The general no-equity company
Introduction
Capital in a company's balance sheet is not an asset but a liability. If a company has financial capital, it is reserving this capital from its owners' pockets, and keeping them from using this capital more productively in their own endeavours. Excess capital invites politics, corruption and waste, it lets the management to pursue wrong ventures for too long and does not bring any benefits to offset these drawbacks. Since the emergence of efficient financial markets, it is solely for the convenience and grandeur of managers, to retain any capital in the company. The new wave of enterprises must emerge, and outperform the mammoths and dinosaurs of the old age.
Summary
The company will have a 24/7 trading of its shares, and every time it has expenses, it will need to issue and sell more newly created shares at the bid, every time is has revenues, it will need to buyback its shares at the ask, and write them off. It will keep its cash balance at a predetermined level, which is optimally 0, and at a maximum of 30 days' burn rate. The balance may not be altered at any manager's discretion.
The Story
Meetup in Bitcoin conference
Alice, Bob and Charles are astute business(wo)men. Each one has a playstash of BTC10,000, other businesses to take care of, income, car, family, etc and so forth. They have come up with a seemingly great idea, but it must be done fast if at all, not one of them has too much time to pursue it, and besides they hardly know each other.
In the bygone era, their idea would probably have gone waste, and somebody else would have spent $1 million to develop it after 12 months with less customer satisfaction. Or perhaps they would have taken the time to incorporate it, with the same results. In either case, lots of good money and even dearer time, would have been wasted, setting up unnecessary and detrimental corporate structures.
The emergence of the company
How to do it better? Simple. Start from nothing. Then begin to bring assets to the company and pay with them in shares. Alice offers to be the company secretary, taking care of mail, document storage, and transactions, for a fixed term of 3 months at a fixed pay of $50 per day. The general meeting of shareholders may cancel this contract any time, it is part of the deal. Alice receives 10,000 shares as a kicker, in addition to the pay that was estimated to be at market rates.
Bob had the initial idea and has brought in some early sketches of the code. He wants 100,000 shares for the surrender of all the rights to these. Others try to bargain this down to 80,000, but Bob is adamant. He offers to "provide pizzas and beer for annual general meetings perpetually, or if he fails this commitment, to surrender 20,000 shares back to the company without compensation". Others take this, after all, if the company goes down, the pizzas are discontinued, but also the shares are worth nothing.
Our company has value!
Charles is willing to offer his office space to the future workers (should they need any) and he insists that he wants to invest BTC500 as a seed investment. Because the company does not hold money balances, this is declined, but the similar end is achieved by Bob instantly selling some of his stash of shares to Charles. This boosts the morale of everybody - the first valuation of their new business is set at BTC2200, not bad for a company 1 hour old. Further dealings with Charles include the obligation of the company to pay a rent of $200 per month for office space and the obligation of Charles to work as general consultant, at the hourly rate of $70, maximum 10 hours per week, reporting to Bob.
As the shareholdings are now Bob 75,000, Charles 25,000 and Alice 10,000, Bob commands the majority and nominates himself President. Everybody further agrees to a standard noncompete and nondisclose agreement for 12 months. Charles and Alice extract a nominal 2,000 shares in compensation for these rights, and Bob thinks everybody should be treated equal and claims the same for himself. Other trivial but fundamental matters are agreed and in the end the company has paid for various rights and grants 7,500 more shares, and taken future financial obligations.
Now with 123,500 shares outstanding, and no money in the coffers, the company is ready to begin operations. First we need to set up the stock market. Charles recently paid BTC0.020 for the stock, and thinks that the company is doing well. He offers to buy some more at BTC0.022. Alice as a sharp treasurer wants to make sure the boyz are playing according to rulz - she makes markets with her stash, willing to sell small amounts at bitcent intervals from BTC0.025 upwards and also buy BTC0.020 downwards. Bob is an inventor, not investor type, and wants to get rid of the controlling share of the company orderly, but as soon as possible. He undercuts Alice's ask by putting some stock for sale at BTC0.024.
