Natural Finance summary for communes/partnerships

A commune does not imply a lack of profit maximization focus compared to a regular corporation.  It is simply an organization structured as an egalitarian partnership.  The overwhelming advantages of structuring an organization as a commune is overcoming the inherent abuse created by power imbalances of unequal ownership and hierarchical organizational structures, and controling corporate corruption by having more eyes with the authority to check employees and other partners.  This article is a summary and catalog of the ideas I've developed in promoting financial transactions in communes.

Natural Governance principles apply to any egalitarian partnership or society.  The one immutable principle is that the circle of partners has ultimate authority, and each partner has the right to an equal share of profits, and the right to be paid that share by default (subject to communal obligations decided by the circle).  As a solution to voter apathy, any partner can delegate his vote in any one or several functional areas to someone else, but delegate authority can be removed at any time.  As a solution to increasing decision speed, specific executive authority can be assigned  to individuals or groups for projects, duties, functional areas based on democratically approved proposals that include salary, budget, and specific narrow decision authority/mandates.  Approved proposals are rarely given any lengthy term or monopoly powers, are likely accompanied by supervisory/review proposals, but by default carry review powers by the full circle often though delegates for the single functional role.  Line item authority and project scope is reviewable by the circle and delegates.  Proposals to replace or eliminate the executor of duties or functional direction can be made by other individuals.  Natural Governance provides an entrepreneurial framework within an organization where any perceived need can be championed by any person that sees it, and who then tailors an exploration and implementation strategy that is acceptable to most partners.

Natural Finance and Natural Governance facilitate investment in communes without ever compromising the rights of creditors or other partners.  In natural financed communes, new partnership investment is a transaction exclusively among partners. For large partnerships, a democratically set (median) purchase amount is determined by the existing partners, and an nth partner willing to buy at that price, gets a new share, pays (1/n) the value of the partnership, and the proceeds are distributed evenly among the (n-1) existing partners.  So even in a partnership of millions, it is fairly straightforward process to admit new partners.  If the share price is too high for most people/workers to afford, they can share in the prosperity of the commune through communal equity options which can be tailored to any affordability level.

Because informed investors need to plan for eventual or possible exit from a private company or commune it is critical that processes to facilitate such exit exist.  Natural democratic governance processes allow the circle of partners to use their median bid for share repurchases as an amount a selling partner could accept, or allows the partnership to vote on accepting the best offer.  Both of these alternatives require that a natural finance project be funded with new loans (likely by existing partners in varying levels).  Another alternative that does not involve new partner funding is to give the partners and option holders the right to bid  against each other (at least 20% discount) in order to sell their share, at the time of a new buyer's transaction, and with proceeds coming from a new share buyer's transaction.

Natural Finance's main focus is debt financing guaranteed to never cause dilution to a creditor because all loans are ordered in sequential payment priority.  Natural Finance permits higher debt capacity and lower financing costs through lower risk loans primarily achieved by proactive monitoring.  The symbiosis with egalitarian partnerships is that equal authority of owners provides controls that limit waste and boondoggles to the benefit of both owners and creditors, and so limits the monitoring activity required from external natural finance controller.  Owners benefit from active control of financial accounts to prevent embezzlement from an owner.

Communes have traditionally been based in anti-capitalist ideology.  Natural finance recognizes the  oppression inherent in hierarchical management structures including towards minority and other shareholders.  The purpose of financial communal equity principles is to remove the restriction that all partners must provide equal labour and other contributions, and so enable the full range of contributions that can help the commune/enterprise be successful.

communal equity accounting - large open partnerships

Egalitarian enterprise ownership provides a function similar to Natural Finance Comptrollership in that it controls hierarchical management power concentration.  A circle of equal partners has to be managed for the equal benefit of all the partners, and equality membership is the only effective way to enforce it.

In my last post, I discussed various ways to structure an equal partnership.    The most interesting of these options was one (3rd option) offering an equal partnership with equal low financial commitments amongst partners. This is a more formal analysis of that option where I will try to keep the more complex parts near the end.

