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Fairshare model high level concept

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  • 1. The Fairshare Model for Raising Venture Capital via a Crowdfunded Initial Public Offering Highlights of a book under construction by Karl M Sjogren Coming in 2014
  • 2. We Need Growth! We Need Jobs! Where’s the leadership? Yes! Yesterday! Big Problem! Something ought to be done! I’m worried about the future. When will recession end? Why isn’t it happening? Occupy Wall Street! How do I prepare for the future? This recession is different—we need new solutions! 12/28/2013 Property of Karl M Sjogren 2
  • 3. What’s the Solution? Fix the housing Entrepreneurs! market! Healthy food! Crowdfunding! Get rid of job-killing Focus on and fix regulations! the problem! More Support jobeducation! creators! There’s an app for that! Get government out of the way! 12/28/2013 Better education! Competent Government! New Attitudes! Reduce the deficit Banks that lend Throw the bums out! Strengthen bank regulation! Invest in the Better future! regulations! Encourage innovation! Yoga! Create opportunity! More venture capital! Government – Business Partnerships! Get ready for the new economy! Property of Karl M Sjogren 3
  • 4. Rates Interest Rates Money Supply Structure Incentives Labor Law Tax Policy Fiscal Policy Regulatory Reform How to Spur Growth? Product Liability Environmental Regulations Tariffs Reform Restrict Imports Education Improve Access Increase Spending Gov’t Spending Reduce Spending Promote Exports Just Wait Out Cycle Quotas Trade Agreements Financing Any Other Ideas? 12/28/2013 Property of Karl M Sjogren 4
  • 5. Many good ideas are being discussed. ? For example, those put forth in Better Capitalism by Robert Litan and Carl Schramm They identify four strategic initiatives : 1. Encourage immigration by highskilled foreigners 2. Improve access to capital for new firms (subject of the Fairshare Model) 3. Speed up commercialization of innovations at universities 4. Regulatory reform Link to Must-See video sketchbook for Better Capitalism (3 minutes long) http://www.kauffman.org/sketchbook.aspx?VideoId=1845640971001 12/28/2013 Property of Karl M Sjogren 5
  • 6. Pathways to Improve Access to Capital Private Sector Equity Accredited Investors Venture Capital & Private Equity firms Government Loan Guarantees Debt Tax Incentives to spur equity investment Unaccredited Investors (a/k/a general public) Regulatory Reform (e.g. JOBS Act) Wealthy individuals (a.k.a. Angel Investors) Fairshare Model target audience 12/28/2013 12/28/2013 Property of Karl M Sjogren 6
  • 7. Basic Securities Term Definition Issuer Company selling securities (stocks, notes, bonds) Accredited Investor • Someone allowed to invest in start-ups and other private company transactions. • Defined in Federal securities law. Criteria: Wealthy enough to absorb full loss of investment • “Angel Investor” = accredited investor who invests their own money (not a fund) Unaccredited Investor Anyone who is not accredited (general public) Broker-Dealer Underwriter, investment bank, brokerage firm, etc. • Regulated by government securities agencies & by self-governing organizations Private offering Only Accredited Investors may invest Public offering Anyone may invest • Issuer must first file disclosure documents (registration statement) acceptable to securities agencies 12/28/2013 Property of Karl M Sjogren 7
  • 8. The Fairshare Model Begins Here ENTREPRENEUR: I have an idea but need money INVESTOR: How much of your company do I get if I give you the money? 12/28/2013 Property of Karl M Sjogren 8
  • 9. Fairshare Model Basics • Two classes of stock--“Investor Stock” & “Performance Stock”. • Investor Stock can trade in the market. It is issued for capital. • Performance Stock is not tradable. • Issued to insiders, converts to Investor Stock based on performance. • Performance measured quarterly. • Measures = revenue, earnings, new raises of capital, Investor Stock price appreciation, etc. • As a class, Performance Stock controls has half voting control. • Like a stock option that votes, and vests with performance, not the mere passage of time. 12/28/2013 Property of Karl M Sjogren 9
