Fairshare model-high-level-concept


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Fairshare model-high-level-concept

  1. 1. The Fairshare Modelfor Raising Venture Capital viaa Crowdfunded Initial Public OfferingHighlights of a book under constructionby Karl M SjogrenComing in Q4 2013
  2. 2. We Need Growth! We Need Jobs! Yes!Yesterday!Big Problem!Something ought to be done!Where’s the leadership?I’m worried about the future. Why isn’t it happening?Occupy Wall Street!When will recession end?How do I prepare for the future?This recession is different—we need new solutions!3/3/2013 Property of Karl M Sjogren 2
  3. 3. What’s the Solution?3/3/2013 Property of Karl M Sjogren 3Moreeducation!Get rid ofjob-killingregulations!Government – Business Partnerships!Entrepreneurs!Invest in thefuture!Bettereducation!Strengthen bank regulation!Throw the bums out!Focus on and fixthe problem!Createopportunity!Getgovernmentout of theway!Betterregulations!Banks that lendCrowdfunding!Reduce the deficitNewAttitudes!More venturecapital!CompetentGovernment!Fix the housingmarket!Get ready for the new economy!Yoga!Healthy food!There’s an appfor that!Encourageinnovation!Support job-creators!
  4. 4. 3/3/2013Tax PolicyRegulatoryReformRestrictImportsPromoteExportsJust WaitOut CycleGov’tSpendingEducationFiscalPolicyHow to SpurGrowth?LaborLawEnvironmentalRegulationsProductLiabilityQuotasTariffsFinancingTradeAgreementsRatesStructureIncentivesMoneySupplyInterestRatesImproveAccessReformReduceSpendingIncreaseSpendingAny Other Ideas?Property of Karl M Sjogren 4
  5. 5. ?They identify four strategic initiatives :1. Encourage immigration by high-skilled foreigners2. Improve access to capital for newfirms (subject of the Fairshare Model)3. Speed up commercialization ofinnovations at universities4. Regulatory reformMany good ideas are being discussed.For example, those put forth in BetterCapitalism by Robert Litan and CarlSchramm3/3/2013Link to Must-See video sketchbook for Better Capitalism (3 minutes long)http://www.kauffman.org/sketchbook.aspx?VideoId=1845640971001Property of Karl M Sjogren 5
  6. 6. Pathways to Improve Access to CapitalWealthy individuals(a.k.a. Angel Investors)Private SectorEquityAccreditedInvestors UnaccreditedInvestors(a/k/a general public)LoanGuaranteesGovernmentTax Incentivesto spur equityinvestmentRegulatory Reform(e.g. JOBS Act)3/3/2013Venture Capital &Private Equity firmsFairshare Model target audienceDebt3/3/2013 Property of Karl M Sjogren 6
  7. 7. 3/3/2013 Property of Karl M Sjogren 7Basic Securities Term DefinitionIssuer Company selling securities (stocks, notes, bonds)Accredited Investor • Someone allowed to invest in start-ups and otherprivate company transactions.• Defined in Federal securities law. Criteria: Wealthyenough to absorb full loss of investment• “Angel Investor” = accredited investor who investstheir 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 & byself-governing organizationsPrivate offering Only Accredited Investors may investPublic offering Anyone may invest• Issuer must first file disclosure documents (registrationstatement) acceptable to securities agencies
  8. 8. ENTREPRENEUR:I have an idea butneed moneyINVESTOR:How much of yourcompany do I get if Igive you the money?The Fairshare Model Begins Here3/3/2013 Property of Karl M Sjogren 8
  9. 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, InvestorStock price appreciation, etc.• As a class, Performance Stock controls has half voting control.• Like a stock option that votes, and vests with performance, not themere passage of time.3/3/2013 Property of Karl M Sjogren 9
  10. 10. Target CompaniesCompanies 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 ofPerformance Stock to Investor Stock• Let public investors invest at low valuation.• Offer protections provided to venture capital funds.• Embrace the concept of investor oversight.3/3/2013 Property of Karl M Sjogren 10
  11. 11. Possible Outcomes for IssuersSome companies will fail (start-ups face long odds).Some will be acquired by other companies.• Performance Stock conversion will be determined by the holders ofInvestor Stock and Performance Stock.• Performance Stock deserves compensation if purchase pricedelivers 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.3/3/2013Property of Karl M Sjogren 11
  12. 12. SnapshotVoting ControlInvestor StockPerformance StockAbility to TradeInvestor StockPerformance Stock• Performance Stock can never trade.• Investor Stock is registered with SEC.• Trading market likely to start off thin, thenimprove as company performs.• Matters that would require approval fromeach class of stock:• Board member election• Change to conversion criteria.• Compensation plans involving Investor Stock.• Changes to capital structure.• Acquisition matters.3/3/2013 Property of Karl M Sjogren 12
  13. 13. Who Will Like What?3/3/2013Key Attributes of the Fairshare Model Investors CompaniesAccess to equity venture capital  Pre-IPO angel investors have an exit  Performance Stock is a POWERFUL competitiveadvantage for managing human capital  Broadly distributed Investor Stock creates evangeliststo promote the company’s interests  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  Property of Karl M Sjogren 13