The exciting aspect of allowing low buy-in egalitarian open membership/equity in a project is making projects accessible to both rich and poor members.  It can replace financing and ownership structure for most projects, but is specifically tailored for real estate projects/municipalities, multi-level marketing organizations, and volunteer charities or semi-volunteer organizations. 

Natural Finance provides a more flexible and cheaper financing alternative than the loan syndicate described in the original scenario.  Natural Finance uses queued priority open soft loans for financing where each investor is guaranteed to never be diluted by future obligations.  Queues exist (in order of payment priority) for unsecured loans, secured loans, deferred compensation, and purposeholder/"shareholder" dividend-equivalents.  An impartial comptroller is assigned to the organization to ensure funds flow through accounts as agreed, and to enforce all other agreements entered by the organization, and so facilitates partnerships in the organization by ensuring trust in it by its partners.

Another function Natural Finance Comptrollership provides is more flexible accounting options than standard GAAP.  GAAP procedures aim to portray an organization to outsiders as an estimate of its liquidation value.  While useful, a partnership with an open buy in price must use the principle of setting a buy in price which doesn't disadvantage anyone based on time of buy in.  So internal information must also be accounted.

Minimal investment partnerships within a natural financed organization may as well be labeled Natural Partnerships.  A natural partnership share has many similarities to standard corporate shares.  It is a share of paid up equity, a right to vote. a right to share in future profits, and is freely transferable.  Unlike a standard corporate share, it also has an obligation to pay its share of unfinanced obligations.  Because of this last feature, the shareholder has the right to abandon his share most likely to avoid paying such obligations.  There are thus 2 financial components to a natural partnership share.  A membership fee and a paid up capital amount.  The membership fee is the small buy in fee that can start an egalitarian organization.  The membership fee is forfeited if the share is abandoned.  Paid up capital is not forfeited however when abandoned, though share of future gains is forfeited.  Natural finance queues enable a distinction between returning past dues, and shares of future streams.

For almost all natural financed organizations, paid up capital of natural partners would be accumulated exclusively through paying back of lender principal.  Basically through accumulated profits.  In natural financed organizations any capital contributions made by partners are lent under the same terms available to general investors.  If, in the future of an organization, contributions from its partners must be raised as a last resort, then its likely the partners agree to make those contributions in the form of interest bearing loans rather than as capital contributions.

Deferring discussion on calculation of open partnership share value (called communal equity) for a moment, a new partner joining the organization, if he is the n-th partner,  owes 1/n-th of the partnership value to the other partners on top of the membership fee.  If the prospective partner is interested in joining mostly for employment income opportunities he can derive from the organization, then it is likely the organization is willing to negotiate with him to pay that amount with no interest, at a speed commensurate with his responsibilities.  If the prospective partner only has a financial interest in the partnership, then he is likely expected to pay the partnership's full entry price without any organizational concessions.  The motivation for a financial partner to invest in the partnership rather than through natural finance loans to the organization is usually in addition to natural finance loans.  Individuals may only purchase a single partnership share.  It grants them a vote and access to collaboration opportunities, and so can be supplementary to other financial stakeholdership in the organization.

Communal Accounting is a supplementary measure to GAAP accounting.  It does not prevent standard GAAP income statements and balance sheets.  An additional accumulated communal equity account is tracked which "capitalizes" most expenses of the organization that are permanent reflections of past member contributions to the firm.  The principle of communal equity is to record those expenses incurred by the first members in the buildup of the organization, so as to equalize contributions made by the first and last members.  Members joining now or 10 years from now should be indifferent to the joining dues.  Expenses that are not a personal benefit to communal members nor are part of the costs of goods produced for sale are presumed to build up communal equity (value).  For organizations that don't provide direct benefits to their members (such as housing, food etc...) then supplementary communal equity will be accumulated losses (with minor timing adjustments).

