Last week, AirBnB proposed granting their most valuable hosts shares in the company, much like employees. This requires a change in securities law. It’s a novel idea that has a history, promise and some risks.
In 1998, an online travel agency, TravelZoo, tried this. They granted free shares to 700,000 people who signed up to use the service. Administration of these shares proved a headache for the company. Many of those who received the shares were unaware of conversion deadlines. The company honored its commitments anyway. The company bore some additional regulatory burden. In 2004, six years later fewer than 1000 of these shareholders had traded their shares for cash. Not a ringing success.
Twenty years later, the Internet is far broader and more robust. 15% fewer American households own stock. Startups remain private longer. The SEC is actively investigating ways to provide main street with access to startups. And the Blockchain is here. This is a wonderful confluence of factors that provide a fertile environment for a far more successful try this time.
Network effect businesses, those like AirBnB and Facebook, face a theoretical risk from blockchain startups. Blockchain technology incentivizes network participants. I received a token for using a service. If more people use that service, my token is worth more. I should do everything I can to increase the value of that token. The user benefits as the network scales. This doesn’t happen today.
AirBnB’s idea defends their business from threats from crypto-upstarts. They propose to replicate tokens’ value with shares. Shares have several benefits over tokens in this model.
First, familiarity. Half of Americans already hold shares; they’ve paid taxes for shares; they have brokerage accounts to hold them. Hosts aren’t required to open new accounts or learn about tokens.
Second, shares are simpler. They don’t require new protocols, or miners, or management of a token economy. Protocol design is a new discipline, something that AirBnB may not have.
Third, AirBnB doesn’t have to change its business very much. AirBnB’s IPO preparation will serve hosts/employees as well as institutional and retail investors. Imagine trying to manage both public market investors and a token economy.
If the SEC permits AirBnB and other network-effect companies to reward usage with shares, the SEC may dull the competitive threat from blockchain - especially where there’s an incumbent. And it could kick off a broader wave of share or option distribution to non-employees as an incentive.