  • 10. Target Companies Companies that adopt the Fairshare Model: • • • • • May have already raised 1-3 rounds from accredited investors. Want to raise $2 to $10 million in public venture capital. Can identify an affinity group of likely investors. See advantage in having stock broadly held by the public. Will use Performance Stock to attract and motivate talent. Such a company will necessarily: • Be confident it will deliver performance that results in conversion of Performance Stock to Investor Stock • Let public investors invest at low valuation. • Offer protections provided to venture capital funds. • Embrace the concept of investor oversight. 12/28/2013 Property of Karl M Sjogren 10
  • 11. Possible Outcomes for Issuers  Some companies will fail (start-ups face long odds).  Some will be acquired by other companies. • Performance Stock conversion will be determined by the holders of Investor Stock and Performance Stock. • Performance Stock deserves compensation if purchase price delivers attractive return for Investor Stock.  Some will raise more capital & trade on an exchange (NASDAQ). • The growth may involve acquiring other companies.  Some may convert to a conventional capital structure. • Tried it, did not like it. • A majority of each stock must agree on a new structure. 12/28/2013 Property of Karl M Sjogren 11
  • 12. Snapshot Ability to Trade Investor Stock Performance Stock Voting Control • Performance Stock can never trade. • Investor Stock is registered with SEC. • Trading market likely to start off thin, then improve as company performs. • Matters that would require approval from each class of stock: Investor Stock • Board member election Performance Stock • Change to conversion criteria. • Compensation plans involving Investor Stock. • Changes to capital structure. • Acquisition matters. 12/28/2013 Property of Karl M Sjogren 12
  • 13. Who Will Like What? Investors Companies Performance Stock is a POWERFUL competitive advantage for managing human capital       Broadly distributed Investor Stock creates evangelists to promote the company’s interests             Key Attributes of the Fairshare Model Access to equity venture capital Pre-IPO angel investors have an exit Insiders do not get rich just because there is an IPO To sell stock, must have bought it or earned it Investors and insiders share voting control Ability to acquire other companies with public stock 12/28/2013 Property of Karl M Sjogren 13
  • 14. Fundamental Problem of a Conventional Capital Structure Assessing an early–stage company is as difficult as divining the adult achievement of young child. • Indicators are there, but can be wrong or misleading. A conventional capital structure requires a company to strike a valuation at each round of investment that pre-supposes performance. • Valuation = Value of an idea, of future performance • “The company is worth $100 million.” Accredited investors are protected from overpaying for a private venture capital deal. Investors in a public venture capital deal are not protected from overpaying. A conventional model is NO PROBLEM for them. A conventional model is a BIG PROBLEM for them. But most don’t realize it. 12/28/2013 Property of Karl M Sjogren 14
  • 15. Overpayment Protection: Who Has It Accredited Investors in a private venture capital deal OVERPAYMENT PROTECTION Investors in a public venture capital deal NO OVERPAYMENT PROTECTION Know the deal valuation Valuation-Unaware They know how to calculate the price to buy the company, given the deal terms. Unaccredited investors do not know how to calculate valuation nor its importance. Get anti-dilution provisions Provide price protection by re-pricing investor shares lower if a subsequent financing is at a lower valuation than the round they bought into. Issuers not obligated to disclose valuation, let alone discuss why its reasonable. Unable to invest earlier, small investors compete to pay “retail” for a “wholesale” deal; they invest with the zeal of “Black Friday” shoppers –but not for “deals”. They have no protection from overpaying 12/28/2013 Property of Karl M Sjogren 15
  • 16. What is a “Venture-Stage” Company? A company with these risk factors: • Market for its products/services is new/uncertain • Unproven business model • Uncertain timeline to profitable operations • Negative cash flow from operations • In other words, 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 12/28/2013 Property of Karl M Sjogren 16
  • 17. Public Venture Capital Private Venture Capital In substance, Public Venture Capital capital provided to a venture-stage company …is “venture capital”…. … whether its from accredited investors… …or from public investors! Same Girl, Different Dress 12/28/2013 Property of Karl M Sjogren 17