As analysis, consider an open communal owership of an art piece (soup can drawing) that is bought with a 100% vendor loan.  The only costs in maintaining it are insurance and interest on the loan.  Initial communal membership of one.    The vendor gets no cash, but will collect rent equivalent interest and avoided insurance costs, and holds the art as collateral.  The buyer hopes that the art will appreciate in value more than the interest and insurance costs.  The commune sets its risk to (almost) zero in allowing new members to join at the value of accumulated interest and insurance costs.  A partnership set at the time of purchase would always be set at this value.  Partners joining in the future, however, have the advantage of waiting to see if the art appreciates in value more than the buy-in costs.  Therefore, a markup percentage is appropriate on the buy in set price.  It can be set monthly or quarterly, and can be negative if market conditions demand so.  5% or 10% markup is considered naturally acceptable capital returns, and 5% will attract more partners than 10%.  Expressing it as a percentage markup is important for disclosure purposes, communal voting on setting the markup, and mathematical simplicity in rewarding each existing communal partner.  The value of soup can drawings, as any project venture, is highly subjective, and categorically impossible to predict.  A 5% markup will attract more members than a 10% markup.  At 5% annual interest and insurance costs, the open communal buy in price would increase by 1/n-th of 5.5% (with 10% markup) of the original asset value.

The above venture excludes valuing either the advantage of having possession and enjoyment of soup can drawings, and the revenue potential of charging a few cents to soup can drawing aficionado visitors.  Any revenues earned by visitation fees reduce the cost of partnership buy in provided they don't exceed the expenses.  Retained profit also increases buy-in price by increasing equity.  Ironically, both losses and undistributed profits increase share value by the same amount, while breaking even does not (to be contradicted later). An aside, but interesting alternative to the vendor selling to the buyer, is the for the vendor to form a communal partnership with the buyer.  The vendor gets to insure that insurance is up to date on the asset, and may continue to enjoy the possession privilege, and the buyer gets half the speculative ownership but half the risk (obligations to pay interest and insurance).  The buyer's ability to abandon the project returning the collateral is unaffected.  If the communal partnership grows to 1000 members, then the vendor will have succeeded in divesting 999/1000 of his interests while continuing to participate in the potential increase in market value, its insurance security, and potentially its viewing pleasure.

The paradox of an organization losing 100k per year being valued the same as one earning 100k is indeed nonsensical.  Net Present Value principles apply.  For presumably perpetual projects with aggressive market value based depreciation schedules for assets (as natural finance secured QCSLs demand), then an earnings multiple of 5-10 times over and above tangible equity is a fairer open buy-in price than accumulated communal equity.  Open buy-in price is the greater of the 2 values.  Tangible equity is essentially the liquidation value of an organization, and excludes intangible assets such as goodwill and brand image.  If intangible assets are a substantial value of the organization, then the multiple of earnings can be justified higher.  The importance is a formulaic buy-in price based on earnings and tangible equity.  Terminal value projects such as an oil well, gold mine, or drug patents have different valuation formulas.  They are also NPV based, but not discussed further at this time.

When the right to abandonment is invoked by a partner, the membership fee portion of his partnership share is forfeited to the organization.  Their share of communal equity is segregated into passive communal equity.  Passive communal equity is only returned to investors as distributions are made.  No profit is available on their shares.  If the organization requires future partner contributions, they are drawn proportionally from passive communal equity and active partners/communal equity.  Any distributions made to partners whether profit shares or results of the sale of the organization, are made to passive communal equity holders as well, but reduce the passive shareholder balance.  New partners buying into the communal partnership have their contributions distributed with passive communal equity counting as half of its proportion.  The rationale for reduced participation of passive equity members is that recruiting new members is an active action by the existing active partnership.

One major advantage of a communal partnership over standard corporate shareholding is that management abuse of shareholders by diluting equity is prevented.  The price of admission to the partnership through either markup of communal equity or earnings multiple above tangible equity can be set through a democratic average of partner desired amounts.  The structure makes it impossible to bribe one manager for preferential stock distribution, because each person is limited to one share, and a price is set for all buyers.  yes/no decisions by potential buyers of a fixed or formulaic price are still market based pricing of stock issues.

