A capital structure is a company’s DNA; a new form of capitalism needs a new DNA.
The Fairshare Model is an idea for a performance-based capital structure for companies that raise venture capital via a public offering. Its mission, to balance and align the interests of investors and employees; to offer public investors a deal comparable to what venture capitalists get.
It has two classes of stock. One trades, the other cannot; both vote. Investors get the tradable stock, which is called Investor Stock. For past performance, employees get it too. For future performance, employees get the non-tradable stock, which is called Performance Stock. Based on quarterly measures of performance, a portion of the Performance Stock converts into the tradable Investor Stock.
A conventional capital structure requires that a value be placed on future performance when an equity financing occurs — the Fairshare Model makes IPO valuation a trivial concern. What an issuer is more interested in is “what does it take for Performance Stock to convert?” As a result, remarkably, the model provides companies incentive to offer a low IPO valuation; if the price of Investor Stock is a measure of performance; the higher it climbs, the greater the conversions!
Once investors recognize that they get a better deal with it, adoption of the model will make it easier for companies to sell stock. It will also provide competitive advantage for managing human capital. Companies can say “We offer a salary, benefits, options on our Investor Stock and something unique. Our Performance Stock, which is priced like founder’s stock and only becomes valuable if we as a team perform.”
Public investors will get a lower valuation, which enables them to maximize diversification in their venture portfolio. Companies will gain a funding option that provides their angel investors with some liquidity.