The Fairshare Model Launches a Movement to Reimagine Capitalism

My new book launches a movement to reimagine capitalism at the DNA level, where ownership interests are defined. It’s called, The Fairshare Model: A Performance-Based Capital Structure for a Venture-Stage Initial Public Offerings.

The capital structure’s name reflects its goal: to balance and align the interests of investors and employees—capital and labor.

The Fairshare Model virtually eliminates valuation risk for IPO investors, making it more likely that they will profit when they invest in a company with high failure risk. It does that by taking a page from the playbook that venture capital and private equity investors use when they invest in a private offering.

They insist on deal terms that provide them with “price protection.” If a company’s performance is not as strong as expect, such terms effectively reduce their buy-in valuation, retroactively. Two ways this may happen are that the investor gets more shares for free, or receives a disproportionate share of proceeds when a liquidity event occurs.

It’s a sensible idea because no one knows how to reliably value a venture-stage company—often unprofitable, they have unproven business models, and rely on investors to survive. Such companies have high failure risk but deal terms can reduce their valuation risk.

Price protection makes it more likely that investors will profit when they invest in such a company and that, in turn, encourages them to invest in similar companies. Thus, price protection is critically important in an entrepreneurial economy.

There is a problem, however. While price protection is routinely provided in private offerings—the kind limited to wealthy or “accredited” investors—it virtually never happens in public offerings, the kind that anyone can invest in. That’s unfair because a dollar is worth a dollar, regardless of whether it comes from average or wealthy investors.

There is a derivative problem—public investors assume far more valuation risk than private ones, even when failure risk remains similar. That is, IPO investors don’t get a valuation safety net, and they buy-in at far higher valuations than pre-IPO investors do.

The Fairshare Model can change that because it places no value on future performance. It does that with a dual-class stock structure—both classes vote, but only one can trade. Investors—IPO and pre-IPO investors—get the tradable stock. Employees get it too, for performance delivered as of the IPO. But for future performance, which accounts for most the enterprise value, employees get the non-tradable stock—it converts into tradable stock based on performance milestones.

The journey that led me to author the book began in 1996, when I co-founded and led a company called Fairshare, Inc. Years before the term “crowdfunding” was coined, we sought make it easier for companies to market public offerings directly to investors, without a broker-dealer. To do that, we worked to build an online membership of people who had interest in learning about offerings from companies that:

  • Had a legal public offering
  • Passed a due diligence review
  • Adopted the Fairshare Model capital structure, and
  •  Allowed Fairshare members to invest as little as $100.

To attract members before we had offerings, we offered education on deal structures and valuation. We provided the ability to interact online and a vision for how to encourage companies to offer Fairshare members a better deal than they typically get. We underestimated the time and expense required to address regulatory concerns. Nonetheless, we attracted 16,000 members before calling it quits after the dotcom and telecom busts.

My thoughts about Fairshare laid dormant for about a decade, until I noticed how attitudes about innovation were changing and that entrepreneurship was becoming cool. Heck, colleges increasingly offered degrees in it! Plus, valuation was becoming a more frequent topic of discussion. Then too, the JOBS Act of 2012 authorized reforms to securities law such as:

  • Investment portals for accredited investors.
  • Funding platforms for average investors.
  •  A dramatic increase in the amount that could be raised in a public offering using an exemption from registration called Regulation A—it rose from $5 million to $50 million.
  • A new public offering exemption—Rule CF, for crowdfunding—to raise up to about $1 million.

Another factor fueled interest in financial service innovation—a movement now known as “fintech.” It was a loss of confidence in financial institutions and the regulators that oversee them. Whether that dissatisfaction was expressed as support for stricter regulation, or for new ways of doing business, the common denominator was dissatisfaction with The-Way-Things-Are.

In particular, with respect to capital markets, I saw ideas on how to innovate the distribution or sale of new stock (i.e., crowdfunding), but few on how to innovate how equity interests are structured for public investors. I concluded that:

  • The time was ripening for a Fairshare-like innovation,
  • I had a unique perspective on IPO deal structures, and
  • Others would emerge to help popularize and implement the core idea behind Fairshare—a deal structure that minimized valuation risk for IPO investors, the Fairshare Model.

I decided that a book was a good vehicle to popularize the concept of price protection for IPO investors because it could focus attention on the idea and avoid burdens associated with creating a platform to deliver it. That is, there would be others who would be interested in helping companies prepare for a Fairshare Model offering and facilitate the sale of their stock. What was needed was someone to popularize the idea itself with investors, entrepreneurs and others in the ecosystem of capital markets. 

An inspiration was Linus Torvald, who released the LINUX operating system kernel as public domain software in 1991. It led to an explosion of computer applications that could run on any hardware platform, including smart phones and cloud computing. By making the Fairshare Model an open-source idea, I could ensure that it took root.

Even though I can describe the Fairshare Model in a few paragraphs, the book is about 400 pages, and took five years to produce. In part, it’s because the subject matter—capital structures and valuation—is unfamiliar to most of my target readers, so there are many facets to cover and it has to presented in an accessible manner. [At the same time, many in my target audience have expertise in capital formation. It was a challenge to find a way to engage both kind of readers.]

The other reason it took so long to produce is that the implications of the Fairshare Model ripple into other areas. I felt the book would be more interesting if it explored valuation and ways investors lose money in venture-stage investments, as well as macroeconomic matters such as economic growth, income inequality and shared stakeholding. Throw in chapters on game theory and blockchain, and you have a long book. One that amounts to an easy-to-grasp graduate level course on finance, economics, and philosophy.

How might the Fairshare Model become more than an idea? Geoffrey A. Moore’s 1991 book, Crossing The Chasm, provides a framework that can visualize the answer. He uses a “technology adoption life cycle,” shown below, to explain how customer acceptance of a technology product evolves. The time scale begins at the left, when a product is introduced. The market expands in the growth phases until it reaches maturity, when the adoption rate declines.

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The early market is comprised of “Innovators” who are enthusiasts for the technology and a larger group of “Early Adopters” who can imagine how they might benefit from it. The mainstream market has three different groups of customers. There is an “Early Majority” whose pragmatic concern—”What’s in it for me?”—must be addressed before they buy. Then, the “Late Majority” who is conservative when it comes to purchasing a new technology—they want evidence that it meets their needs. And, final group of customers will be the “Laggards,” who are generally skeptical about new solutions.

Moore says that there is a gap in the adoption cycle between the early market and the mainstream market. He called it “The Chasm,” and says that products that successfully cross it can go on to expand their market. Those that fail to do so are likened to a train that falls off a trestle bridge that spans the gap. The technology Adoption Life Cycle explains why some products grow from niche to mainstream markets, while others that do well with early customers fail to catch on with larger numbers of them.

The Fairshare Model has a chasm to cross before it is put into practice by companies. I call it a “Concept Gap.” To cross it, investors must signal that they like the Fairshare Model, and professionals in the capital formation and organizational matters must be prepared to advise companies on how to make it work. The Concept Gap is shown here—the time scale is subject to Hofstadter’s Law (i.e., cognitive scientist, Douglas Hofstadter).

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Should the basis for a pre-money valuation be disclosed?

“The U.S. Securities and Exchange Commission can help investors protect themselves from overpriced stock deals if it requires valuation disclosure in offering documents.”

That’s the opening line from an article I wrote called “The Case for a Valuation Disclosure Requirement.” It argues that the SEC should require companies that sell stock in a private or public offering state the pre-money valuation they set for themselves in their offering document.

The article didn’t address a question, “If an issuer is required to disclose the pre-money valuation it gave itself, should it also be required to discuss how it arrived at the figure?” It’s an intriguing one because no one knows how to reliably value a venture-stage company, one whose existence is dependent on new infusions of capital.

