Why Don't Uber Drivers Own Shares? Now They Could
Today: Can you reward key stakeholders with upside in your business? That’s what Fairmint is all about.
The Agenda 👇
Crypto becoming mainstream
Fairmint and seamless capitalism
There’s more power on the outside now
Liquidity is key—and Fairmint provides it
Europe will have to wait, though
Following up: Wealthy Nigerians investing in Nigeria
1/ Hear that? It’s the sound of crypto finally making its way into the mainstream. Here are a few signals, among many others:
Bitcoin has seen its price rise by nearly 400% since March, having even flirted with one bitcoin being worth $20,000. And it’s more than a bubble, as explained by Fortune’s Jeff John Roberts.
The US just elected its first member of Congress with some crypto holdings: Senator Cynthia Lummis of Wyoming (a Republican, holding bitcoins).
Crypto is officially huge on Ant Financial’s roadmap, as recently explained by Lillian Li of the excellent Chinese Characteristics—all the more so since the IPO has been squashed.
Andreessen Horowitz is doubling down: they closed another crypto-fund, of $300 million, earlier this year and hired a prominent compliance expert as operating partner.
Bruno Maçães, a Portuguese political scientist and former politician, writes about crypto-driven new systems of governance. Check out his World Game newsletter on Substack.
Finally, Fairmint, one of a few companies in our portfolio that relies on crypto, is having a big moment following an in-depth analysis by Check Your Pulse’s Sari Azout and Not Boring’s Packy McCormick:
2/ To say that Fairmint is potentially the most transformative venture in The Family’s portfolio would be an understatement. Put simply, it makes it easier and more accessible than ever to deploy capital in any business, making the upside available to pretty much anyone. Here’s why that’s so groundbreaking:
The Entrepreneurial Age is one in which entrepreneurship is the key resource making it possible for companies, individuals, and government agencies to reach their goals. That’s true within the tech giants’ huge operations as well as for the creators of the passion economy.
A more entrepreneurial economy brings about many opportunities, but it also contributes to making it harder to access capital. Lenders are disoriented by the uncertainty and drive for innovation that characterize the Entrepreneurial Age. That makes equity financing the way to go!
3/ You might think it’s easy for a company to raise equity capital (“Everyone owns stocks these days”). But it’s not—especially in the tech space, and especially at the early stage!
Fact is, equity financing is a fairly new practice. As I wrote back in 2016, A Brief History of the World (of Venture Capital), it became possible thanks to progress in information technology:
For most of capitalism’s history, entrepreneurial ventures were financed through credit instead of equity. There are several reasons why it was preferable for financiers to lend money to companies rather than to buy shares in them.
First, available information systems were not very effective in tracking what happened in a company’s operations and finances. Retail businesses had to wait for the cash register (invented in 1879 in Dayton, Ohio) to entrust their employees with the company’s day-to-day money. So we can imagine what it meant for shareholders to trust an entire company with the much higher sums they were willing to invest. How could they make sure the money was put to work in the company and not embezzled by the CEO or their employees? Without a proper information system it was difficult to determine how much profit a company made, let alone if it made a profit at all. The easier way to secure a return on one’s investment was to lend money and submit a claim for reimbursement at the agreed date, whatever the situation of the company. (In the old days, shareholders’ liability was mostly unlimited, so even if the company didn’t exist anymore, the debt could be recovered from its shareholders.)
We’ve come a long way since the first joint-stock companies: now there’s proper accounting and reporting, tough regulations designed to protect and empower investors, and ever better technology for processing information and communicating with shareholders.
There’s even the possibility of signing documents electronically as well as infrastructures such as Carta, SeedLegals, and Zenvest to manage deals and cap tables along the way.
But there are still many gaps and frictions and we’re a long way from a seamless workflow.
4/ Why do I think Fairmint will make a huge difference moving forward? Let’s start with the basics. I always explain today’s economy in just a few words (a thesis I developed with my friend Henri Verdier in our 2012 book L’Âge de la multitude):
In the Entrepreneurial Age, there’s more power outside than inside organizations.
That’s in sharp contrast to the Fordist Age, when power was concentrated inside organizations.
A corollary is that the organizations that win in the Entrepreneurial Age are those who learn to harness that power that’s on the outside.
I expanded on this idea in Capitalists Beat Merchants Everytime (2017):
A key feature of tech companies: they accomplish a lot without immobilizing as many assets or employing that many people. This explains the high rate of return on equity for those who make it to a successful exit (Instagram) or to perennial domination (Facebook).
[Thus companies can leverage] additional capital provided by us, the users.. That includes user-owned tangible assets (apartments on Airbnb, cars on Uber and Lyft), user-generated content (Amazon reviews, Instagram pictures), Trebor Scholz’s “digital labor” (‘likes’, ‘shares’ and other clicks are congruent to labor), money (as with peer-to-peer lending), and many other intangible resources such as peer trust, sensitivity, creativity, and the wisdom of the crowd.
