The Fairshare Model is a performance-based capital structure for companies that seek to raise venture capital via a public offering. It balances and aligns the interests of investors and employees.

1. Fairshare Model: A performance-
based capital structure for companies that
raise venture capital via a public offering
Karl M Sjogren (book expected in Q4 2015 Q1 2016)
OPEN MIC NIGHT --- MAY 28, 2015
THE VAULT, SAN FRANCISCO
Hofstadter's Law: It always takes longer than you expect, even when you take into account Hofstadter's Law.

2. September 24, 2015 Update
Since I gave this presentation:
 Three chapters (section IV) have been added to the draft I am “crowd vetting” at
www.fairsharemodel.com They address the concerns that some have about making it
easier for small venture-stage companies to sell their stock to public investors. I discuss
fraud, overpayment, failure, unethical sales practices as well as other objections to equity
crowdfunding.
 I am a slower writer than I hoped I would be in May 2015; I pushed expected publication
to Q1 2016.
 My draft material needs editing as well and other work before it is ready to be published
in print and e-book formats. I am exploring options to crowdfund the cost of that work.
The balance of this slide deck is unchanged.

3. Fairshare Model: a crowd-vetted book
Section I – Overview
Chap. 1 – Set-up
Chap. 2 – The Fairshare Model
Chap. 3 – The Problem With a
Conventional Capital Structure
Chap. 4 – Crowdfunding
Chap. 5 – Target Companies
Chap. 6 – Fairshare Model
History & Projection
Section II – Context
Chap. 7 – Economic Growth
Chap. 8 – Income Inequality
Chap. 9 – Cooperation as a Tool
for Competition
Chap. 10 – Tao of the Fairshare
Model
Section III – Valuation
Chap. 11 – Concepts
Chap. 12 – Calculation
Chap. 13 – Evaluation
Chap. 14 – Disclosure
Topics for Section IV (not written yet) –
Fraud, Failure and some wrap-up topics
There are 14 draft chapters at www.fairsharemodel.com

4. The Fairshare Model Begins Here
ENTREPRENEUR:
I have an idea but need money
INVESTOR:
How much of your company do I
get if I give you the money?

5. Vision, Goals and Perspective
Vision
Middle Class investors can invest in the IPOs of venture-stage companies…
on terms comparable to those that venture capitalists get in a private offering.
Goals
1. Alternative to a VC round (for companies).
2. Liquidity for pre-IPO investors (limited if offering is small).
3. Attractive option for public investors to be “mini-angels.”
Perspective is that of average investors. Ranking of interests:
1st Place --- Average IPO investors (i.e. what is best for them?)
2nd Place --- [Tie] Entrepreneurs and pre-IPO investors
3rd Place --- Secondary market investors
Fairshare Model
is an idea.
It has not been
used before.
Look at IPOs from this angle and
you’ll have an intuitive sense for
the Fairshare Model.

6. What is a “Venture-Stage” Company?
A company with these risk factors: • Market for its products/services is uncertain
• Unproven business model
• Uncertain timeline to profitable operations
• Negative cash flow from operations
• Meaning, it requires investor cash to operate
• Little or no sustainable competitive advantage
• Execution risk; team may not build value for investors
Many public companies list such risk factors in their disclosure documents. Crowdfunding will
increase the number of public venture-stage public companies…but they are not new.

7. Fairshare Model (for a public offering)
• Two classes of stock, Investor Stock and Performance Stock.
• Both vote, only Investor Stock can trade.
• Performance Stock can never trade.
• Based on quarterly measures of performance, Performance
Stock converts into Investor Stock.
Approval from each class required for:
• Board member election
• Change to conversion criteria.
• Compensation plans involving Investor Stock.
• Changes to capital structure.
• Acquisition matters.