I think issuers should be encouraged to discuss the basis for a valuation. But, they should not be required to do so. Why? If management doesn’t want to talk about it, they will say something like this:

“The initial public offering price of our common stock was determined through negotiations between us and our underwriters.”

That banal statement all that was said about the (undisclosed) pre-money valuation for Alibaba Group in its 2014 offering document. It was the largest IPO in history.

If required to explain a valuation, many issuers will say something similar. The world doesn’t need more junk-speak, so I oppose a requirement to explain what determined where a valuation was set.

That said, if issuers must disclose their valuation, some may want to say something about it. That is especially true for a small IPO, such as one based on SEC Rule CF (crowdfunding), which be used to raise $1 million, or Reg. A+, which can be used to raise up to $50 million. Small companies tend to set their pre-money valuation without guidance from intermediaries who assemble investors capable of making a significant investment.

Investment banks provide such feedback but that doesn’t mean that the valuation of a Wall Street IPO is more rational. That’s because it isn’t based on the issuer’s expected operational performance. Rather, it is driven by what the banker thinks secondary market investors will pay. A discount of 15 to 20 percent is applied to that, which enables the best customers of broker-dealers in the banker’s deal syndicate to flip their shares at a quick profit to average investors.

That is how the pre-money valuation is set for large IPOs, but it will not be described that way in a prospectus. After all, that could create cynicism that can undermine the investment bank business model! If any explanation is provided for an underwritten offering, it may look like this.

We [the issuer] estimate the fair value of our common stock using a discounted cash flow model and in consideration of the following factors:

•    the market value of comparable companies;

•    our historical results and forecasted profitability;

•    our market and liquidation value of our assets; and

•    other conditions that affect our business.

Small IPO issuers don’t have a selling machine to stir and probe demand. They make their case directly to investors who are likely to have a more long-term perspective on the stock. Those issuers are likely to discuss their valuation in greater detail. Many will struggle with what to say though. Just as it’s hard for an investor to evaluate a valuation, it is a challenge for a company to explain why it set one where it did.

The predecessor to NBC’s Late Night with Seth Meyers show was Late Night with David Letterman. A staple of Dave’s show was a “Top Ten” list of dryly humorous explanations for various things. In that spirit, I offer two lists of explanations for a pre-money valuation.

The first are explanations that you might see if the SEC requires valuation disclosure. The other has those you will not see (if it is reviewed by issuer’s attorney).

Top Ten Explanations for a Pre-Money Valuation You MIGHT See

10. We applied a multiple of 2.3X to our projected revenue for next year.

 9. We applied a multiple of 8X to our projected income in three years.

 8. We need $10 million and our founders want 55 percent of the company, so that works out to a valuation of $8.2 million.

 7. A valuation expert assessed our projections and risk factors, then used a sophisticated model to set a valuation range; we selected the mid-point.

 6. We expect to be worth $40 million within 3 years, so we valued the company at $10 million to offer those who invest now an attractive deal.

 5. Our management team is worth it.

 4. We created a five-year income projection and assumed a constant growth rate thereafter. To this, we applied a cost of capital of 18 percent to arrive at the present value of our company.

 3. We met with lots of smart people and came up with a figure that made sense to everyone.

 2. Firms in Silicon Valley and New York City are reportedly being valued at $500 million—we’re based in the Midwest, so we offer a discount.

 1. Our principal competitor has twenty times more customers than we do, but our product is better, so we should be valued at a premium.

 Top 10 Explanations for a Pre-Money Valuation You Will NOT See (if reviewed by issuer’s attorney)

10. Beer pong!

 9. Our potential market is $6 billion in size; we expect to own one percent of that.

 8. VC backed companies are getting that.

 7. Consensus figure from our Ayn Rand book club.

 6. (Number of founders X $5 million) + (number of engineers X $2 million).

 5. We sense an opportunity.

 4. Our business model is disruptive.

 3. We intend to be the top player in our space.

 2. We applied a multiple to our projected loss, then changed the negative sign to a positive.

 1. If all goes well, it’s reasonable!

NOTE: While companies are not required to disclose their valuation, they are required to make a highly detailed disclosure about how they value their stock-based compensation (i.e., stock options, restricted stock). The assumptions and calculations must be reviewed by a valuation expert, the issuer’s auditor, and its attorney. Add the internal cost—the software and man-hours—and it is an expensive disclosure. The irony is twofold:

1.      No one cares about stock compensation disclosures. Everyone who relies on the financial statements to evaluate a company adjusts off any stock-based comp charges to get a pro-forma income figure that useful. Stock comp expense is ignored because it is a non-cash expense that has no bearing on the financial health of a company.

2.      Though pre-money valuation is of keen interest to investors and would cost nothing to calculate or disclose, it is not a disclosure requirement.

Go figure.


Karl M. Sjogren is the author of a forthcoming book called  “The Fairshare Model, a performance-based capital structure for companies that raise venture capital via a public offering.”

I call it the Fairshare Model because it balances and aligns the interests of investors and employees…capital and labor.

Readers who enjoy this article may find this of interest: A 2:3 Paradigm for Investor Risk in Venture-Stage Companies

The Case for a Valuation Disclosure Requirement

The U.S. Securities and Exchange Commission can help investors protect themselves from overpriced stock deals if it requires valuation disclosure in offering documents.

Valuation is occasionally cited in news reports but many people are unsure what the word means, let alone know how to calculate one.

Briefly, valuation is the presumed price to buy a company, based on its stock price. When new shares are sold, savvy investors focus on the “pre-money valuation,” which is the number of shares outstanding before the offering times the price of a new share. The number is important because the buy in valuation is a key determinant of an investor’s eventual return.

Whether privately held or publicly traded, a company’s valuation should approximate what it might be acquired for. Often, it doesn’t, especially if it is a venture-stage company. Such a business is often unprofitable, has questionable prospects and will need capital from future investors to operate. A venture-stage company is difficult to value reliably.

Assume a scenario where such an enterprise, ABC Company, is raising capital at a $50 million pre-money valuation. How might an investor evaluate an investment? If she knows the valuation, she is likely to pose a question like this one.

“ABC Company has modest revenue and no profit, so why should I invest when it is valued at $50 million?” 

If the investor does not know the valuation, she might instead ask, “Why should I invest at $X per share?” But this is not meaningful. Many combinations of share prices and shares outstanding can result in the same valuation. Both numbers are used to calculate a valuation, just as two hands are used to make a clap.

The key question is “Why is ABC Company worth $50 million?” and investors who fail to ask it are more likely to make a poor decision, even when they are right about the company’s ability to achieve its potential. That’s because one can overpay for a position in a successful company.

Valuation is a vital data point and investors should not, as they do now, have the burden of calculating it. Many do not know how to. Others may be uncomfortable doing so or forget to. Some may calculate it incorrectly. But if the amount is declared in an offering document, anyone can see what it is.

But the SEC does not require valuation disclosure. It assumes that investors can and will calculate it themselves. This is remarkable, given how important the figure is and how likely it is that an investor will fail to correctly calculate it. It is also odd, when one considers how many pages of an offering document are devoted to risk factors while a valuation can be expressed in a single sentence.

Venture capital and private equity firms absolutely know the valuation of companies they invest in. They also have insight on comparable valuations via their network and fee-based research services that rely on voluntary disclosure from private companies. Angel investors tend to know a company’s valuation but have less market insight than VC and PE firms. In stark contrast, only a small fraction of a company’s public investors is likely to know it’s valuation and few of them will know how it compares. This is not the hallmark of a healthy, open market.

The beneficiaries of a valuation disclosure requirement will be numerous. That’s because data aggregation services can be counted on to harvest data points about private and public offerings from the regulatory database and use it to create rich content. For example, valuations could be associated with the amount raised and when, with an issuer’s industry, location, financial data and other factors. Such insight can enhance capital markets in ways that Zillow and Trulia benefit the real estate market.