Operations commence
The first day of operations is full of activity. The company burns $550 for the management salaries, and $70 in other costs. Many things were achieved, a webguy was hired for $22 per hour for example. In the end of day, this will require the company to pay BTC10.502, but it does not have any. Automagically, the company trading bot goes to the market, and issues more shares, selling them to Charles at BTC0.022. A total of 478 new shares were issued and sold to Charles. He is still willing to buy 9522 more, unless things change. The first day saw 0.39% dilution.
Now, several things can happen. The company hinges on its own employees' trust. If some members of the team see that the company is not making progress, they become unwilling to buy its shares. It must be noted, however, that we are not talking about huge sums here. The actual expenditure of the first day was $70, the rest was paying salary from left pocket to the right.
Angel saving from sudden death
After the first week, exactly this happened. The initial enthusiasm had worn down a little, and Bob had become a little too anxious to cash out his stash. Intention was all well and so on, but Charles' willingness to pay for the shares had gone down to BTC0.009 per share. Bob can achieve his aim of becoming a minority shareholder just by continuing like this 2 more weeks, but he has a better idea. He introduces Eric to the rest of the team. Eric wants to invest in everything Bitcoin and offers to buy 10% of the company for $50000.
Lucrative as the deal may seem, the others prefer that Eric buy his shares in the open market, competing with Charles. He may end up gobbling the shares for less or for more, but at least the process of price discovery benefits the whole company. The share price is soon back in BTC0.020.
Things get heated
As Eric is increasing his share, Charles starts to feel remorse for pressuring the share price down. He decides that, at a minimum he wants to recycle his own earnings back to the company, converting them to new shares at ask. Alice has a similar thinking and the webguy, Dave, is the worst of all - he is doubling down his salary and buying in the open market. The only sellers at this point are Bob and the company, and the company manages very well without any cash reserves, as the majority of its own employees believe in it and are eager to corner a chunk of it.
In the beginning Bob was thinking it to be a wise idea to sell out his majority stake. Soon he finds out that his services are no longer as important as proviously thought. The buying bloc had formed a conspiracy to oust Bob, and now it is time to strike. As the others possess 55% of shares, Bob has no realistic way to regain the majority, nor intention to. He is left with the option to sell out most of his stash at a fair price of BTC0.030, or try to sell in the open market, where the bloc will pressure the price down. He decides to sell out, and leaves the 4 week old company with about $100,000 in his pocket. He settles the unused obligation to buy beers and pizzas with the company for 3,000 shares.
First Annual Quarterly Monthly Report
In one month since incorporation, the company has seen its share price go down, bringing in new believers and offering them a way to buy for cheap. It has also seen a speculative bubble, which turned out to be a successful corner. Now the cartel is dissolved and the product is about ready to launch. The shares are trading at BTC0.078, as a couple of friends were eager to also invest some. The burn rate is now about $2000 per day, which is (due to bitcoin price double) only BTC20, which is 278 shares, which is 0.22% dilution per day.
New challenges - should we call banks or VCs to help?
There is a need to launch a massive marketing campaign. The estimate is that $150000 should be spent on marketing alone in 3 weeks. Should we organize an IPO or crowdfunding round? Yes, or no. Depends on how you look at it. The method so far will work. There is never a need to think about financing, actually. It happens automatically. The owners of the company are well versed in the situation and are eager to buy new shares as they are offered in quantity. If the willingness and price plummets, it is a clear signal for the management to cut down on upfront spending, and trade time for money. If the stock price goes up with the pageviews, and new investors flock in following the publicity, there are literally unlimited funds at the company's daily disposal to continue advertising in the way of the most vicious pump and dump scheme, with the exception that the control of the company is eroded, the more shares are issued and/or sold. Nobody can run away with the money as there is no money to begin with - it is decided every day in the open market.