  • 18. What You Pay to Play… … venture capitalist… …depends on…. Who R U? … who you are! Let’s explore how 12/28/2013 Property of Karl M Sjogren 18
  • 19. Private Venture Capital Supply-Chain Some accredited investors invest only in the early rounds. • Angel investors are early investors, but seek VC funds to for rounds over $1-2 million. • VCs with operational expertise are the “lead institutional investor” (i.e., evaluate deal, serve on board of directors) for other investment funds that prefer to follow. Others favor later rounds, after its apparent the company is on-track to have an IPO or be acquired (i.e. exits are visible). 12/28/2013 Property of Karl M Sjogren 19
  • 20. Classic Conventional Valuation Trend The valuation for accredited investors begins low and increases over ensuing rounds to the price offered to “public venture capital” investors. Example 12/28/2013 Property of Karl M Sjogren 20
  • 21. What Best Explains the Trend? Performance? • To a degree Risk reduction? • See Risk Factors in a IPO prospectus What the Next Guy (the public or potential acquirer) may pay? • Guestimate: this explains 30-60% of the late pre-IPO valuation increase The Fairshare Model book will posit a Next Guy Theory for buyer behavior 12/28/2013 Property of Karl M Sjogren 21
  • 22. Who is the Next Guy for Unaccredited Investors? There isn’t one…except other public investors Downside Exposure Public investors at greater risk of overpaying for a venture stage deal than pre-IPO investors 12/28/2013 Property of Karl M Sjogren 22
  • 23. Possibilities: Conventional Model Valuations between years 2-8 in this example are better explained… by who the Next Guy will be… than by what the company’s performance is. 12/28/2013 Property of Karl M Sjogren 23
  • 24. Possibilities: Fairshare Model Same example, but the valuation (aggregate of Investor Stock) is explained by performance, and it’s shared by investors and insiders, as Performance Stock converts to Investor Stock. IPO valuation comparable to what a VC might pay. 12/28/2013 Property of Karl M Sjogren 24
  • 25. How to Begin? Fairshare Model = disruptive innovation in the structure of securities. – “Crowdfunding” is an innovation in the distribution of securities. Innovations are challenging if they are not pushed by suppliers, demanded by customers or required by government. – “Dutch Auction” approach to IPO pricing. Good idea! Not pushed by “suppliers” (issuers, investment banks), demanded by customers (those positioned to “flip” shares) nor required by government or the self governing organizations that oversee exchanges. Fairshare Model does not benefit existing players. – Venture capital and private equity funds; investment bankers; Investors positioned to “flip” hot IPO shares, or, IPO companies with a conventional capital structure Issuers will not adopt it unless it helps them raise capital. – General investor interest must be there. It’s beneficiaries don’t realize they get a bad deal now, or, feel helpless. – Valuation-unaware – Weak understanding of investor protections – More concerned with access to deals than with terms of deals 12/28/2013 Property of Karl M Sjogren 25
  • 26. Concept Gap Where the Fairshare Model is now If Early Issuers and Investors benefit, more issuers will adopt it Should it become popular, capitalism will have evolved in interesting ways. Better Capitalism!!!! Should Investor Interest be significant, some issuers will adopt it Concept Gap 12/28/2013 Property of Karl M Sjogren 26
  • 27. Help Narrow the Concept Gap If the model appeals to you, please create buzz . • Talk about the Fairshare Model • Spread the word via social networking • Join the community at www.fairsharemodel.com to hear what others have to say—favorable or not. The Fairshare Model Needs You! I will publish a book on the Fairshare Model by Q4 2014. • I seek critical input from attorneys, financial experts, angel investors, etc. while working on it. Companies: my focus is to define a credible & attractive equity capital option for you; if investor interest is there, the next step will be to define “how-to” guidance. Email me at karl@fairsharemodel.com 12/28/2013 Property of Karl M Sjogren 27
  • 28. Better Capitalism…the new frontier This is the construction of the Fairshare Model. It’s mission: to explore new relationships between labor and capital, to help entrepreneurs finance companies with public venture capital, to boldly go where no capital structure has gone before. 12/28/2013 Property of Karl M Sjogren 28