Together, an issuer’s valuation disclosure and access to robust market data will position any investor, not just the professional ones, to ask questions such as these.

  • ABC Company appears to be like XYZ Company, which was recently valued at $40 million. What makes ABC worth $50 million?
  • The average valuation for companies at ABC’s stage of development is significantly different; what explains that?
  • ABC’s valuation is comparable to companies with backing from major VCs. Given that ABC doesn’t have such support, shouldn’t it be lower?

Such data can help companies avoid the problems of raising capital at excessive valuations. Doing so encourages arrogance about Other People’s Money and naïveté about future raises of capital. The effects of either is bad and painful to recover from.

Companies that offer a below-market deal will benefit because more investors will recognize that one is offered. The data will also help investors evaluate an issuer’s valuation trend; to compare its IPO valuation to what it was in its pre-IPO offerings. A likely result of such analysis will be realization that much of the appreciation may not be explained by better performance or reduced risk but instead, by the notion that public investors should pay (a lot) more than private investors. That presumption is sure to be challenged as public investors wise up.

Valuation disclosure sets the stage for these all these things to happen. Issuers will feel compelled to compete for investors, much like merchants do for customers. Some in the investment business will scorn this prospect. It erodes the influence of clubby networks and seems, well, undignified. But competition is the cornerstone of capitalism and economies are more vibrant when they are as open as a bazaar.

Some believe, mistakenly, that the SEC approves an issuer’s valuation. It doesn’t. Rather, the agency assesses whether an issuer complies with disclosure requirements that caution caveat emptor.[1] A buyer beware tone makes sense, especially for valuation, because there is no reliable way to assess what one should be. Besides, in a market economy, prices are set in the market. But a Don’t Ask, Don’t Tell position does not make sense. If one doesn’t know what valuation it is, how can it possibly be judged?

There is a clear role here for government, the SEC, to promote transparency and competition.

Absent a regulatory requirement, valuation disclosure will not be commonplace. Attorneys will advise issuers to not do it, citing concern that disgruntled investors might later argue the company represented itself as being worth the valuation. An undaunted CEO will find the task more complex than just providing the figure because the prospectus will also need to explain what valuation is. The following concept formula summarizes why government is needed.

Buyers in most markets—housing, clothing, food, etc.—know that there can a difference between price and worth. Such items have utility, so it is easy to judge worth. It is harder to evaluate a price for something that do not have utility, like a stock. That’s because it’s hard for anyone to know what one is worth. Those who are valuation unaware are further disadvantaged in making a judgment—they do not know the “real” price.

Grocery stores demonstrate the potential benefit of valuation disclosure. Unit pricing helps shoppers evaluate and compare products. When it’s not present, they must calculate the price per pound, per ounce, etc. Many don’t because they are hurried or uncomfortable to doing so. Absent unit pricing, food companies compete based on brand, advertising, packaging and shelf position. With it, there is more emphasis on value for the price. Nutritional fact panels take the analogy further. Disclosure of ingredients and nutritional information encourages manufacturers to offer healthier foods. Similar dynamics are possible in the market for equity securities.

Skeptics of a valuation disclosure requirement might consider that more money has undoubtedly been lost by investors who overpaid for a stock than by fraud, which is a focus of regulators. Also, that investors who are not valuation aware are more susceptible to behavior that former U.S. Federal Reserve Chairman Alan Greenspan dubbed “irrational exuberance.” In an online post, one investment advisor shared this humorous illustration of it:

At the height of the dot-com boom, the stock of the stodgy Computer Literacy Inc. rose by 33% in a single day simply by changing their name to ‘’

Funnier still is the tale of Mannatech, Inc., whose shares shot up 368% in the first two days following the initial public offering. Tech-crazed investors were keen to invest in anything to do with the internet and a company called Mannatech certainly sounded like it fit the bill.

The only problem was that Mannatech makes laxatives.

The SEC’s present position on valuation disclosure (i.e., no requirement to disclose) does nothing to inhibit such behavior. Consider the world’s largest IPO ever: the Alibaba Group raised $25 billion at an astronomical $170 billion valuation. The valuation references in its 2014 prospectus essentially say this:

Prior to this offering, there has been no public market for our [Alibaba’s] shares. The public offering price has been determined by negotiation among us and the underwriters based upon several factors.

Well, golly gee-whiz! Knock me over with a feather! That’s such a meaningful bit of information! Seriously, if that’s what will be said about a valuation—and it typically is—why bother saying anything?

Implicitly, Alibaba, like other issuers that similarly describe how their IPO price is set (i.e., virtually all of them), ask investors to view the matter as if it were the birth of Athena, the goddess of wisdom in Greek mythology.

Rather than emerging as an infant from a womb, she was born fully formed, as an adult, springing out from the head of her father, Zeus. Perhaps it is not coincidental that Athena is also associated with purity, for she remained sexually chaste.

IPO issuers who make such pronouncements suggest that wisdom and purity guide where their valuation is set.

The wisdom comes from its management and their investment bankers.

Purity is evoked in a virginal sense: the issuer’s valuation is untested in the public market. So, goodness! Who can possibly know whether the one at IPO makes sense?

Of course, these factors are based on myth, just as Athena herself.

Greed has at least as much sway on the setting of a valuation as wisdom. And all companies have a valuation history. Why it should be considered irrelevant to public investors is a curious matter. After all, private investors routinely consider what a company’s valuation trend is.

My point is that it is a challenge is to assess what a business may be worth but wrong-headed for regulators to not require every issuer to be transparent on what their valuation is and, for that matter, what led management to set it where it did.

The most straightforward explanation for why the SEC does not require valuation disclosure is that its staff does not see it as an issue. After all, an investor just needs to pull two numbers out of the offering document and multiply them. But, this logic is at odds with lessons learned about pricing from grocery stores. Furthermore, one would think than the agency whose motto is “the investor’s advocate” would embrace approaches that help investors make more prudent decisions and to attract better deals.

It could be also that no one has promoted the idea enough. In a moment, I’ll tell you how you can help change that.

It is also possible that the reason is more complex and less benign. That The-Way-Things-Work against the interests of average investors—those who are at the bottom of the capital market food chain. Here are two things to consider:

  1. Public investors are bifurcated into two groups. Those who get IPO allocations are the best customers of the underwriters or those with economic and political influence. Many of them flip their shares to secondary market investors at a higher price. Thus, they are not long-term investors and they are unlikely to see a problem with the Way-Things-Work. The second group is made up of average investors who compete for shares in the secondary market. They tend to be buy-and-hold investors. Since they bid prices up, it appears that there is no reason to change anything; there is no need to make valuation more transparent. But the fact that, in retrospect, many IPO valuations are excessive belies that conclusion. I ordinarily eschew conspiracy theories but I see opposition to valuation disclosure as support for a system that disadvantages average investors.
  2. Several regulatory agencies are self-funded, at least in part. They include the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. The SEC is not self-funded; all the money it generates from fees and fines go to the general treasury. That makes it wholly dependent on the Congress for its annual appropriations. This is not happenstance. It enables politicians to leverage their influence over the SEC to raise money for their re-election campaigns. The financial services industry is likely to oppose valuation disclosure because it threatens the business model of its most powerful members. If more investors are valuation savvy; they may be less eager to buy shares in the secondary market from those who get IPO allocations. Thus, lobbyists are likely to discourage legislative support for valuation disclosure.

The possible reasons why valuation isn’t a required disclosure now are interesting. What’s important, however, is that you and a few thousand others can help change that.

Let your senators and congressional representative know that you want them to support the concept. Email the SEC chairman, Jay Clayton, at and urge him to take the issue up for study. Here’s a message that you might use:

Dear Chairman Clayton,

I understand that the SEC does not require issuers of equity securities to make prominent disclosure in offering documents of the valuation that they give themselves. I urge you to change this. I hope the commission will make the following a required disclosure for both private and public offerings: 

  • The so-called pre-money valuation; and;
  • Discussion of factors that were considered when setting it.

