The Fairshare Model Performance-Based Capital Structure
The Fairshare Model a performance-based capital structure for companies that seek to raise venture capital via an initial public offering. The concept can be applied to an initial coin offering to raise equity capital. I call it the Fairshare Model because it balances and aligns the interests of investors and employees...capital and labor.
When a conventional capital structure is used, the issuer and investors must agree on a value for future performance when an equity investment is made. The Fairshare Model is unconventional because it places no value on its future performance when it has an IPO. Thus, a company that adopts it effectively presents IPO investors with zero valuation risk.
The Fairshare Model has two classes of stock. Both vote but only one can trade. To make it easy to distinguish them, I call the tradable stock “Investor Stock,” and the non-tradable one “Performance Stock.” In practice, Investor Stock will be the issuing company’s common stock, and its Performance Stock will be a preferred stock or a separate class of common stock.
- The tradable Investor Stock is issued to pre-IPO and IPO investors—employees get it too, for performance delivered as of the IPO.
- For future performance, employees get the non-tradable Performance Stock.
- Performance Stock converts to Investor Stock based on rules described in the company’s offering documents.
- The criteria for conversions can be changed if the two classes agree.
A challenge for Fairshare Model issuers will be how to define performance, how to measure it, and how to allocate the benefits of it among employees.
There will be variation in how companies do these things, reflecting their industry, stage of development, and the personalities of decision-makers.
With that qualification, here are five categories of performance that issuers might adopt:
- Market capitalization—defined as the price of Investor Stock multiplied by the number of shares of Investor Stock outstanding.
- Developmental milestones such as release of a product or securing intellectual property.
- Operational measures like customer acquisition and retention, or measures of quality.
- Financial measures like revenue or profit.
- Measures of social good
- The eventual acquisition price of the company, if applicable.
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Over the weeks ahead, I will publish a series of articles on LinkedIn that consider aspects of the Fairshare Model. Here is what I have put out thus far.
- The Fairshare Model Launches a Movement to Reimagine Capitalism at the DNA level--where ownership interests are set. https://lnkd.in/gfSQGnU
- A New Way to Structure Ownership in a Venture-Stage IPO—The Fairshare Model https://lnkd.in/gh2xNdk
- What is "Venture Capital,” Really? https://lnkd.in/gMTEXEP
This is the fourth in a series of articles that discuss ideas in my new book, The Fairshare Model: A Performance-Based Capital Structure for a Venture-Stage Initial Public Offerings. It is ...
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