Democratizing Private Cashflows and SMB Equity?
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If you own equity in an independent private business, it probably is sitting somewhere in a PDF File online or on Docusign. You “own” something, but what exactly…information rights, dividends, tag/drag rights, and how easily can you transfer or price it?
My investment thesis has long been about a cambrian explosion of investment assets themselves. The internet is opening up the long tail of investing just as it did media.
Just look at Coinmarketcap. You now have tens of thousands of assets to invest in.
Add to that tens of thousands of global stocks.
Add to that tokenized media. Real world assets. And everything else of value that will be brought on chain.
“For everything else, for 99%+ of what's valuable, for every financial asset and every capital asset, we will secure it onchain.”
There’s an asset that is uniquely interesting to me that I believe bringing on chain will create new optionality; that is equity in privately held, independent small businesses.
I believe as of today there is no mechanism for holding, transferring, selling, or adjusting privately held small business equity without tedious legal adjustments and digital paperwork.
Imagine a business doing $1M a year in revenue with $300k in profit. Profits are distributed to owners annually and the business has a 7 year track record. Imagine there are 3 holders of the equity, someone at 60%, 30%, and 10%. Right now there is not easy way to change the legal structure, sell shares, or buy shares in this type of business. Everything is manual, and deals like this are difficult to find.
The way the product could work is this:
Move the company legal structure on-chain (smart contracts instead of paper contracts). This makes shared ownership visible, programmable, and verifiable.
Verifiable cashflows: Move the company payments data, banking or accounting data onchain with ZK-tech to create verifiable revenue streams without leaking key performance data.
Quarterly or annual, “marketplace” for this equity that allows shareholders to buy and sell equity to independent investors pooled into an SPV format. This equity would have non-voting rights and could be agreed upon by the owners on how much is up for sale, how frequently, and with which rights.
Global Market: Put this annual equity sale offer into a broader/global “market” for equity creating better liquidity, pricing, and demand.
To keep the cap table clean, you push all of this into a new programmable wrapper. Investors buy into the wrapper, and Investors buy those units from the wrapper, not direct shares from the business. The business signs one agreement with a single entity and treats it as the only outside shareholder. All payouts, reporting, and investor trading happen inside that wrapper, so the company’s cap table stays clean while investors still get liquidity.
Company pays dividends (or revenue share) to the wrapper.
Wrapper’s smart contract (and legal docs) apply the distribution rules.
Investors receive their slice automatically, maybe as USDC
Wrapper sends investors a simple 1099?
In this way you could “democratize private equity” giving access for equity holders to sell shares and become more liquid while giving investors new and unique product opportunities to invest in small businesses.
Investors:
I believe there is a large investor pool interested in investing in, buying, and selling this paper equity. The reason I believe this is because of the unique risk profile of this type of business. Rather than being in the ultra high risk category, this business is already paying out dividends. That means that investors are buying cashflows over speculative adoption.
Doing this could be like DAO’s in reverse. You start with a real existing company and then exit into a DAO like format over time, increasing the shareholder base and giving liquidity/cashflow to investors.
Challenges?
Of course there are many problems with this model; from valuations, fraud, mal-incentives and dilution. You would need to drastically reduce costs, friction, and have updates to some of our current legal standards. Reporting would need to be verifiable and automatic.
I’m curious as to anyone who’s seen tech that is helping put this type of equity on chain, or is creating an Equityzen like model for small business?
xx David
Great vision for a Unicorn. Of the ~30 million SMBs in the US, how many would be healthy enough to play?