I support initiatives that encourage market forces to improve investor protections. If the SEC requires this disclosure, more companies may compete for investors by offering lower valuations and other favorable terms.


[Your Name]

Seriously, if you want to see the ball advanced on this issue, do it! Members of the Congress are highly sensitive to what their constituents say. The SEC is similarly receptive to input from the public.

You have the power to influence whether valuation disclosure is seriously considered. It takes no money. It just requires that you to take a moment to express your support for it and ask others to do the same.

[1] Some states use their “Blue Sky” laws to evaluate an issuer’s valuation, but, they lack authority over offerings that are registered with the SEC.


Karl M. Sjogren is the author of a forthcoming book called     “The Fairshare Model, a performance-based capital structure for companies that raise venture capital via a public offering.”

It will be published about five months after 250 people pre-order a copy from Inkshares, a publisher that relies on reader support to decide what to publish.

Preview it and place a pre-order at

Readers who enjoy this article may find this of interest as well: A 2:3 Paradigm for Investor Risk in Venture-Stage Companies




An Allegory for What Troubles Developed Economies

Metaphors can bring focus to complex situations, like what underlies the troubles of the American and European economies. My allegory conjures moons and tides to create an image that is easy to grasp but difficult to solve. It hints at why public dialogue about what to do about it has, increasingly, taken on toxic qualities.

To set-up the imagery, recognize that a mega-trend drives the economic disquiet that is so evident among voters; the return on labor is falling while the return on capital remains relatively high. Here, the return on capital is rents, interest, dividends and capital gains while the return on labor is real wages and proxies for a sense of security, belonging, and purpose.

The relationship reflects slow economic growth and rising income inequality. This trend has three interweaving drivers—technology, economic theory and the supply of labor. Their effect came into play in the 1980s and have gathered strength since.


Computers and telecom technologies made it easier to perform all manner of work and be more productive. However, and significantly, it also made it easier to relocate where it is performed. Once digitized, work took far less time and effort to recreate. And it was easily shared, willingly or not.

It is difficult to identify job categories where the income potential has not been adversely affected by ability to move the work elsewhere. Robotics and other forms of machine learning represent a permutation of the trend—they move work away from humans altogether

Economic Theory

Philosophers provide the intellectual framework for movements. Technology enabled schools of thought that led businesses to conclude that they didn’t need to do everything in-house. The initial expression of this idea was outsourcing. It first affected support functions like computer operations and payroll, then migrated to those that had been considered central to competitiveness, manufacturing and customer support. Offshoring was just a skip and a hop away.

The outsourcing and offshoring movements were aided by two other economic theories. One was that countries are net beneficiaries of free-trade. The other was that management’s principal duty was to maximize the wealth of shareholders—this exerted a negative effect on the return on labor for non-management employees.

Lean organizational philosophies are a variant of the idea that companies need not do everything themselves. They view activities that do not add value to the final product as superfluous and something to eliminate. They are especially popular among emerging companies, which foretells the future of work, given that these types of businesses are responsible for most job creation.

Supply of Labor

The Soviet Union dissolved in 1991. With the end of the Cold War, Russia, along with China, sought to transition from a centrally controlled economy to one that was more market oriented while minimizing political instability. Countries indirectly affected by the Cold War, like India, had adjustments to make as well. As these nations became export oriented, the supply of labor increased significantly. As a result, the battle for the commanding heights of the world economies shifted from one based on political ideology to one driven by market economies.

In 1992, the European Union was formed. Member countries came to share a currency; citizens were free to travel, live and work within the E.U. and commerce within it was free of restrictions and border taxes. In part, E.U. countries sought to emulate the United States of America. Additionally, they sought a response to rising imports from Japan and the so-called Asian Tiger countries—Hong Kong, Singapore, South Korea and Taiwan.

Similar trade concerns led to the 1993 NAFTA trade agreement between the U.S., Canada and Mexico. “Globalization” was coined to describe what was going on, increased integration of economies around the world.

The Allegory

Tribes were an early form of social order for unrelated humans. Often, tribal affiliation reflected familial connection; it always reflected shared interests.

Advantages of scale led to city-states, where tribal affiliation weakened in importance. Ancient Athens and Rome were city-states; similar clusters were common in Europe in the Renaissance period.

Over time, nation-states supplanted city-states because larger affiliations of common interests promoted economic and political influence.

Metaphorically, the tide of support rose to the nation-state level.


It remained there until the effect of technology, economic theory and an expanding supply of labor began to be apparent to developed economies. These forces, depicted here as rising moons, created a tide of support for trans-national pacts like the E.U. and NAFTA. It spurred other regional trade activity as well, such as the 2006 framework agreement between Mexico and the Common Market of the South (Mercosur) and the Trans-Pacific Partnership Agreement (TPP) negotiated by the Obama administration.

The highwater mark for trans-national solutions is depicted by the effect that the rising moons have on the tide of popular opinion. It was reached in 2016, when the U.K. voted to exit the E.U.—Brexit.

Shortly thereafter, Donald Trump was elected U.S. president. He promised to withdraw from the TPP, to cancel and/or re-negotiate NAFTA and to label China an unfair currency manipulator. He summed up his approach as America First, which mirrored his campaign slogan, Make America Great Again. In France, the leader of the nationalistic National Front party, Marine Le Pen was a finalist in the 2017 presidential contest.

Each of these political outcomes defied traditional thinking. Collectively, they suggest a dynamic—loss of confidence in trans-national solutions because they didn’t protect voters from the forces that pressure the return on labor. The stock and housing markets made it easier to overlook their effect before the Great Recession. The subsequent job losses, tight credit and collapses in asset values made it impossible to ignore. That pain was felt widely and optimism about the future sagged.

Dissatisfaction with the pace of the recovery left voters Mad as Hell but, in a peculiar way. They knew what they were against—the situation they were in. They knew what they wanted—restoration of what they had and more. However, they were unsure how to achieve it and so were the politicians who represent them.

Economic growth is measured by the growth in gross domestic product but it comes from increases in population and/or improvements in productivity. Few developed countries see population growth as their economic engine. And it is hard to increase domestic productivity when work can be easily moved elsewhere or, increasingly, to machines.

Conventional policy solutions were not designed to address the reasons for the declining return on labor. Lower income taxes, for example, may encourage economic growth but not necessarily domestic job creation—a business that hires locally and pays well can have customers willing to buy from foreign competitors who don’t. Fewer regulatory requirements benefit foreign and domestic producers alike—and fewer regulations can harm domestic providers of services that help businesses satisfy the requirements. Better training can make a workforce be more competitive, but the specter of lower cost foreign workforce will pressure wage growth and job security.

These challenges help explain why an undertow of tribalism increasingly colors economic talk, especially on social media. Keith Payne, author of The Broken Ladder: How Inequality Affects the Way We Think, Live and Die, put it well when he said

When inequality becomes too large to ignore, everyone starts acting strange. It divides us, makes us believe weird things and erodes our trust in one another.

The tide suggests that protectionist trade policies may gain support, which will fuel debate about how to change the effect of one moon, economic theory—little can be done about technology and the supply of workers. It will be a remarkable debate, since economies are more interconnected than ever. Also, because it will confront the grand premise of the dogma of deregulation, free-trade and shareholder wealth maximization…that economies work best when government gets out of the way of its participants.

A nation with high labor costs need not resort to protectionism. It can compete based on workforce training, infrastructure, legal process, capital markets and an intolerance of corruption. An economy can compete based attitudes of its participants—entrepreneurs and those who decided to back them; advisers, investors, marketers, suppliers, regulators and even those willing to buy new products. In other words, economies compete based on business ecosystems, not just parts. Unfortunately, a holistic approach offers little solace to those who feel most damaged by the declining return on labor.