8. Fairshare Model premise:
IDEAS ARE JUST A MULTIPLIER OF EXECUTION
Value of an Idea Value of Execution
Awful Idea = -1 No Execution = $1
Weak Idea = 1 Weak Execution = $1,000
So-So Idea = 5 So-So Execution = $10,000
Good Idea = 10 Good Execution = $100,000
Great Idea = 15 Great Execution = $1,000,000
Brilliant Idea = 20 Brilliant Execution = $10,000,000
To make a business, you need to multiply the two.
The most brilliant idea, with no execution, is worth $20.
The most brilliant idea takes great execution to be worth $20,000,000.
Tip of the hat to:
Derek Sivers www.sivers.org

9. That Premise Doesn’t Explain the
Valuation of Venture-stage Companies
What drives the increase in valuation that often
occurs as a company approaches its IPO?
Is it performance…
…. or is it something else?

10. Two Explanations
1. The Next Guy Theory of Valuation
2. Market Forces
Discussed in chapter 3--The Problem With a
Conventional Capital Structure

11. Next Guy Theory of Pricing
For an investment, the price is no more than what the buyer believes the
Next Guy will pay, less a discount.

12. Implication

13. Market Forces
Next Guy Theory applies to items without utility…like investments.
Retail
Wholesale
For items with utility (food, clothing, etc.), a wholesale/retail
price discrepancy is common.
Apply this concept to the IPO market:
•“Product” = equity in a venture-stage company
•“Manufacturer” = issuer
•“Wholesale customers” = pre-IPO investors
•“Retail customers” = public investors

14. Comparable Product with a Retail Markup?
No! The product is not comparable, there are important differences.
The product sold at wholesale to pre-IPO investors is better than the retail version.
• The stock that VCs get have price protection and other features (i.e. liquidation preferences, anti-
dilution provisions, etc.)
The product sold to public investors lacks such features.
So, the retail buyer gets an inferior product and pays more for it!
I can’t think of another market—a competitive market—where that happens. Can you?

15. What Explains the Price Increase in “The
Product” as it Approaches an IPO?
Four hypothetical drivers
1. It is considered “normal”
- But, many things once considered normal are no longer
The Next Guy Theory provides insight into the dynamics, but what are the drivers?
2. A bigger neighborhood
- More Potential Buyers = Higher Potential Demand = Higher Potential Price
3. Competitive market forces are weak
- If strong, issuers would compete for investors by offering lower valuations
4. VC value-add (knowledge, connections, ability to write a big check quickly)
- Challenge for companies that crowdfund – “How to replicate VC value-add?”
- How much is the VC value-add worth to public investors?

16. Whatever the explanation, what risk does the
IPO valuation present for public investors?
Why so
much
downside
exposure?

17. Because of a Conventional Capital Structure
John Kenneth Galbraith coined the term “conventional wisdom.”
There is conventional wisdom about how to organize (and value) the ownership interests in a
corporation. It is reflected in a “conventional capital structure.”
Defining characteristic of a conventional capital structure:
A value for future performance must be set when a company raises equity capital
He uses it to describe a convenient and comfortable point of view that is often false.
Hard to do in a reliable manner!
Nonetheless, a conventional capital structure requires…indeed, it demands a value for future
performance at the time of an equity raise.

18. The Little Shop of Horrors that is a
Conventional Capital Structure FEED ME A
VALUATION
SEYMOUR!

19. A Conventional Capital Structure Poses
Problems for Public Investors too
1. The basis for a valuation is shaky.
2. They assume most of the risk that it is too high.
Interlaced foundations of the problem
Public investors…
• Pay “retail” but don’t know it.
• Don’t get a better deal because issuers see little
advantage in offering one. Investors may respond
with “what’s valuation? Is it worth?”
• Don’t demand a better deal because they are not
valuation savvy; terms were not an issue in the
Occupy Wall Street protests.
• Are not valuation savvy, in large part, because
the SEC doesn’t require valuation disclosure.

20. The Fairshare Model is Unconventional
It’s complexity is designed to favor average investors—as well as well-performing teams.
Remarkably, it provides incentive to offer IPO investors a low valuation. Entrepreneurs do not
care what the valuation is; it doesn’t affect their financial position or voting power.
What matters is “what does it take for Performance Stock to convert into Investor Stock?”
It is unconventional because there is no need to place a value on future performance!
BTW, that’s another difference—where there is complexity in a conventional
capital structure, it is frequently to advantage insiders over average investors.
The incentive? A rise in the market cap can be defined as performance, triggering conversions.

