Karl Sjogren’s 2019 book The Fairshare Model: A Performance-Based Capital Structure for Venture-Stage Initial Public Offerings presents an idea for how to raise venture capital via an IPO. The concept can be applied to a blockchain venture that raises equity capital via an initial coin offering (ICO). Its name describes its purpose--to balance and align the interests of investors and employees.
A Detroit-area native, Karl Sjogren has a BA and MBA from Michigan State University, is a certified public accountant (inactive), and credentialed in turnaround management.
“Valuation equals analytics, plus emotion, plus deal terms.”
In today’s episode, we will do things a little different from the usual. We will look at what motivated Karl to write his book, do a quick summary of Karl’s Fairshare Model, and then an overview of some of the lessons he learned during the process.
Karl was co-founder and CEO of a company called Fairshare between 1996 to 2001. The company had an online community of investors with interest in the IPOs of young companies. The idea was to build an audience by giving them education about the deal structure and valuation and share due diligence.
Once the company got to critical mass, the plan was to provide members free access to pick their public offerings. The members were expected to have a legal offering, a passed due diligence, use Fairshare’s deal structure, the Fairshare Model, and allow members to invest as little as $100. Basically, it was crowdfunding before the term was coined.
From this experience, Karl got the motivation to write more about the Fairshare model and its impact on raising venture capital via Initial Public Offerings.
While writing his book, Karl learned that there are three capital structures: conventional capital structure, a modified conventional capital structure, and the Fairshare Model.
The Fairshare Model is for a venture stage company that wants to raise capital via a public offering. In it, there are two classes of stock. Both have voting rights; one trades, and one does not. Investors get the tradable stock.
Employees get the tradable stock as well for value generated as of the IPO date. But for future performance for most of the enterprise, the employees get a voting stock that does not trade. It converts into a tradable stock based on performance criteria described in their prospectus. So the basic idea is, instead of developing a valuation upfront before the investors come in, the valuation unfolds based on performance.
The conventional capital structure is used in most IPOs and in private offerings where you do not have professional investors, friends, and family types of investors. The hallmark is there is a single class of stock. So an investor who owns, say 10% of the company, if it is going to be acquired, they get 10% of the proceeds.
A modified conventional capital structure is used by professional investors, venture capital funds, and private equity funds. The hallmark is that multiple classes of stock and capital structures are needed if you are going to treat shareholders differently.
Valuation is a complex topic, and no one knows how to do it right. The real complexity is not so much how you calculate these things but how they all sort of fit into an economy.
Emotion plays a crucial role in making investment decisions. Whether you are deciding to buy or sell your shares or trying to understand how the market is performing, you will more often than not depend on your emotions to decide.
Deal terms play a critical role when investing. Make sure your deal terms give you specific rights and privileges. That kind of safety net allows you to recover should things go wrong.
Look at the deal terms critically as you think about what could happen should things go well and, most importantly, should something go wrong.
A valuation framework is just a framework and not the gospel truth. However, it is still essential to learn how that structure works and understand what drives a company’s value.
There are four drivers of the value of a company when we look at it from the analytic side:
Recognize the importance of deal terms. Do some serious thinking and discussions with other people who have raised money as entrepreneurs or your investors, and understand what each of these terms can do to your other shareholders.
Karl’s number one goal for the next 12 months is to launch a social movement to reimagine capitalism, to get enough investors interested in the Fairshare Model so that companies can consider adopting it to raise venture capital via an IPO.
“It is possible to innovate in this space in a way that benefits investors, companies, and economies.”
Connect with Karl Sjogren