Perhaps we need philosophers from across the political structure to describe what it means to live a good life in the times we face and what a vital, innovative economy might look like—one that allows for self-actualization by more people. Essentially, we need a framework to re-imagine capitalism.


Karl M. Sjogren is the author of a forthcoming book called “The Fairshare Model, a performance-based capital structure for companies that raise venture capital via a public offering.”

It will be published about five months after 250 people pre-order a copy from Inkshares, a publisher that relies on reader support to decide what to publish.

Preview the first chapter at

Reduced Employer Payroll Taxes: A Direct Path to Job Creation

A mega-trend drives economic disquiet in developed countries; the return on labor is falling while the return on capital remains relatively higher. You intuitively sense this. Economist Thomas Piketty provided data to support it in his 2013 book, Capital in the 21st Century.

This trend explains the restiveness about anemic economic growth and rising income inequality that is so evident in western nations. Brexit supporters in the United Kingdom reacted to foreign workers who drove down wages. Declining prospects for a better life motivated U.S. voters to elect Donald Trump; immigration and free trade were the lightning rods he raised. Similar sensibilities have a following in France, as evidenced by the support garnered by Marine Le Pen, the nationalist party’s presidential candidate.

There are three interweaving drivers of the declining return on labor—technology, management theory and a greater supply of labor:

  • Technology: the digitization of information makes it easy to relocate work. It is difficult to name jobs where earnings growth is not adversely affected by the ability to move work elsewhere. Robotics and other forms of machine learning have a similar effect—they move work from humans.
  • Management Theory: Beginning in the 1980s, companies decided they didn’t have to do everything themselves. Outsourcing took root with computer operations, payroll and customer support then moved to manufacturing. Offshoring was a skip and a hop away. Lean organizational philosophies are a variation of the idea and they are popular among emerging companies, which provides an ironic foretelling about the future of work. Since the 1970s, these types of employers have been responsible for more job creation than Fortune 500 companies.
  • Greater Supply of Labor: The end of the Cold War led China and India to develop an export orientation and this created wage pressure on workers in higher wage countries. It is unrelenting; China, for instance, faces wage competition from other Asian nations while it competes with western economies for high skill work.

The political landscape looks startling different once you recognize the drivers. As different as the moment in The Wizard of Oz when the screen transforms from black and white to color. Essentially, optimism among those who rely on the return on labor has been eroding because it is easier to change where their work is done.

In the face of these three drivers, is it possible for today’s job market to look much better? Might protectionist trade policies have significantly blunted their effect? If so, might government administration of those policies made the economy less competitive?

We can’t change what these drivers have wrought–the genie is out of the bottle. Today, there are two forward-looking questions. What policies will enhance productivity and thus, economic competitiveness? And, what can be done to ease the social unrest that has been unleashed?

Since economies are complex, policy prescriptions tend to rely on indirect cause and effect. Advocates of lower income tax rates, for example, believe that the prospect of higher after-tax income will lead businesses to make investments that, in turn, create domestic jobs. The idea relies on plenty of speculation.  Those who favor investments in education also rely on indirect solutions—more education makes a workforce more attractive to employers and that, in turn, creates more and better jobs.

Indirect solutions rely on theory, logic and intuition for validation, however, it can be easier to find hard evidence for direct solutions.

There is a direct solution for job creation—one that can test the effect of lower taxes on employment. Simply reduce employer payroll taxes. If it costs less to employ people, theory has it that businesses will hire more of them, right? Employers and employees share the payroll tax burden.  Employees see their portion on payday but may not realize that their employer pays about the same amount. The self-employed pay both portions.

The employer portion is a vestige of an age when job creation wasn’t such a concern and when labor was a larger component of product cost.  Increasingly, the cost is in materials with low labor content and business infrastructure/overhead; the drivers of the declining return on labor also reduce its cost.

The relationship between taxes and employment is intimate at the payroll tax level; all employers pay it and all would benefit from a reduction. By contrast, a reduction in the income tax rate only benefits employers with taxable income. The correlation between that and the payroll is weak—companies with lots of workers may be unprofitable and profitable ones need not have many domestic employees.

Tax code reform is desirable for many reasons…but job creation isn’t a direct one. Cause and effect between income taxes and job creation is indirect and uncertain.

Furthermore, lower income tax rates don’t affect the three drivers for the declining return on labor.  They could, however, increase income inequality; the rates on capital gains is already much lower that the rates on earned income.

Another problem with relying on the income tax code to encourage job creation is that law-making is influenced by special interests. Congress is the Wizard of Oz of tax policy: a benefit of an employer payroll tax reduction is that legislators will not feel compelled to cry out “Pay no attention to the (lobbyist and campaign contributor) behind the curtain!”  That’s because there will be broad support for changes that encourage employment of U.S. workers.

How to pay for it? A tax on the sale of securities in the secondary markets. One paid when a stock or bond is sold by an investor to another investor (i.e., not when it is sold by a company to raise capital). Effectively, it would be a sales tax on transactions that generate the return on capital. A minuscule tax rate would cover it. A higher one could be used to help make healthcare and education more affordable, something that would ease workforce anxiety and position it to be more productive.

Direct solutions trump indirect ones. A tax on the return on capital to underwrite the needs of those who rely on the return on labor makes economic sense—it promotes job creation and growth. It makes political sense too: the net loser from the three drivers vote—foreign workers and robots don’t.


Karl M. Sjogren is writing a book about an idea for a performance-based capital structure for companies that seek to raise venture capital via a public offering. It is called The Fairshare Model because it balances and aligns the interests of investors and employees…capital and labor.

A 2:3 Paradigm for Investor Risk in Venture-Stage Companies

risk-paradigm-image How might one evaluate an investment in a venture-stage company? That is, one that presents high risk of failure and will require more money from investors in the future to survive.

It is a tough question, one that isn’t just the province of investors in private offerings—it affects average investors and anyone concerned they will be imprudent in their investment choice.

Venture capital can be raised in a private or public offering. Wall Street initial public offerings routinely raise venture capital; think most tech and virtually all biotech IPOs. “Venture capital” is defined by the issuing company’s risks, not how it is raised.

The JOBS Act of 2012 led to changes in securities regulations that make it less burdensome for companies to sell stock and for investors to invest in them. It will take time to assess their effect but this much is apparent—more young companies will sell their shares to the public in the years ahead.

The potential, not their performance, is their appeal. Thus, how to evaluate an investment in one?

Below, is a framework I developed while writing a book about a performance-based capital structure for companies that raise venture capital via an IPO.

It explains why I hold two opposing views about the JOBS Act reforms. I am enthusiastic about crowdfunding, online platforms and Reg. A+ offerings as they improve access to capital for entrepreneurs—people who contribute much to our economic vitality—but I fear that average investors will fare poorly when they invest in them.

The 2:3 Paradigm

I call this framework the 2:3 Paradigm.

The ”2” refers to the two fundamental risks for investors—failure and valuation. The first is that the venture will fail to meet expectations. The second is that the investor will overpay for a position, something that can happen even if the company meets expectations.

These risks underpin all others. Those related to market, technology, and management are a blend of these two. That is the case for fraud as well; it is failure and valuation risk garnished with false or inadequate disclosure.

Failure risk is omnipresent in a venture stage investment. Valuation risk lurks as well; an investor may invest in a successful company but lose money (or make less than expected) because the buy-in valuation was too high.

The “3” in the model’s title indicates that there are three paths to address them—analytics, cohorts and structure—and they can be combined for a variety of effects. Similarly, the primary colors—red, yellow and blue—can create an array of colors.

The following table shows that investors use two of these paths—analytics and cohorts—to mitigate failure risk and that there isn’t a structural solution for failure. In contrast, all three paths are potentially available to investors to mitigate valuation risk.