The management has a daily feedback on their actions - the share price. It does work this way in public listed companies of yesterday, for sure. But their management receives the signal, but it is not obligatory to act on it. Here the management is every day prompted to invest their own money (or work, which equals money) to the company to keep the share price from plummeting, should the investor confidence be shaken. This will likely lead to quite realistic valuations in the early game, which does not encourage excess spending, grandeur and waste (and hopefully less politics than organizing "financing rounds" every so often. Rather the company aims to be the most profitable the fastest. Like it should be.
And they lived happily ever after...
When the company starts to churn out profits, the game will reverse. Suppose this company had bloated its sharecount to 200,000 during the marketing phase, but also it has also started to make profit - real profit, after costs, wages and salaries - say $1000 per day. Due to recent developments, this is BTC5. Per year, this is BTC1,825, assuming no growth. The company will now expend this money daily, no matter what, to buy back its own shares, which increases the value of the remaining shares. The lowest ask will always be taken. If the prospects of the company are solid, it is prudent to assume it shall trade at 7 to 20 multiple of earnings, which would translate to a company valuation of BTC13k to BTC37k. The share price would therefore be in the range of BTC0.065-BTC0.185. Every actor can decide (per day, if they want) whether they want to receive salary or shares as the effective compensation from their work, and whether they want to lighten their ownership, take dividends by selling their shares prorated, or hang on with the success.
Discussion
The above happens to some startups, but for real, it is generally no more than 33%. The outdated financial structures prevent them from moving smartly in the agile landscape of today's business. If there were more competitors organized in the new we have unlimited funds at not our disposal way, the elephants would have a hard time to ever score a hit.
As startups tend to fail, and the ease of anyone starting a business this new way, will certainly lead to proliferation of a helluva score and a weird array of businesses, and therefore increase the death rate, most of the new ventures still fail. The number may even grow. But the total economic cost of these failed ventures is a tiny fraction of what the current system wastes as futile effort. Today startups are either undercapitalized, which translates to unoptimal allocation of the inventor-owner-entrepreneur-cleaninglady's time, or overcapitalized, with huge governance structures, swimming in money, and sometimes making it big, but most often just spending away the other people's money, building a platform that had a fatal flaw since the beginning, which was actually discovered 2 weeks after the financing round, but kept secret from investors in favor of secure big salaries for the management.
The system here proposed, will squeeze the crap out of the organization every day, giving the most clear control signals to the management. Should the level of trust in the team collapse totally, the share price collapses as a result, and anyone can pick it up cheaply and set the new direction. The company, on the other hand, is immune from financial markets collapse. Because the financing is evaluated daily, there are no artificial barriers of going through the financing round (and going belly up if it is delayed). The workers can easily keep the company running by reinvesting their salaries. It should be noted that rarely, if ever, much money is spent to anything else in the earliest stages of the company.
By running the daily lotto, who will pay the others' salaries today, the losers are however weeded out in a matter of days, or maximum weeks, not months and years as before. For the top quality inventors, investors and entrepreneurs (and to the lesser degree, anyone who can generate value to the organization in any way), this offers unparalleled opportunities to capitalize on that value. Bob made $100,000 in a month, and has by the time of this one hitting public, made another $100,000 with his new idea. Alice made steady income and good gains for her stocks. Charlie, Dave and Eric all profited.
Had the negative outcome happened, hardly any value would have been lost. After a total cost of maybe 100 working hours, the team would have realized that they don't even trust their own idea, so it would be the time to move on and do something else, perhaps in different teams. Only Charlie would have been sour, seeing his investment in Bob's shares evaporate in bright daylight, but there was an offsetting gain to Bob, and actually the lump investment is against the spirit of this new way. Charles should have just worked diligently and invested his hefty hourly wage back to the company, if he is overconcerned for monetary loss. This would be insignificant for an investor who can distribute his bets in multiple companies.
Are there any theoreticians around, apart from Mircea Popescu whose work I truly admire?