For most projects, the membership fee is expected to be $1000.  Membership fees become organization equity.  Each share would have a book value of at least $1000 because of this.  Consider an organization like General Motors with 1-10 million people affected by its operations including customers.  If such an organization formed as a communal partnership with 1m members, there is $1B in equity from membership fees alone.

A communal egalitarian partnership can have senior and junior partner divisions.  Junior partners are those who haven't fully paid up their partnership share yet, but are current with their negotiated payment schedule.  A partnership share can be split among a group, though no one can own more than a share.  Those partners with more financial resources than other partners can contribute additional funds through (natural finance) loans.

A communal egalitarian partnership can replace many natural finance comptrollership duties other than account control if the partnership is large enough (5+), as peer review/monitoring enforcing partner commitments to the partnership is likely serves investors as well.  A communal egalitarian partnership is more trustworthy to outsiders also because it allows outsiders to join it.

Redefining Commune -- Communal enterprises

A Communal project is typically an equal partnership in  life/ventures/societies.  A commune is traditionally defined as a living project with equal partnership.  I will further redefine communal to drop equal partnership requirement, and mean a legal framework for sharing of liabilities regardless of any hierarchy or individual profit incentives, but with a substantial internal share of profits.   A cooperative is a communal enterprise.

This is considered a draft post for communal equity

A marriage is a commune in every sense of the word, while a family is not because there is no legal requirement for family members to mutually assist each other.  A bank is almost a commune:  A network of branches, investment banking, and capital trading all pool together to mutually back liabilities.  The extent of its communal nature is entirely dependent on the level of performance-based employment and profitability incentives of each unit.  Higher union wages and performance bonuses all increase the communal purity of a bank, even when it fails communal definition by returning the coomon surplus to shareholders.

Natural Finance separates rewards for financial and labour contributions.  Assigns financial benefits to Investor's financial contributions, and purpose-holding benefits (by default, rights to distribute or direct ultimate profits) to labour.  A founder commune in the traditional equality sense is an obvious option.  Another option is allowing corporate/communal officers to democratically reward officer efforts with post-investor benefits.  Natural Finance facilitates several corporate currency instruments (deferred compensation, W, X and Z prizes are all addressed in manifesto).  Using democratic bonuses and deferred compensation, a communal enterprise can satisfy communal definition without equal participation by labour, and without any consideration for financial contribution.

Natural Finance treats sub-projects much like banks treat branches.  A sub-project is financed in the parent enterprise's name usually with a substantial portion as a secured QCSL tied to the project (which have interest and depreciation repaid each month/period).  Queued behind that secured QCSL are any benefits for the project leader(s).  Sub-projects typically have 10% of contributions go towards the queue.

Sub-projects can be very fine grained.  Any unit sales or production function, or any function that performs a measurable output can be made into a sub-project.  Sub-project managers have at least 3 compensation streams.  cash salary, enterprise deferred compensation, and project bonus (y prize).  The default relationship is an employee one.  As a default, the employee contract is re-negotiated (or discontinued0 after the y prize is paid.  Alternate options include giving sub-project managers "equity" stakes, and treating salary cash payments as (5%) advances on future distributions.

A co-operative can be viewed as a collection of sub-projects.  Co-operatives traditionally involve individual resellable ownership rights to definable portions of an asset, together with a democratic share of ownership and liabilities in the whole.  Achieving the same structure through Natural Finance, involves assigning a resellable perpetual right to the sub-project for its manager, rather than employment of the manager.   The communal tightness of each sub-project is flexible.  A joint-venture is a non-communal alternative, and sub-projects can be structured more like joint ventures than a mutual sharing of liabilities.  Ownership is not as key of a feature as joint vested interests in success.  Equality of members is also not critical to a communal definition, though democratic or equality of member opportunities scores many communal points.

Modern incentivised management techniques naturally benefit from shifting purpose-holding away from investors and towards labour and direct stakeholders.  While traditional financial thinking embraces individual rewards, and  has animosity to communal concepts stemming primarily from distant cold-war politics, communal responsibility and purpose has important motivational possibilities including peer-reinforced indoctrination, and when we drop mandated equality, can include traditional incentives for individual effort.

