In consideration of the most ethical distribution of shares for a startup business (via a public, initial investment event ie- IPO, ICO, or 'crowd-equity-fundraiser') the following occurred to me.
Consider this example business:
- 1 founder
- ~1 year of part-time work or 'sweat equity' invested so far
- no physical assets, but soft assets and IP (ie- software or digital entertainment) near or ready for market release
- no existing sales or revenues
Specifically I was wondering, how can the founder determine an appropriate valuation and distribution of shares; ie- the amount of equity to make available for public vs how much to reserve for him/herself.
Some might say that a purely balanced initial offering would entail making available 100% equity to the public, and that the founder should acquire shares in the same way the market will acquire them.
To me that seems like the most natural, practical, and ethical way to go about an initial offering. It levels the playing field from day one of the offering and encourages the entrepreneur to instigate investment with his/her own capital.
Is there any precedent in this happening (ie- some past IPO on a well known exchange or perhaps some other historic example) ?
Of course, this doesn't necessarily account for the existing sweat-equity invested so far. Also there is a dilemma if said founder has little or no capital of his/her own to invest - in which case the event may result in an undesirable outcome. Ie- results in giving up 100% or 99% of shares because they are unable to invest funds of their own.
Yet, without any sales/revenue or product on the market the value of said sweat equity is basically an arbitrary value as far as the public market/investors are concerned anyway. It may be in the best interest of everyone if any such 'arbitrariness' is removed altogether; to help establish a base of integrity for the business' economics from day 1.
So just pondering this, I have identified the following potential solutions (and would like input on or suggestions of other solutions):
A) Founder makes available 100% equity, but uses a reasonable amount of the proceeds to pay him/herself a salary (or wage) and from that salary invests in the same initial offering to acquire shares for him/herself.
- this would imply a window of offering of say 30, 60 or 90 days common in more recent 'initial offering' formats (ie- Kickstarter style equity crowdfunding or ICOs) which serves to both allow time for more investors to participate as well as time for the founder to earn salary and buy shares
Receiving investment to simply re-invest that back in to the same investment seems unethical (and pointless given you could achieve the same outcome by simply reserving an (albeit arbitrary) allocation of shares for yourself initially) - but if the founder is actively working to advance the business it seems fair that he/she can pay thyself with the new capital as it flows in through the initial offering - and choose to invest those earnings while the window is still open.
B) Founder makes available 100% equity, sets a valuation / target fundraiser goal, keeping any equity/shares unsold
- In this scenario, the founder launches the initial offering making available 100% equity, keeping only the equity unsold. Ex: $1m valuation / 100 shares / $10k per share - only 15 shares (15% or $150k) are sold during the initial offering and as such 85% shares will automatically go to the founder. Founder did not necessarily reach the capital target but has achieved some extent of new capital without having needed to risk or put everything on the table.
Combination of A + B may also work - though perhaps that could be imbalanced against the market (though I would contest, is still significantly better than simply choosing an arbitrary allocation of shares to make available for public)
Ultimately, if the founder is making his/her business available for investment to the public - they 'hold the deck' so to speak - and as such it is easy to 'stack the deck' if they want to - but by making an ethical initial offering fundraising/equity distribution model - in combination with transparent bookkeeping (and routine insight day to day operations) I feel like the founder can make a compelling case and use that to hopefully smash the initial offering.