2:3 Paradigm for Risks in a Venture-Stage Investment 3 Pathways to Mitigate Risk
Analytics Cohorts Structure
2 Fundamental Risks Failure X X
Valuation X X X

Analytics Path

Analytics refer to data that one can independently assess. Established companies have a lot of it. Young companies don’t and what they do have has dubious predictive value, especially if they utilize novel technologies or business models.

In 1968, Edward Altman at New York University devised an algorithm to predict whether a public company would be bankrupt within two years. It weighed measures of profitability, working capital and market value for indications of weakness. Altman dubbed the result a Z-Score.

Could there be a forward-looking measure for early-stage companies? One that assesses the potential for success, not failure? It is a beguiling challenge, one that Nimish Gandhi at Invesights ( has tackled. A former academic who has studied small companies, he has a methodology to predict the viability of early-stage and established companies. Invesights’ algorithm generates a score called Investment Outlook Score (IOS), akin to a FICO score that measures a person’s creditworthiness. Like a Z Score, an IOS seeks to portend the future. Unlike the Z Score, it measures business vitality.

Independent of such a system, analytics can screen for failure risk by identifying dubious assumptions, evaluating competitive advantage and the reliance of a company on future infusions of capital.

Analytics is central to valuation analysis and discounted cash flow (DCF) is its cornerstone. Theoretically, it is appealing; the present value of an enterprise is the sum of its future cash inflows, discounted for the time value of money (interest rate) and a risk factor. In practice, it is only as helpful as the earnings projections, which can be unreliable for established companies and are routinely so for start-ups. Computer scientists have an expression that fits—garbage in, garbage out.

DCF can suggest a valuation when an investor’s anticipated exit is via acquisition of the company. But there are problems here too. Namely, its very risky to set a valuation based on a discount to an outcome that may never happen. Then too, any purchase price may be a function of the company’s strategic value to the acquirer, not its cash flow, and that can vary greatly based on who the buyer is and the company’s future market position.

Multiples offer another analytic approach to valuation. Public stock analysts look at the multiple the market applies to a company’s earnings per share—its price/earnings ratio. Acquirers and private equity (PE) firms value companies using a multiple of sales, profits or indicators of value such as the number of customers. When a valuation exceeds a multiple’s norm, valuation risk climbs.

Multiples are not particularly useful to VCs for they invest in new technologies and disruptive business models and it is hard to identify relevant multiples for such opportunities.

Bottom line: in theory, analytic tools offer a compelling way to establish a valuation for a company but in practice, they have shortcomings, especially when dealing with venture stage companies.

Cohort Path

A cohort is a group whose members share a common characteristic, and here it refers to those who influence an investor’s assessment of a company. Since one need not have a personal relationship with someone to be influenced by them, the pool of potential cohorts is immense.

Virtually everyone heeds what others say or do. That makes the cohort path the most popular way to assess failure and valuation risks. As social creatures, investors want to know, what do others think of a company? Is it likely to go up in value?

Analysts who follow public stocks are on the analytic path when they consider the fundamentals of a business and its prospects for growth. They are on the cohort path when they compare their assessment to a company’s market value.

Technical analysis is a pure form of the cohort path. It’s practitioners study stock price charts to identify valuation risk. In wizard-like fashion, they attempt to discern meaning from patterns of trading that look like heads, shoulders, teacups, and so on. The same can be said for momentum investors, who buy when prices trend up and sell when they do the opposite. It sounds odd, but machine-based trading systems pay attention to cohorts too…they monitor the behavior of other robo-traders as well those who are human.

VC and PE firms use cohort networks to help them evaluate both failure and valuation risk in private companies. Angel investors do this too when they approach due diligence as a team sport, coordinating it with others.

In contrast, investors evaluating a public venture stage company have poor quality access to cohorts. Financial advisors sensibly discourage such investments because of their high failure and valuation risk, but that doesn’t prevent someone who wants to take a chance from doing so. Venturesome public investors are left with media reports, press releases, and online postings. These can help assess failure risk but they often offer notoriously poor information about valuation risk. Some of these cohorts put out misleading information for their own gain. They seek to spur demand for shares as part of a pump and dump scam or crash them to profit from short sale positions.

Access to the cohort path for investors in venture-stage companies is evolving. In 2013, the U.S. Securities and Exchange Commission began to let websites share information about private offerings with accredited investors. In 2016, the SEC allowed other types of websites to provide information on offerings to any investor. Such developments are recent and suggest dynamism for the cohort path in the years to come.

Structure Path

The structure path is about the terms of an investment. A capital structure facilitates deal terms, hence the name.

A corporation’s capital structure is defined in a document that goes by names such as the articles of incorporation or certificate of incorporation. It describes, among other things, the rights of its shareholders. The document must be amended before unique deal terms can be granted. For a country, the document is equivalent to its constitution, which sets forth, among other things, the rights of its citizens.

Deal terms don’t reduce failure risk. They can limit valuation risk, however, and significantly so. Put another way, the structure path does not help investors avoid a failure, but it can keep them from overpaying for a position.

The smartest, best networked investors in the venture space—VC and PE firms—are skilled at using the analytics and cohort paths to reduce failure risk. But since it’s hard for anyone to know the “right valuation” for a company, analytics are of limited value when assessing valuation risk. The cohort path is similarly handicapped because everyone has this problem. Therefore, while these investors use these two paths to evaluate valuation risk, they rely on the structure path to control it.

More precisely, VC and PE firms use the structure path to secure deal terms that can reduce the significance of their buy-in valuation…effectively, a valuation safety net.

A price ratchet clause is a basic way to do this. It retroactively reduces an investor’s effective price per share if later investors get a lower price (i.e., protected investor gets additional shares for free). Another is a liquidation preference clause, which entitles an investor to a preferential return, relative to other shareholders, and it is activated if the company is acquired or otherwise liquidated. A 3X liquidation preference, for example, entitles an investor to receive three times its investment from the proceeds before others get anything.

Thus, VC and PE investors tell entrepreneurs, “Give me my terms and I’ll give you your valuation.”

Apply the 2:3 Paradigm to Valuation Risk

Before considering how the three pathways address valuation risk, let’s touch on how a valuation is established.

Three are three approaches—asset, income, and market. The asset approach looks at the value of a company’s assets. The income approach estimates the present value of its future earnings and, possibly, its eventual value to an acquirer. The market approach uses the valuation of comparable companies as a marker. A valuation amount may reflect input from more than one approach.

This table shows how the approaches to establish a valuation intersect with the paths investors can take to mitigate the risk that it is too high.

Valuation: Ways to Set the Amount and Mitigate the Risk Mitigate the Risk
Analytics Path Cohort Path Structure Path
Establish the Amount Asset Approach X X
Income Approach X
Market Approach X


  • The asset approach is on the analytics and cohort paths because asset valuation can reflect independent assessment and/or the opinion of others.
  • The income approach is on the analytics path as it relies on independent assessment of DCF analysis, valuation multiples or similar metrics.
  • The market approach is on the cohort path because its goal is to evaluate what others think.

Note that no valuation approach utilizes the structure path. That’s because structure doesn’t set a valuation, it protects against a bad one. It can protect new investors from a valuation that proves to be too high (e.g., price protection, preferential rights to a return, claw back provisions). It can also protect current shareholders from a too low valuation from new investors (e.g., earn out provisions).

There are two key points here:

  1. Valuations based on the asset, income and market approach can be unreliable for established companies and are virtually always unreliable for a venture stage company. That’s not an indictment of the approaches as much as an acknowledgement of how challenging it is to get reliable data.
  2. Structure can make a valuation elastic, conditioned on subsequent events.

The final table shows that the structure path is available to private investors but not public ones.

Access to Paths Analytics Path Cohort Path Structure Path
Private (pre-IPO) investors X X X
Public investors X X

This one raises a question. If companies offer pre-IPO investors price protection, why don’t they offer it to IPO investors too?

Fundamentally, its because IPO investors don’t demand it, so issuers have little incentive to offer it.

