Previously, I mentioned that investors lose a small percentage of their holdings in a spolu every year (I recommend about 5%). If there are no new spolu shares being created, the relative holdings between the investors do not change. Their usual earnings from their spolu profit distribution would not change as their number of shares decrease because the number of shares will decrease for all shareholders.
But losing spolu shares for no reason seems contrary to principles of free enterprise. Allow me to make a few points on this matter.
But let’s assume this scenario. A spolu started up 10 years ago, which was financed by seed capital of original investors. After two years, the spolu put out its first profit distribution and has not missed a distribution since. The original investors have made their money back and 50% more. Now, the spolu wants to expand its operations and is looking for outside investors to fund that expansion.
But in the last 10 years, the original investors had their holdings reduced by about half. This dilution of original investment would make it easier for the spolu to find new investors for the expansion. The new prospective shareholders would see more reward for their investment if the legacy shareholders share less in the future returns. This makes finding the expansion funds more likely. The original investors would likely be better off with their diluted holdings and the expansion than with their original holdings but no expansion.
Basic financial analysis (discounting cash flows) emphasizes the near future than the far future. In other words, the profits of the long term do should not factor much in the original investment decision. In a similar manner, astute spolu investors should select investments that the “payout” is possible in less than 10 years. Any profit distribution after that payout is a surplus for the investor. So if the payout time has been reached, asking original investors to take a cut in the profits of the expansion is not that painful.
When the spolu concept becomes popular, the current corporate model will still be around. For investors who don’t like the feature of losing 5% or so of their spolu holdings every year, they can still invest in corporations.
Published on Medium 2024
Spolu 21: Simple Business Structure
Toto, I have a feeling we are not in the 1960s anymore
