoted (vs. short termism).
Fairshare Model presentation for F50's SVE Demo Night @ Google
Fairshare Model presentation for F50's SVE Demo Night @ Google
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, finance, tax and accounting,
corporate governance and others in the capital eco-system to assess how to
implement—engineer—the Fairshare Model for a given issuer.
3. Time and experience: companies that use it must like it.
• Yet to be written.
• It’s just an idea now.
• Chicken vs. Egg conundrum
Timeline
The chasm facing the Fairshare Model is a “Concept Gap.”
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
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 is available from Amazon, bookstores
and many e-book distributors.
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
Entrepreneurs: Pick Your Challenge!
“What is the value of my
future performance now?
“How do I define my deliverables?”
Meanwhile…
Conventional Capital Structure Fairshare Model
vs.
…as VC and private equity funds*, and Wall
Street banks* enjoy venture-stage IPOs,….
…The Fairshare Model
encourages public VCs to say…
* Portrayed here by Sally, simulating an orgasm in the
diner scene from 1989 movie, When Harry Met Sally.
When enough do, the Fairshare Model
will be on course to become the New
Normal for venture-stage IPOs.
“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

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Fairshare Model presentation for F50's SVE Demo Night @ Google

  • 1. The Fairshare Model: A Performance-Based Capital Structure for Venture-Stage Initial Public Offerings (Published April 2019) By Karl Sjogren SVE Demo Night @ Google F50 Elevate Accelerator Program 30 July 2019 Sunnyvale, CA USA presentation
  • 2. My Background • BA and MBA (Michigan State University) • CPA (inactive) • Established companies, startups and turnarounds • > 30 years as consulting CFO/Controller in SF Bay Area • Co-founder & CEO of Fairshare, Inc. (1996-2001)
  • 3. Setting: the 1990s • Browsers introduced → modern internet • “Crowdfunding” not yet a term • Dawn of regulatory adaption to the Internet Age • Regulatory mindset + Small Companies + Internet + Average Investors = Something Bad
  • 4. — Our 1996 Plan • Form an online community of investors interested in “Direct Public Offerings” (IPOs sold without a broker-dealer). • Provide education on valuation and deal structures, plus interaction. • Once we have a critical mass of members, offer free access to companies to pitch their DPOs, if they: • Have a legal offering • Pass due diligence review • Use the Fairshare Model deal structure • Allow members to invest as little as $100 • Business Model: a “buyers cooperative.” • Revenue from membership fees and advertising (i.e., no commission) • Do not handle anyone’s money or stocks.
  • 5. 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.
  • 6. 2013—I Resurrect the Idea (Partially) • Environment had evolved • Entrepreneurship is “cool,” and even a college major! • More people curious about valuations • Regulators more receptive to innovation (e.g., JOBS Act of 2011 & Fintech). • New Plan: • Promote Fairshare Model deal structure via a book (i.e., free speech) • Encourage funding portals, offering platforms & broker-dealers to implement • Make the Fairshare Model to capital structures, what LINUX is to computer operating systems (i.e., an open system).
  • 7. If the Fairshare Model is a book, what’s the story? • Protagonist (Hero) – average investors & employees. • Antagonist (Villain) –The-Way-Things-Are Done-Now: a conventional capital structure. • Hero’s inspiration—VCs because they have found a solution: a modified conventional capital structure. • Conflict—anxiety about the future • Can the benefits of capitalism be more fairly realized, and by more people? • Hero’s challenge: • Recognize his latent power to shape markets by asserting his interests. • Develop new skills.
  • 8. The Key—a Unique Perspective
  • 9. Vision Average investors can invest in venture-stage companies on terms comparable to those that venture capitalists get in a private offering. Goal 1. For IPO investors: Reduce valuation risk. 2. For companies: An attractive alternative to a VC round.
  • 10. 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.
  • 11. Different Perspectives on “Venture Capital” 1. Traditional view 2. Silicon Valley view 3. Fairshare Model view
  • 15. 2:3 Paradigm for Venture-Stage Investors Two Fundamental Risks 1. Failure risk • Hard to control 2. Valuation risk • Controllable Three Equity Capital Structures 1. Conventional 2. Modified Conventional 3. Fairshare Model * Fraud = [Failure Risk + Valuation Risk] X False and/or Inadequate Disclosure *
  • 16. A Conventional Capital Structure Used in IPOs and in private offerings with unsophisticated investors. • Single class of stock—All for one and one for all. • Issuer sets value for future performance when new stock is sold. • I sell half of my startup for $1.00 → my future performance is worth $1.00. My idea ($1.00) + Your money ($1.00) = Value of the company after you invest ($2.00) or My share (50%) + Your share (50%) = Total ownership (100%) Valuation risk Is my idea worth $1.00?
  • 17. A Conventional Capital Structure is a Little Shop of Horrors FEED ME A VALUATION SEYMOUR!
  • 18. 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. Pre-Money Valuation
  • 19. Fairshare Model = Price Protection for IPO • Multi-class stock structure • Deal terms
  • 20. Put another way, the Big Idea is… …to replicate the VC Model for investors in a public offering—one open to any investor.
  • 22. 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
  • 23. 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 (# of Investor Stock shares X market price) • Developmental achievements • Operational financials (sales, profit) • Eventual acquisition price (if applicable) • Measures of social good
  • 24. Implications for Fairshare Model Issuers 1. Incentive to offer IPO investors a really, really low pre-money valuation • If market capitalization a measure of performance. 2. Competitive advantage in recruiting and motivating employees. Other Companies Fairshare Model Company Salary X X Benefits X X Options on tradable stock X X Performance Stock participation X
  • 25. Incentives to Support Use of the Fairshare Model Employees IPO investor Pre-IPO investor Less valuation risk for IPO investors X Voting power decoupled from valuation X X X Employees can earn more than VCs would allow X Avoid equity 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 Interests aligned and balanced. Long-term perspective promoted (vs. short termism).
  • 28. 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, finance, tax and accounting, corporate governance and others in the capital eco-system to assess how to implement—engineer—the Fairshare Model for a given issuer. 3. Time and experience: companies that use it must like it. • Yet to be written. • It’s just an idea now. • Chicken vs. Egg conundrum
  • 29. Timeline The chasm facing the Fairshare Model is a “Concept Gap.”
  • 30. 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
  • 31. 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 is available from Amazon, bookstores and many e-book distributors.
  • 32. 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
  • 33. Entrepreneurs: Pick Your Challenge! “What is the value of my future performance now? “How do I define my deliverables?” Meanwhile… Conventional Capital Structure Fairshare Model vs.
  • 34. …as VC and private equity funds*, and Wall Street banks* enjoy venture-stage IPOs,…. …The Fairshare Model encourages public VCs to say… * Portrayed here by Sally, simulating an orgasm in the diner scene from 1989 movie, When Harry Met Sally. When enough do, the Fairshare Model will be on course to become the New Normal for venture-stage IPOs.
  • 35. “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