21. Conventional Model Fairshare Model

22. Tao of the Fairshare Model
When should the ownership interests of insiders be defined,
before or after performance is delivered?
Put another way…Who should bear the risk of uncertainty,
should it be insiders (employees and existing investors)…
or should it be new investors?
Taoism is a Chinese philosophy about truths. Finding one’s tao requires meditative and moral exploration.
Fairshare Model’s tao: harmony within the uncertainty inherent in a venture stage investment.
Contemplate this question:
Those who believe the risk of future
performance should be borne by new investors
will favor a conventional capital structure.
Those who believe it should be borne by insiders
will favor the Fairshare Model.

23. Visualize the tao of the Fairshare Model
Imagine a long balloon. But instead of air, it is full of uncertainty.
Ownership side Performance side
And certainty is represented by a weight
One end represents ownership interests while the other represents future performance.
Principle
In a venture-stage company,
uncertainty can be moved
but not eliminated.

24. Where the Uncertainty Is
The bet is on valuation. The bet is on human behavior; will shareholders agree
on how to reward performance?
A different bet, not necessarily a better one!

25. How VCs Deal With Uncertainty
Takeaway
The Fairshare Model simulates a
VC deal structure in a public
offering!
Discussed in
chapter 10

26. Entrepreneurs: Pick Your Challenge!
“What is the value of my future
performance now?
“How do I define my deliverables?”
Meanwhile…
Conventional Capital Structure Fairshare Model
vs.

27. …VCs and Wall Street banks enjoy so much
success with venture-stage IPOs…. that, eventually, public investors
may say…
Diner scene from 1989 movie, When Harry Met Sally
(portrayed here by Sally, simulating an orgasm)
As this happens, interest in the Fairshare Model will grow!

28. Chapters 3, 11 and 13 discuss the dynamics that affect the valuation of venture-
stage companies.
The most controversial assertion is that valuations reflect weak market forces…an
inefficient market…driven by public investors (Next Guys) who are:
• unsure what valuation is,
• why it is important, and
• how to calculate it, let alone evaluate it.
Chapter 14 argues that regulators could strengthen market forces if they require
issuers to disclose their valuation. Please join me in calling for it!
Let’s look at how the Fairshare Model might play out in some scenarios.
Skeptical? Why don’t companies compete for
IPO investors by offering better deal terms ?

29. What Kind of Companies Might Adopt
the Fairshare Model?
Feeder Seeks capital to develop a product and be acquired.
Aspirant Aspires to build for the long-term.
Pop-up Fund a project, product, movie, game, invention, oil well, etc.
Spin-Out Tired backers; a VC’s “living dead” or to-be-spun-out division of a company.
Rejuvinator Established company in financial distress (i.e., GM in 2009?).
These categories can overlap. Plus, a company may be a shape-shifter.
• A Feeder may tell you it’s a Feeder….but it might may tell you that it’s really an Aspirant.
• A Pop-Up may think that it’s a Feeder or Aspirant.
• A Spin-Out can’t remain a Spin-Out—it must evolve into a Feeder or an Aspirant.
• An Aspirant may wind up being a Feeder after all.
Discussed in chapter 5

30. Category of
Company
Strategic
for
Fairshare
Model? Goal
Likely
Offering
Size
Likely to be
a SEC
Reporting
Company?
Expectation of
Performance
Stock
Conversion
Secondary
Trading Market
Feeder Yes
Launch
product—get
acquired.
$3M to
$7M
Maybe High
Pink Sheets; principal
investor exit via
acquisition
Aspirant Yes
Build a
company
that lasts
$5M to
$20M+
Yes High
Pink Sheets, a
regional exchange, or
NASDAQ Micro for
larger ones
Pop-Up No
Offer equity
in a project
Less than
$5M
Unlikely Low Same as Feeder
Spin-Out No
Alternative
for a new VC
round
$5M to
$20M+
Yes High Same as Aspirant
Rejuvenator No
Fund a
turnaround
$20M+ Yes High
NASDAQ Micro or
better
Target Companies for Fairshare Model
We will
look at
scenarios
for these
two

