So how does benefit trickle around in Ethos, and what does it mean for my wife and I?
Well, firstly I need to define a term – I’m going to call it Sponds. I might have used the term value, but Sponds is a bit more specific – it is something that I can actually use to trade, and might be convertible into money now or in the future. So Sponds might be money as salary/PAYE, dividends, shares, or money in a Partner Account held by Ethos with my name on it (a sort of personal pot of money Ethos keeps for me – see later). Clearly there is likely to be a lot more value I want and get out of Ethos than just Sponds, so I needed a new collective term.
Let’s say that Ethos gets a funding contract from the InnovateUK (the UK’s innovation agency) for £10M for Project Pangloss.
Why is that so great?
Clearly one answer is a “happy little Hugh”, because he will be doing fun things, which is important to all!
But my wife tends to worry about the family Sponds more than the wider benefits to society.
Well, starting at the beginning, was I involved in the bid?
And did I get any Sponds for my involvement at the time?
If not, Ethos has some way of working out what that might mean in terms of Sponds (or soon will have!).
Am I going to contribute directly to Project Pangloss?
If so, I will get Sponds for my involvement, and the Sponds I get will be directly related to the time and effort I put into Pangloss.
What sort of Sponds?
Well, money into my bank account is the most obvious. Money is coming in to Ethos to do Pangloss, and so the people who deliver this will get paid. But I (we?!) have a choice here. I have something called a Partner Account, and I can choose to have the money paid into that instead.
Why on earth would I do that?
Firstly, it helps Ethos as a whole, since it helps to make sure that Ethos has enough money at any given time to keep operating, paying bills, expanding, etc., and not borrowing at horrible rates. So it is sort of like a loan.
Secondly, it is actually recognised as a loan to Ethos, and so when any spare Sponds are being distributed, the amount of money in my Partner Account contributes to the proportion of the spare Sponds that I will get.
Thirdly, I can actually spend the money direct from my Partner Account for interesting expenses, so I can easily pay for such things without tax.
And finally, I can always get the money from my Partner Account paid to me (assuming Ethos doesn’t actually crash and burn!), and it might be at a more advantageous time, for tax or whatever.
But money is not the only sort of Spond.
Shares are also Sponds, and a lot of the idea of Ethos is that it is *my* company, in proportion to the amount of effort I choose to put in.
So when I do some stuff for Ethos the organisation might find useful (and that is a complex issue that is not as yet resolved – just what is the mechanism for deciding some effort is valuable?), I am likely to get some Ethos shares, which are the way of representing that I have contributed further to the building up of Ethos.
The decision to do this is made by a group of fellow partners, the Remuneration Group, who consider lots of different issues, and then arrive at a decision. If you think this is rather woolly and even fragile, you would be right – this is also an area of the Ethos processes that are currently being refined and resolved.
So what does having shares mean? I’m glad you asked…
most obviously, Ethos is likely to make some “profit” on Pangloss. In fact, for an Innovate UK project, they pay money in addition to the salary-type costs, and this is intended to pay Ethos for all the other work and costs required to deliver (the “overheads”), such as administering the account, buildings, and the cost of putting together proposals. Some of this becomes the spare Sponds I mentioned before, that get distributed later.
Less obviously, and less quantifiable, as well as less predictable, a contract like this has an effect on Ethos shares, and the amount that Ethos is worth as an organisation.
This all circles around my shares.
Firstly, shares are not something I can turn into money at the moment, so this is mostly about some rosy future we are all working towards.
But they do affect the present, because they are part of the data input to the Remuneration Group. The Remuneration Group is there to dole out Sponds, which come in two sorts:-
Spare Sponds, which you can think of as Ethos’ profit, and is decided to start with as to how much Ethos can dole at at any given time;
Shares, which are being issued all the time, as people do stuff that increases Ethos’ value.
They use the same data for both:
recent activity that people have had for Ethos;
how much is in the Partner Accounts.
So, the rosy future, and the complex question of shares.
We all want that some day the shares will be convertible into money for those who want to. The big significance of Pangloss in this respect is that it significantly increases the annual business of Ethos, and this causes a chain reaction of implications.
Businesses are typically valued according to how much turnover they make per year, using a Multiplier to arrive at overall value. The value of a business can be anything from 2 x turnover to 20 x turnover, depending on how risky it is, and which commercial sector it is in, etc.. Of course, businesses have other values than the overall value, particularly for founders and Partners, but when it comes to shares, it is this sort of value to consider.
So, plucking figures out of the sky, let’s say that last year’s turnover was £10M, and there are currently 20M shares issued. And let’s say that we are using a Multiplier of 4, and I have 1M of those 20M shares.
So last year Ethos was “worth” (in virtual money terms) £40M. This means that each share was worth £2, and my 1M shares were worth £2M.
This year, with Pangloss happening (I’ll ignore the fact that Pangloss will take time to deliver!), turnover will now be £20M, which makes Ethos worth £80M, and so each share is worth £4, and my 1M shares are now worth £4M.
Nice, eh?!
However (you knew that was coming!), in delivering Pangloss, people will be doing stuff for Ethos, and as we now know, that means they get shares. So in fact there will now be more than 20M shares issued. So the £80M value will be distributed across a greater number of shares, and each share will be worth less, and so my 1M shares will not be worth £4M.
So how much will they be worth?
Well, there is an argument (very strong) that says that Pangloss which brought in £10M worth of turnover, has therefore increased the value of Ethos by £40M, and so this value should be distributed to the people doing Pangloss by issuing £40M worth of shares, which is 20M.
Now doing the calculations, Ethos is worth £80M, there are now 40M shares, so each share is worth £2, and my 1M shares are worth £2M.
Yes, it is a zero sum game! And in fact it doesn’t even depend on what Multiplier you choose, if you do it like that – if the value added of Pangloss is just added as shares, that’s what happens.
Of course, if the Remuneration Group decides to do things differently, for example by not issuing quite as many shares, then the value of each share goes up a bit.
Sorry, but that isn’t all 🙂
Because remember that some of the shares that get issued will be to me, if I do stuff on Pangloss.
So what is quite likely to happen because of Pangloss is that I have more shares, and both the new shares and the shares I already had will be worth more – so these are two positive effects that can be multiplied together.
So OK, can I ever sell these shares?
The plan is yes. Ethos wants the Partners to retain control over its direction, and so we don’t want to sell any shares to outsiders. But for a healthy company, clearly shares that can’t be sold are useless. So the plan is that there will be an internal market between Partners, where shares can be traded at some rate that the market will determine. The launch date for this market is 1st Dec 2018. Ethos as an organisation may also choose to participate in the market, to help it work.
Anything else?
I’m glad you asked.
When Pangloss is the raging success we expect, there will be a roaring business that might usefully actually go to the market and get more funding from business angels or evil venture capitalists etc..
We don’t want such people anywhere near the Ethos mother ship, and so the way we will use such funding to grow the roaring business, where it needs it, is to form partnerships outside Ethos, such as Joint Ventures (JVs) or Special Purpose Vehicles (SPVs). These also have the effect of protecting Ethos if the businesses crash or somehow go wrong (protecting the Sponds in my Partner Account and shareholding).
Ethos will have appropriate shares in such ventures, so that Sponds flow back into Ethos and I get some of them if I am entitled to them.
Why wouldn’t you want to work this way too?