Undoubtedly, this is because many public investors are valuation unaware. After all, if you are unsure what a valuation is, how to calculate it or how to evaluate one…why would you call for valuation protection?

Then too, the way-things-are works rather well for valuation savvy IPO investors who trade out of their position soon after they get shares. Rather than buy and hold, they buy and flip. For them, valuation protection comes from being a favored client of the underwriter, able to get an “IPO pop” of fifteen percent or more. If you doubt that, ask yourself, “If Wall Street banks allocated IPO shares in a lottery, how long would it take privileged investors to call for price protection?”

And, if public investors signaled interest in terms that reduce valuation risk, would issuers offer it? Surely, yes, for it is the nature of markets to respond to demand.

If they wanted to, how would companies offer it? While there would be variation in what was offered, all issuers would share a quality—they would have a multi-class capital structure when they have an IPO. It allows a corporation to treat IPO investors different from other shareholders. A single-class capital structure requires that all shareholders to be treated the same.

VC and PE backed companies always have a multi-class capital structure when they are private. Employees get a different stock than investors (i.e., employees get common stock and investors get preferred stock). When there are multiple rounds of financing, investors in each round have a unique class of preferred stock that specifies their deal terms.

Typically, when such a company has an IPO, its multi-class capital structure converts to a single class structure. The different classes of preferred stock convert to the common stock held by employees in accordance with their terms and new common stock are issued to IPO investors.

However, IPO issuers need not have a single class of stock. When Ford Motor Company went public in 1956, it sold Class A shares to the public while certain insiders held Class B shares with super-voting rights. Nearly fifty years later, the Class B shares represented about 2% of Ford’s total shares but controlled 40% of the vote. In 2004, Google took a similar approach with its IPO; the Class A it sold to the public had one vote per share and the Class B shares held by some pre-IPO shareholders had 10 per share. Since then, several companies have used a multi-class structure to similar effect in their IPO.

Note the irony of the way-things-are. Private companies adopt a multi-class capital structure to protect new investors while IPO issuers use one to protect insiders.

The Problem with Public Venture Capital

I opened this piece by saying I’m supportive of initiatives that make it less expensive for young companies to raise venture capital from public investors; such companies contribute mightily to economic growth and job creation. At the same time, I fear that average investors will fare poorly when they invest in them.

Not because of failure risk. Over time, I suspect many will be able to reasonably evaluate it themselves or through cohorts.

The problem is valuation risk. Average investors will be exposed to a full dose of it for two reasons.

  1. Companies value themselves much higher when they sell stock to public investors than to private ones.
  2. Public investors have poor access to good cohort data and virtually no access to the structure path.

Valuation Risk Reduction for Public Investors

Here are two ideas to help public investors reduce their exposure to valuation risk.

Valuation Disclosure

The first is a valuation disclosure requirement for offering documents. All investors, private and public, could reduce their valuation risk if the SEC makes it easier to use the cohort path.

It can do this by requiring all issuers of equity securities, whether private or public, to disclose the valuation implicit in their offering. That is, make issuers state in their prospectus that “based on the terms of our offering, our valuation is $X prior to selling our new shares” or words to that effect. Presently, investors must calculate the valuation and, I’ll bet, many don’t know how or neglect to.

This data point will enhance the competitiveness of capital markets by making it easy for data aggregation services to provide two key data points.

  • The valuation of comparable companies, be they private or public.
  • The valuation trend line for the issuer—from the earliest round to the present one.

The effect would be to make equity capital markets function more like real estate markets, where websites allow buyers and sellers to view the price of comparable properties and a home’s valuation history.

Fairshare Model

The second idea is to encourage companies to use a multi-class capital structure to reduce valuation risk for IPO investors; to treat public venture capital with the respect given to private venture capital.

The Fairshare Model, the book I’m writing, presents an idea for how to do this. It’s about a performance-based capital structure for companies that raise venture capital via an IPO.

The Fairshare Model has two classes of stock—one trades, the other doesn’t, but both vote on shareholder matters. Pre-IPO and IPO investors get the tradable stock, known as Investor Stock. For already delivered performance, employees get it too. For their future performance, employees get the non-tradable stock, called Performance Stock. Based on criteria described in the company’s prospectus, Performance Stock converts to Investor Stock. The criteria can change if both classes of stock agree.

The Fairshare Model minimizes investor valuation risk because the IPO valuation does not include the value of future performance. That means an idea alone is not worth $1 million. There are no unicorns. Rather, there is powerful incentive for employees to deliver performance.

Intriguingly, the Fairshare Model creates incentive for an issuer to offer a low IPO valuation. Since employees largely hold Performance Stock, they are focused on what it takes to convert it to Investor Stock. If a rise in the price of Investor Stock is a measure of performance, employees will want to see a low IPO valuation. This, in turn, allows them to say to IPO investors, “We don’t do well unless you do.”

The Fairshare Model can also reduce failure risk by helping issuers attract and manage human capital. In addition to pay, benefits, and stock options on its Investor Stock, a company can offer employees an interest in its Performance Stock. It pays off when they, as a team, meet the conversion criteria.

Companies will consider using the model if a critical mass of investors signal their interest in it because a well-performing team can end up with more wealth than they would had they raised their capital from a VC.

The essence of the Fairshare Model is that it balances and aligns the interests of employees and investors—labor and capital.

This has implications that go beyond this piece, such as economic growth, income inequality, and workforce competitiveness. These topics and more are discussed in the full draft of The Fairshare Model, which can be obtained at the “resources” tab at


I hope I’ve given you a fresh, meaningful way to think about capital formation in the venture space.

There isn’t much that can be done to minimize failure risk—it is a defining aspect of this terrain. It’s a different story with respect to valuation risk.

All players, particularly average investors, will benefit from more robust market data, which is what a valuation disclosure requirement is about.

VC and PE investors have shown that the structure path can reduce valuation risk; the Fairshare Model takes a page from that playbook.

With articles like this and my forthcoming book, I hope to seed a movement to reimagine capitalism. Anything that ambitious takes time, of course, but begins with ideas. The more specific they are, the more actionable, the better. Should you challenge mine, I welcome it. Any effort to change the-way-things-are must survive the crucible of criticism.

If you like the ideas discussed here and in The Fairshare Model, share them and add your own.  Join me in calling for valuation disclosure. If you feel particularly supportive, please pre-order the book.


Karl M. Sjogren is the author of a forthcoming book called “The Fairshare Model, a performance-based capital structure for companies that raise venture capital via a public offering.”

It will be published about five months after 250 people pre-order a copy from Inkshares, a publisher that relies on reader support to decide what to publish.

Preview the first chapter at

Applying a Formula for Happiness to Free Trade

formula-for-happinessExpressing happiness in a formula can prompt new thinking about the cause of unhappiness and how to be less unhappy.

Happiness = What’s Happening – Expectations

This formula states that happiness can be increased by improving what is happening or by lowering expectations.

The U.S. is nearly a decade into an economic cycle that has inflamed anxiety that the future is dimmer than the past. Concern about the effects of free trade unites polar opposites on the political spectrum. The happiness formula can help us untangle how we feel about trade by identifying which variables could change.

Turning down the heat on a matter is a good thing. Frustration led U.K. voters to exit the European Union, a decision most regret. In the U.S. anger over the 9/11 terrorist attacks caused a majority to support the invasion of Iraq which is now universally seen as a poor decision. Similar sentiments about the economic outlook has increased interest in protectionist policies.


Let’s consider the second variable first.

Optimism is natural for Americans but some of us have not considered that, in many ways, we have had the wind at our back. We benefited from having abundant resources and separation by oceans from lands that suffered the ravages of war. A continuous infusion of immigrants, many of whom helped advance scientific and commercial innovation, also contributed. In other words, the rise of a prosperous U.S. Middle Class occurred when much of the world was in a weak competitive position.