All in all, there’s corporate value in bonding with this multitude of users because it gives corporations easy access to all of the additional capital above and thus contributes to maximizing return on equity.
5/ The Entrepreneurial Age means competition is constantly heating up. As a result, that power from the outside is becoming one of the world’s most sought-after resources. This is why, as I explained in Capitalism Today: Customers as Shareholders, more and more companies are considering rewarding members of their community with upside—effectively turning them into shareholders:
What happens once everyone on the market excels at designing applications, collecting data, orchestrating network effects, and innovating on a continuous basis? At this point, capitalists have to explore new approaches. Airbnb is inviting stakeholders into its governance, as discussed by Matt Levine here. BlackRock is warning corporate CEOs that they will have to comply with society’s demand for action against climate change. Corporations such as Casper and Etsy are positioning themselves as movements so as to further leverage the power of their customers.
But there’s yet another line of thought that I find promising when it comes to aligning the interests of a corporation and its customers: Once you’ve reached peak quality at scale, can you distribute an even larger share of the corporate surplus to your customers by effectively turning them into shareholders?
6/ The idea of rewarding key stakeholders is not new. All tech startups set up their own employee stock option plan (ESOP); it’s also common practice to reward key advisors with equity instruments. Yet Fairmint offers a simpler alternative to such plans (quoting Sari and Packy):
The history of financial innovation is the history of democratizing access to upside. As more stakeholders share in the wealth they create, they’re incentivized to collaborate, experiment, and innovate. There would be no Silicon Valley, for example, without the Employee Stock Ownership Plan (ESOP).
When a group of engineers known as The Traitorous Eight left Shockley Semiconductor Laboratory to found Fairchild Semiconductor in 1957, investors rewarded their treachery with a new type of compensation: stock options. If Fairchild did well, they would do very well.
Options seemed radical then; they’re commonplace now. Startups are risky, and they don’t have nearly as much money as their more established competitors. Options, which give employees a small chance at a life-changing payout, are how startups compensate for that risk, and they’ve been the pixie dust that has fueled Silicon Valley’s meteoric half-century rise.
Above all, Fairmint makes it easier to extend such incentives to key stakeholders who contribute to growing the business because they hold that ‘power from the outside’. Here’s Sari and Packy:
What if Wikipedia was owned by the editors?
Could the small businesses that list on Yelp, or the contributors who power its ratings, own shares in the company?
Could Reddit reward its moderators with ownership?
Why couldn’t Airbnb give Hosts equity when they become SuperHosts?
Shouldn’t Uber’s drivers own a piece of the business if they maintain a high enough rating over enough rides?
Would writers be less likely to leave Substack if they owned a piece of the company?
What if early users of SaaS products could invest in the company itself? My mom has been singing Zoom’s praises since 2014. She’d be retired if they worked with Fairmint.
What if Taylor Swift’s fans could replace Scooter Braun?
7/ Liquidity is a key feature of Fairmint’s value proposition. Although I already know the company, I admit it’s the part that was the least clear to me after having read Sari and Packy’s essay. So I had a bit of back and forth with Fairmint’s co-founders, Thibauld and Joris, and here’s what came out of it.
If you know finance, it’s likely you’re familiar with the concept of “market making”. If you’re not really into finance, just know that it's a fancy word for saying that someone is operating a marketplace on which economic agents can buy and sell securities.
Such a marketplace can be public: in a way, a stock exchange is effectively a market maker. But market making can also be done privately, like when a large brokerage such as Goldman Sachs trades blocks of securities for its clients. As I wrote in my 11 Notes on Goldman Sachs:
When Goldman Sachs entered the block trading business, there were few Wall Street firms willing to bear the extraordinary risk that came with buying and selling large blocks of securities. The superficial view that most financiers had of block trading was that it didn’t earn that much money and forced the brokerage firm to tie up its own capital (which was scarce due to the dominant partnership structure of the time).
What Goldman Sachs designed was a different model: for them, the key to success in block trading was not to have a larger balance sheet with enough capital to tie a block of securities waiting for a buyer. Like on all marketplaces (see the Travis Kalanick quote above), the key was to ensure enough liquidity to be able to sell the block of securities as soon as they’d bought it (or even before). In what was known as a “cross”, a single block of securities could be bought and sold in a very short lapse of time, making sure that the firm earned large brokerage commissions on both sides without tying up capital on its balance sheet. But that took a lot of insight, an uncommon capacity to sell, and an extraordinary proximity with the clients.
Later on it was precisely to get closer to its block trading clients that Goldman Sachs invested more than its competitors in complementary businesses such as conducting research and underwriting stock repurchases.
Fairmint makes it possible for any company to become a market maker for its own securities—or more precisely for Fairmint’s continuous agreements for future equity (CAFE): securities that are offered on a continuous basis and, much like Y Combinator’s famous SAFE, can be converted into shares in a future priced equity round.
In short: It’s about continuously buying and selling options which give you the right to buy shares in the company in the future.