31. Prelude to Feeder & Aspirant Charts
Five charts follow that illustrate possible scenarios for Feeders & Aspirants.
They show how conversion of Performance Stock may dilute Investor Stock.
Feeder charts
1. Acquired 3 years after the IPO (with
presumed performance factor)
2. Acquired 1 year after the IPO (with
presumed performance factor)
Aspirant charts
3. No Performance at all
4. Presumed performance but no actual
performance
5. Presumed performance, then actual
performance
100% of Investor Stock = Investor Stock @ IPO + Performance Stock that converts

32. IPO + 1 yr + 2 yrs + 3 yrs
From Money 100% 92% 84% 50%
From Performance 8% 16% 50%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
%ofInvestorStock
Time Since Fairshare Model Offering
Shareholders agree that
Performance Stock get 50%
of the acquisition proceeds
Feeder Acquired 3 Years After IPO
“Presumed performance” is a
employee goodwill incentive.
No need to define or measure
quarterly performance for a period
(e.g., development phase).
Presumed performance assumption:
• 8% year
• 20% maximum
Acquisition offer in year 3.
Investor and Performance
Stockholders agree to split the
price evenly. So, 50% of the
Investor Stock in year 3 is from
Performance Stock.
No agreement, no acquisition.
Note 3 year time scale
Investor Stock issued via
Performance Stock
conversion for “presumed
performance”

33. Feeder Acquired 1 Year After IPO
IPO + 1 Qtr + 2 Qtrs + 3 Qtrs + 4 Qtrs
From Money 100% 98% 96% 94% 40%
From Performance 2% 4% 6% 60%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Time Since Fairshare Model Offering
Shareholders agree that Performance
Stock gets 60% of proceeds
%ofInvestorStock
Same presumed performance
assumption as before (8% year
or 2% per quarter).
Acquisition offer 1 year after IPO.
Shareholders agree that 60%
of the proceeds should go to
Performance Stockholders.
It is 10% higher…because
the offer came faster.
Note 1 year time scale
Performance Stock conversions
based on presumed performance

34. IPO + 1 Yr + 2 Yrs + 3 Yrs + 4 Yrs + 5 Yrs + 6 Yrs + 7 Yrs
From Money 100% 100% 100% 100% 100% 100% 100% 100%
From Performance 0% 0% 0% 0% 0% 0% 0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
%ofInvestorStock
Time Since Fairshare Model Offering
No Performance Stock conversion because there is
no presumed nor actual performance (i.e. a dud).
Aspirant: No Performance Conversion
With neither presumed or actual
performance, there are no
conversions. Therefore, only
Investor Stock issued for money
or pre-IPO performance is
tradable.
Company raises capital to build
product and launch business.
No presumed performance rule.
All Aspirant charts use 7 year time scale
Imagine it is…
• A biotech and it’s product
fails FDA testing;
• A game developer that
doesn’t release a product; or
• A software developer
whose product flops.

35. Aspirant: Only Presumed Performance
Same presumed performance
assumption as for Feeder:
• 8% year
• 20% maximum
• Yr 1 - 8% conversion
• Yr 2 – 8% conversion
• Yr 3 – 4% conversion
Company fails to meet
performance goals, so
conversions cap at 20%.
IPO + 1 Yr + 2 Yrs + 3 Yrs + 4 Yrs + 5 Yrs + 6 Yrs + 7 Yrs
From Money 100% 92% 84% 80% 80% 80% 80% 80%
From Performance 8% 16% 20% 20% 20% 20% 20%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
%ofInvestorStock
Time Since Fairshare Model Offering
Presumed performance conversion of 8% per
year--capped at 20%
No conversion for actual performance

