How Do Regenerative Treasuries Work?
Issuing equity to employees, investors, and the market
Regenerative treasuries issue shares (tokens) to employees, investors, and the market. Equity holders have pro rata ownership of the liquidation value of the company. Liquidation value is the sum of the remaining assets after all other obligations have been fulfilled.
Employee Equity Issuance
Employees are compensated in entirely shares, which are issued at a predetermined redemption rate. For example, an employee may be given 100,000 shares worth $100,000 over the course of a year. This means the equity is issued at $1 per share. When the equity is issued to employees, the company moves corresponding USD assets from the balance sheet to escrow. The escrowed USD assets cannot be spent or allocated for anything else as long as the employee holds redeemable equity. From the balance sheet’s perspective, the runway of the company has decreased and the money is considered spent.
The employee who received the equity has “redemption rights”, which means that they may redeem their equity for the “treasury protected” USD assets at any time. The redemption rights are special privileges given to employees to provide a transparent minimum level of compensation. The redemption rights of the employees are non-transferable; if the employee wishes to sell their shares, the purchaser is just purchasing equity without any redemption value.
If the market determines the shares of the company are worth $2 per share, and the employee seeks to sell some of their equity for USD, then the employee will prefer to sell their equity to the market rather than redeeming their shares for $1. When the employee sells 100,000 shares at market-prices, they will net $200,000, providing substantial upside from their minimum guaranteed compensation of $100,000.
Importantly, the redemption rights given to the employee are non-transferrable. When the employee sells their shares, the $100,000 of USD assets that were previously placed in escrow move back to the balance sheet. The employee’s sale of equity decreases the company’s liabilities, increases the unburdened assets, and increases the number of redeemable shares that the company can issue. Therefore, the company’s runway increases when employees sell their shares.
Investor Equity Issuance
Similarly, investors that contribute capital to the company are issued equity with a special non-transferable right. Instead of “redemption rights, they are given “liquidation preference”, which means that if the company chooses to cease operations and shut down, they receive the value of their initial investment prior to the pro-rata distribution of equity to all shareholders. For example, an investor may contribute $1 million dollars to a company and they receive 1 million shares. They contributed capital at a rate of $1 per share. In the event of liquidation, those investors will receive $1 per share, cumulatively $1 million dollars, and then the remaining assets of the treasury are distributed to shareholders proportional to the number of shares they hold. If there is not enough money to provide the investors the full value of their initial investment, then investors simply receive a pro rata amount of the assets, receiving less than their initial investment. In this event, there is no capital to distribute to shareholders. Liquidation preference only provides an advantage in the event the organization chooses to shut down and liquidate.
Since the liquidation preference given to investors at the time of investment is non-transferrable, the liquidation value of the company increases if an investor chooses to sell their equity. There are less obligations to be fulfilled prior to distributing capital to shareholders, therefore the liquidation price per share increases when investors choose to exit the company. The person who purchases equity from an investor receives no liquidation preference.
Market Equity Issuance
The company may also choose to conduct open-market operations. This means that outside parties may purchase shares at the market rate. A company may choose to do this during times of euphoria in order to increase their USD-assets on their balance sheet. It is strategic for a company to do this when the sale of shares increases the existing shareholder’s liquidation value per share, strengthening the company.
Inversely, if the market is pricing a company’s shares at a substantial discount to the value of the assets on the balance sheet, then the company may choose to use USD assets to purchase shares off the open market, effectively increasing the per-share liquidation value of the company.