8/ I’ll spare you the regulatory jargon, but here’s what Fairmint is based on:
A provision of the 2010 JOBS Act makes it possible for companies to advertise their funding rounds and sell equity to accredited investors, who then need to hold those securities for at least one year (that’s the ‘lock up’).
At the end of that one-year period, holders are free to sell their shares to non-accredited investors. So if you’re a normal person (someone who doesn’t have a lot of money and who doesn’t work in finance), you can’t be invited to participate in a startup’s funding round (unless you’re “friends and family”—that is, you already know the founders); but one year later you can buy shares from an accredited investor that participated in the round.
What Fairmint provides is an infrastructure to orchestrate these secondary transactions and, again, become the market maker. Much like Uniswap, Fairmint makes it possible to buy and sell securities regardless of the volume of transactions at a given moment. The price may vary depending on supply and demand, but, as in the case of Goldman Sachs’s block trading, you don’t actually need an end buyer if you want to sell your CAFE securities in a given company—and vice-versa.
What’s needed to make it all work are people coming from two categories: investors willing to deploy their capital in exchange for future equity in a given company; and the company’s key stakeholders (Airbnb’s hosts, Uber and Lyft’s drivers, Substack’s writers, Patreon and OnlyFans’ creators) that are rewarded with future equity in exchange for bona fide work.
In the latter case (key stakeholders), it’s all about incentivizing the community with options on equity, therefore sharing the upside with those who effectively contribute to the business’s success. In the former case (actual investors), it’s about the opportunity to address a much larger base of capital providers via a secondary market made by the company itself.
9/ But wait a minute: all of the above is stuffed with US references (‘SAFE’, ‘JOBS Act’, ‘Accredited Investors’). Is Fairmint’s product accessible outside the US?
Sadly, it is not—and this is a key part of what makes America so powerful in today’s Entrepreneurial Age: its willingness to race ahead in financial innovation.
In comparison, in Europe it’s still impossible to advertise any opportunity to invest in a private company, whether it’s primary (buying new shares issued especially for you) or secondary (buying shares from an investor that’s already in the cap table). This is why Fairmint only does business with US-based clients issuing securities (CAFEs) for US-based investors, whether they’re accredited or not.
10/ And we’re missing an opportunity here. Here’s the extent of what would be made possible by Fairmint being available here in Europe:
Tech startups could raise capital from a much broader base of investors, rather than depending on the small European VC world (and a few US-based funds).
Tech startups in Europe could catch up on harnessing the power of their community of users, rewarding them with a share of the upside.
It could compensate for the absence of a proper stock exchange, by having every thriving company effectively going public on its own website, all powered by Fairmint!
Finally, it would send a strong signal that Europe, even though it’s lacking many things that make developing countries so strong in the Entrepreneurial Age, is not ready to give up on financial innovation—thus catching up to the US in this regard.
I’m very curious, and know this is all very technical (at the crossroads of financial services, software architecture, and crypto protocols), yet does it make sense? And if yes, what do you think?
Here’s what I wrote in the past in relationship to Fairmint’s business and the future of capitalism:
A Brief History of the World (of Venture Capital) (May 2016)
Capitalists Beat Merchants Everytime (September 2017)
Bitcoin: Innovation Hiding in Plain Sight (January 2018)
Why Employee Equity Matters (February 2019)
Europe Shouldn't Be Content With Boring IPOs (October 2019)
Give Capitalism a Chance (October 2019)
Capitalism and the Future of Nation States (December 2019)
Capitalism Today: Customers as Shareholders (January 2020)
IPOs: Will the Next Generation of Founders Choose to List in Europe? (October 2020)
Debriefing Our IPO Panel (November 2020)
Your Customers Are More Than Their Collective Purchasing Power (November 2020)
Have a look at this thread by Michael Pettis (and article in The Financial Times by Neil Munshi) about how wealthy Nigerians investing in the Nigerian economy rather than foreign assets is key for the country’s economic development:
If you’ve been forwarded this edition of European Straits, you should subscribe so as not to miss the next ones.
From Munich, Germany 🇩🇪
I've been in crypto since 2013 and heavily involved in the last madness run in 2017. I was the promoter of the 4-th industrial revolution and even ran digital magazine about it.
But actually, I've also seen the darkest side of the ICOs, where greed & fraud take place in the heads of bright founders.
Bitcoin believers rely entirely on the idea that bitcoin is limited in supply making it far more attractive than fiat currencies that are being printed like mad by central bankers around the world. However, bitcoin has already hard forked several times, multiplying the number and type of bitcoins in circulation. In fact, if you put together all the hard forks Bitcoin (and tokens are just forks of EHT) has undergone since it was first created, the number of total bitcoins has actually grown faster than the number of dollars. That's a fact.
By the end of the day people are interesting only in multiplying their gamble, not business dev. 99.5% of the people from the industry failed to deliver anything beyond scam. And we will have another Great Depression 2.0 executed.
For sure we need the new systems of our governance (as you've sharply mentioned in the Hedge), but I'm not quite sure tokenization & cryptozation is the proper answer...