36. IPO + 1 Yr + 2 Yrs + 3 Yrs + 4 Yrs + 5 Yrs + 6 Yrs + 7 Yrs
From Money 100% 92% 84% 68% 54% 42% 32% 24%
From Performance 8% 16% 32% 46% 58% 68% 76%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
%ofInvestorStock
Time Since Fairshare Model Offering
Presumed performance
conversion of 8% for
year 1 & 2
Conversions in years 3 – 7
reflect actual performance
Aspirant: Presumed & Actual Performance
Same presumed performance
assumption
• Year 1: 8% conversion
• Year 2: 8% conversion
• Year 3: 4% conversion
But performance is strong;
conversions exceed the
presumed performance.
Total = Presumed + Actual
Year 3: 16% = 4% + 12%
Year 4: 14% = n/a + 14%
Year 5: 12% = n/a + 12%
Year 6: 10% = n/a + 10%
Year 7: 8% = n/a + 8%
This team performs so well, it winds up with
76% of the Investor Stock after 7 years—far
more than would be possible with a VC.
Scratch pad to calculate annual conversions
32 - 16 = 16 58 - 46 = 12
46 - 32 = 1416 - 8 = 8
Cumu-
lative
8%
16%
Below
Cumu-
lative
32%
46%
58%
68%
76%
68 - 58 = 10
76 - 68 = 88 - 0 = 8

37. The Fairshare Model bargain for investors
If the company performs, investors will be diluted on a percentage basis—their slice of the
ownership pie will be reduced, possibly dramatically.
However, if the performance translates into a higher valuation, investors should not suffer
economic dilution—their stake should grow in value.
VCs like to say “I’d rather own a small slice of a big pie than a large slice of a small pie.”
Same principle.

38. The Fairshare Model bargain for employees
In addition to other compensation--salary, benefits, bonuses and stock options on its Investor
Stock-- employees have an interest in its Performance Stock pool.
• Performance Stock is like cheap founder’s stock; its only value is its ability to vote and its
potential to convert into Investor Stock.
As the team performs well enough to meet the conversion criteria, employees have another way to
earn stock that they can sell (or hold).
Huge Potential: A company that adopts the Fairshare Model could have a competitive advantage
with respect to attracting and managing human capital.
Wouldn’t you be pleased to
get an offer that includes
Performance Stock?
An employer’s “brand” reflects
how it implements it’s
philosophy about people.

39. Balance & Align Interests: Shared Values
Entrepreneurs have an incentive to offer public investors a low valuation.
Equity incentives are tethered to collective operational performance vs. valuation at individual option grant
date, which employees don’t control.
Investors have an interest in helping the company meet its goals
Bottom Line---The use of cooperation as a competitive tool
VS.

40. 1st Challenge for the Fairshare Model
Show that a lot of investors like it! They signal interest in companies that use it.
We Are Here!
We Are Here!!
We Are Here!
We Are Here!!!
BEFORE companies think about how to make the Fairshare Model work for them…
….a LOT of you need to make noise.
Each of your voices must generate buzz.
Sounds that leads others to take note and join in.
People who like the Fairshare Model must combine their small voices and shout….
..just like the tiny residents of Whoville.

41. 2nd Challenge for the Fairshare Model
Debug and tune it more tightly. This will be done with entrepreneurs, attorneys, accountants,
angel investors, experts in capital markets, etc.
A conventional cap structure has Ponderables too!
• Does it scale…downward? Its approach to
valuation works for established companies, but,
does it work well for public venture-stage
companies?
• Can the interests of investors and employees be
better aligned as the valuation climbs?
The “Ponderables”:
• How might performance be defined?
• Who should define performance?
• How might it be measured?
• Who should measure it?
• How should rewards of performance be allocated?
• Who should administer the rewards of performance?
• What are the tax and accounting implications of the Fairshare Model?
Variations based on industry, stage of development,
geography, personality…

42. 3rd challenge for the Fairshare Model
Time and experience. Sustaining goodwill between the providers of capital and labor is the
central challenge.
Now

43. A Lot to Think About
So, join me to explore…

44. The new frontier…
Better Capitalism
This is the construction of the Fairshare Model.
It’s mission: to explore new relationships
between investors and employees,
to help entrepreneurs raise venture capital,
to boldly go where no capital structure has gone
before!

45. Help Build the Fairshare Model!
1) The Fairshare Model is in competition for inclusion in the world’s first crowdsourced
FINTECH book. *Recommend* the abstract…tomorrow or Saturday (before June)!
◦ Google “The FINTECH book" to learn more about the project
◦ Google “The FINTECH book" + “Fairshare Model” to see the short abstract
2) Read the draft chapters at www.fairsharemodel.com
3) Help make it better. Send comments, challenges (love them!) and suggestions to me
at Karl@FairshareModel.com
4) Create buzz about the model!