Gigaom recently published a post about a new kind of stock that provides for a return to investors regardless of whether the company has any type of exit. While interesting, it is a complete waste of time.
When looking at providing a return to investors, entrepreneurs and their investors should determine their goals and objectives. A new class of stock is a waste of time and energy, especially as these types of deals should be handled on a one-on-one basis.
The basic premise is that companies will follow the below path:
5% will have a 10X exit
10% will have a 3X exit
35% of companies will not not have any type of exit
50% of companies will fail
Most term sheets are counting on the 15% that have some type of exit. However, they don’t take advantage of the ~35% that don’t have an exit, but do become self-sustaining companies (at some level).
I would propose that the term sheets simply include that dividends be paid out on profits and not revenue to investors. Gigaom would have the payments as a percent of revenue, which can be quite detrimental to the business as a whole, whereas it is quite supportable to make payments (really dividends) to investors when they are a percent of profits.
There are a number of companies that have incorporated the payment of dividends and have returned 5-10X to their investors within 3-5 years.
There simply isn’t a need for greater complexity in the types of stock, only a clear understanding between the entrepreneur and investors about the expectations for the business.
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