  14. 14. Fundamental Problem of aConventional Capital StructureAssessing an early–stage company is as difficult as divining the adultachievement of young child.3/3/2013A conventional capital structure requires a company to strike avaluation at each round of investment that pre-supposes performance.Accredited investors are protectedfrom overpaying for a privateventure capital deal.A conventional model is NOPROBLEM for them.Investors in a public venturecapital deal are not protectedfrom overpaying.A conventional model is a BIGPROBLEM for them.But most don’t realize it.• Indicators are there, but can be wrong or misleading.• Valuation = Value of an idea, of future performance• “The company is worth $100 million.”Property of Karl M Sjogren 14
  15. 15. Overpayment Protection: Who Has It3/3/2013Accredited Investorsin a private venturecapital dealOVERPAYMENT PROTECTIONKnow the deal valuationThey know how to calculate the price tobuy the company, given the deal terms.Get anti-dilution provisionsProvide price protection by re-pricinginvestor shares lower if a subsequentfinancing is at a lower valuation than theround they bought into.Investorsin a public venturecapital dealNO OVERPAYMENT PROTECTIONValuation-UnawareUnaccredited investors do not know how tocalculate valuation nor its importance.Issuers not obligated to disclose valuation, let alonediscuss why its reasonable. Unable to investearlier, 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 overpayingProperty of Karl M Sjogren 15
  16. 16. What is a “Venture-Stage” Company?3/3/2013• 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 investorsA company with these risk factors:Property of Karl M Sjogren 16Many public companies list such risk factors in their disclosure documents
  17. 17. Public Venture Capital3/3/2013capital providedto a venture-stage company…is “venture capital”….… whether its from accredited investors……or from public investors!Same Girl, Different DressIn substance,Private VentureCapitalPublic VentureCapitalProperty of Karl M Sjogren 17
  18. 18. What You Pay to Play…3/3/2013… venture capitalist…… who you are!Who R U?…depends on….Let’s explore howProperty of Karl M Sjogren 18
  19. 19. Private Venture Capital Supply-Chain3/3/2013Some accredited investors invest only in the early rounds.• Angel investors are early investors, but seek VC funds to forrounds over $1-2 million.• VCs with operational expertise are the “lead institutionalinvestor” (i.e., evaluate deal, serve on board of directors) forother investment funds that prefer to follow.Others favor later rounds, after its apparent the companyis on-track to have an IPO or be acquired (i.e. exits arevisible).Property of Karl M Sjogren 19
  20. 20. Classic Conventional Valuation Trend3/3/2013The valuation for accreditedinvestors begins low andincreases over ensuing roundsto the price offered to “publicventure capital” investors.ExampleProperty of Karl M Sjogren 20
  21. 21. What Best Explains the Trend?3/3/2013Risk reduction?Performance?What the Next Guy (the publicor potential acquirer) may pay?The Fairshare Model book will posit aNext Guy Theory for buyer behavior• To a degree• See Risk Factors in a IPO prospectus• Guestimate: this explains 30-60% ofthe late pre-IPO valuation increaseProperty of Karl M Sjogren 21
  22. 22. Who is the Next Guyfor Unaccredited Investors?3/3/2013There isn’t one…exceptother public investorsDownside ExposurePublic investors atgreater risk ofoverpaying for a venturestage deal than pre-IPOinvestorsProperty of Karl M Sjogren 22
  23. 23. Possibilities: Conventional Model3/3/2013Valuations betweenyears 2-8 in thisexample are betterexplained…by who the NextGuy will be…than by whatthe company’sperformance is.Property of Karl M Sjogren 23
  24. 24. 3/3/2013Possibilities: Fairshare ModelSame example,but the valuation(aggregate of InvestorStock) is explained byperformance,and it’s shared byinvestors andinsiders, asPerformance Stockconverts toInvestor Stock.IPO valuation comparable to what a VC might pay.Property of Karl M Sjogren 24
  25. 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 requiredby 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 structureIssuers 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 deals3/3/2013 Property of Karl M Sjogren 25
  26. 26. Concept Gap3/3/2013Where theFairshareModel is nowConceptGapShould Investor Interestbe significant, someissuers will adopt itIf Early Issuers andInvestors benefit,more issuers willadopt itShould it become popular,capitalism will have evolvedin interesting ways.Better Capitalism!!!!Property of Karl M Sjogren 26
  27. 27. Help Narrow the Concept GapIf 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.comto hear what others have to say—favorable or not.I will publish a book on the Fairshare Model by Q4 2013.• I seek critical input from attorneys, financialexperts, angel investors, etc. while working on it.Companies: my focus is to define a credible & attractiveequity capital option for you; if investor interest is there,the next step will be to define “how-to” guidance.Email me at karl@fairsharemodel.com3/3/2013The Fairshare ModelNeeds You!Property of Karl M Sjogren 27
  28. 28. This is the construction of theFairshare Model.It’s mission: to explorenew relationships between laborand capital,to help entrepreneurs financecompanies with public venturecapital,to boldly go where no capitalstructure has gone before.3/3/2013Better Capitalism…the new frontierProperty of Karl M Sjogren 28