Challenges to the post-war economy began in the 1970s as soaring oil prices saw foreign automakers take market share out of the domestic arena. Ensuing years saw increases in many imported goods, largely electronics, textiles and furniture. Some U.S. jobs were lost to imports, but there was as yet a feeling that trade was a rising tide that lifted all boats.

The North American Free Trade Act is a lightning rod now, possibly because Ross Perot memorably said in his 1992 presidential campaign that approval of NAFTA would be followed by a “giant sucking sound” as jobs moved from the U.S., but that treaty helped blunt imports from Asia.

Expectations began to waver as competitive factors other than free trade contributed to economic insecurity. Work migrated from the industrial centers to those that offered lower costs—from Rust Belt states to those in the Sun Belt. Companies outsourced activities they had performed in-house. Computers made it easier to move work to where it could be performed more cheaply. There has also been the effect of new business models; big-box and online retailers favor low-cost products and business practices that have devastated traditional retailers.

The cumulative effects are profound. In his book, Rebooting Work, Maynard Webb observes that:

The half-life of a company is diminishing quickly. The average life expectancy of a company in the S&P 500 has dropped from seventy-five years in 1937 to fifteen years today.

What’s Happening

Turn now to “what’s happening” and what can be done to improve it. Put aside tax policies or spending priorities that require unlikely political consensus. Should the U.S. abandon support for free trade?

There is support for this on the political right and left. If maximization of gross domestic product were the sole objective of trade policy, few countries would engage in free trade. They would instead do what promised to benefit their own economy, even if it damages other countries. Such a beggar-thy-neighbor approach was common after the first World War and it helped lead to the second one.

An argument for free trade is that countries that trade are unlikely to go to war; when goods don’t cross borders, armies will. Another is that global resources are better utilized and broader benefits are created when goods are produced by the most efficient producer. Greater choice and lower prices are other benefits.

A country’s challenge is to use social policies to ease the dislocation that occurs when workers in un-competitive industries lose jobs. When that doesn’t happen, the problem is with social policy, not trade policy. Anxiety over trade has intensified in the wake of the Great Recession but that crisis was rooted in capital markets (i.e., financial instruments based on unsound mortgage debt), not trade policy.

Some who cast a dim eye toward free trade view government negatively; they want it smaller and less involved in our everyday lives. For them, an embrace of protectionism is ironic because such policies require more government involvement in the economy. Government  decides which industries to protect and how to do it. It also decides how to spend the revenue generated by tariffs. Should it be used to improve the nation’s competitiveness? If so, how and where? The opportunity for influence-peddling leads lobbyists to anticipate protectionism as the media views an election—good for their bottom line.

However one feels about government picking winners and losers, protectionism advocates face a key question. How will it increase long-term demand for American products?

If Not Protectionism, What?

The fundamental solution is for Americans to be more productive than their competition. If we can’t do that as the result of innovation, nimbleness or quality, it requires lower costs.

In their book, Better Capitalism, economists Robert E. Litan and Carl J. Schramm propose four strategic initiatives to change what is happening in the decades ahead:

  1. Encourage immigration by high-skilled foreigners
  2. Speed up commercialization of innovations at universities
  3. Improve access to capital for new firms
  4. Regulatory reform

The first initiative runs counter to anti-immigration sentiment, the running mate of protectionism, but it helps the U.S. compete on brainpower. The second and third enhance innovation and economic nimbleness.

Litan’s and Schramm’s fourth initiative is controversial. Industry upstarts and those on the political right often want less regulation. Those on the left want more, as may industry incumbents for whom regulations serve as barriers to competition. Nonetheless, policymakers can clear the regulatory underbrush. They can also reform social policies, such as those concerning education and training, to enhance competitiveness; those that promote equal opportunity will nurture hope in the future.

Another Idea: Cooperation Between Capital and Labor as a Competitive Tool.  

The Fairshare Model, a book I’m writing, presents a way to do this. It’s about a performance-based capital structure for companies that raise venture capital in an initial public offering. I call it the Fairshare Model because it balances and aligns the interests of investors and employees.

For decades, venture-stage companies have been responsible for more economic growth and job creation than Fortune 500 companies. They present investors with two risks—failure and overvaluation—and the model mitigates the valuation risk.

The Fairshare Model has two classes of stock. Both vote but only one can trade. Investors get the tradable stock, known as Investor Stock, and employees get the non-tradable stock, known as Performance Stock. Performance Stock converts to Investor Stock based on milestones.

The Fairshare Model improves access to capital (#3 above) with a deal that encourages investors to invest. If a rise in the Investor Stock price is a performance criteria, a company will set its IPO price low. It also helps companies attract and manage human capital. They will offer employees Performance Stock, which pays off when they deliver the performance investors expect.

If the Fairshare Model proves viable with start-ups, established companies may adopt it. To grasp the significance of this, consider the challenges that General Motors confronted as the era of rising fuel prices began. Uncompetitive products eventually led it to bankruptcy. If its capital structure had been based on the Fairshare Model, employees would have had owned Performance Stock that would have changed their response to developments. The quality of communications and the sense of urgency and responsibility throughout GM would have been higher. Product design would have been more competitive. Workers would have been more interested in better processes and training and less inclined to push for higher wages and benefits.

Now imagine that Sears and Roebuck, U.S. Steel, Eastman Kodak and other once iconic companies used the Fairshare Model. It has the potential to enhance competitiveness and ease income inequality by enabling those who rely on a declining return on labor to participate in the higher return on capital.

Over time, initiatives like these, which don’t rely on a lower labor rates, can improve “What’s Happening” by making the American economy more productive and its participants happier.


The Fairshare Model will be published about five months after 250 people pre-order a copy from Inkshares, a publisher that decides what projects to back based on reader support (crowd funding).

You can preview the first chapter and place a pre-order here.

With the USD $5 credit that Inkshares issues to new customers, an e-book will set you back just $10. A combination of an e-book and signed print book, $20. If it isn’t published or you cancel your order before the book is shipped, Inkshares will refund your money. So, for a modest, risk-free amount, you can help launch a discussion about how to re-imagine capitalism.

Pre-Order Bonus

A special version of chapter 13, Calculating Valuation, with tables to look-up the pre-money valuation based on the size of the offering and the percentage of the company offered.  The tables are not in the full draft at

If you are unsure what a company’s pre-money valuation is, why it is important or how to calculate it, this video is for you The slide deck is here

Storm of Beta, a behavioral finance website, interviews Karl Sjogren of the Fairshare Model

On October 10, 2015, the financial/economic education website Storm of Beta ( published an extensive interview with me.

The interview is here

Storm of Beta is a website that focuses on financial and economic insights. Its “penny for your thoughts” series covers insights into behavioral finance and its implications and applications to financial markets. That focus brought The Fairshare Model to the attention of Storm of Beta, as it is nothing if not an application of behavioral finance to the public venture capital market..


Three new chapters address objections to equity crowdfunding

The September 24, 2015 update to the draft of The Fairshare Model book adds three chapters that discuss concerns that have been raised about equity crowdfunding. The principal focus is fraud, overvaluation and business failure. Particular attention is focused on the cause of failure and a common cause of it–management.

Other objections discussed as well such as unethical sales practices and the sensibility that is expressed as “why don’t we simply rely on VCs to meet the needs of young companies?”

See the resources tab!

NewFinance presentation on May 28, 2015

On May 28, 2015, I made a presentation on the Fairshare Model to the NewFinance Meetup group in San Francisco. The slide deck is under the Resources tab.

When I made my October 2014 presentation (slide deck under Resources as well), I had just one chapter posted online–what is chapter two in the May draft.

Now, fourteen chapters are online! Therefore, this latest slide deck has more to summarize. In particular, chapter ten on the Tao of the Fairshare Model (my favorite) and chapter five, Target Companies for the Fairshare Model.