Communal equity principles

Comptrolling function - verifying trust

Queued Soft Loans are repayable based on ability.  It is important to lenders that whim or choice not determine ability, and important that lenders need not request payment to obtain it.  Comptrollers ensure this in addition to preventing corruption of the enterprise.

Comptrollers are 3rd parties appointed when the enterprise becomes a Natural Finance Comptrolled Organization (NFCO).  The comptroller organization is appointed for "life".  The comptroller organization has control over all enterprise financial accounts.  It must sign off with enterprise officers on every major expense.

The comptroller's authority over future projects and expenses is based only on whether they compromise survivability of the enterprise.  He guards over high, potentially preferential, payments, and ensures that new project funding covers a portion of related ongoing expenses (6 months worth for example).  The strictness of the comptrolling function on management depends entirely on the health and success of the enterprise.  Companies in the startup phase, or with higher debts than assets have tight controls.  No revenue means management cash salaries are at their minimum levels, while they rise to their maximum when operational earnings reach 10% (or natural rate if lower) of outstanding soft loan principal.

NFCOs have 2 distinct stages in their lifetimes.  The transition occurs when secured and unsecured QCSL investors gain certainty of payment.  Defined as the point when all investor QCSL holders are projected to be paid in 5 years.  After the transition point, the focus or primary mandate of the comptroller becomes ensuring that purpose-holders (other than management) have their promises fulfilled.  It is possible for the enterprise to slip below the transition point, in which case the primary comptrolling mandate shifts back to investors.  Purpose holders care about total compensation, as compared to cash compensation that concerns investors.

The investor benefit of comptrolling is the superior certainty that enterprise revenue is diverted to repaying them, together with expense control.  Far superior to management employed auditors.  This is in addition to the certainty in priority of payment of natural finance QCSLs.

The management benefits of submitting to comptroller authority are in attracting investors, paying them less due to lower risks, and having a secure attractive currency with which to influence suppliers, project partners, and with which to influence social groups to become purpose-holders.  The manager gains the freedom to found companies without any out of pocket investment, earns comfortable to high salary when corporation is profitable, and gains ultimate freedom after company passes the transition point.

Maximum management cash salary ($100K) at 10% return to investors is justified in that an enterprise achieving such a return is naturally successful regardless of the market forces determining the natural rate for the enterprise.

Chartered public accountants in their audit role of a corporation differ substantially from Comptrollers.  First, the Agent-Principal problem exists with CPAs.  They are hired by management to project a perception of honesty and solvency to outsiders such as shareholders and tax authorities.  They can be fired if they are unwilling to confirm management's desired perceptions.  Bernie Madoff gave the impression he was audited, for example.  GAAP rules allow auditors leeway in interpreting corporate cashflow optimistically for investor perception, and pessimistically for tax authorities. Comptrollers have authority over the corporation that auditors don't.  There is no corporate right to fire them.  Cash-basis accounting determines all decisions.

Stock vs Cash Dividend - The 3rd choice

Variable Dividends (or Fixed Yield Dividends) are a cash dividend that is equivalent choice to a fixed fractional stock dividend.  A fixed fractional stock dividend of 1/10th or 1/40th of a share has a variable cash dividend equivalent of 1/11th or 1/41th of the stock's market value.  The cash value of the dividend is variable with the stock price, which makes the dividend yield fixed.  So even if corporations don't pay as high a dividend as shareholders deserve, they can pay more when stock price is doing well, and less when it is doing poorly.  So can afford a higher target payout ratio, and smooth out stock price fluctuations by providing investors with a mechanism to hold low and sell high.

While all investors should be disappointed with management's primacy of self agendas over their contractual mandates, I recognize that there are far greater evils in this world.  Living with the reality of corruption of mandates to shareholder value,  and deceptions to investors regarding shareholder rights, the continued health and capitalization of the corporation does benefit other direct stakeholders (management, employees, customers).  Yet a higher target dividend payout is possible through variable dividends without compromising the health of the company.

A 3rd choice is possible to boost target payout rates much higher.  Issuing a loan option instead of or in addition to the cash dividend option provides a way for the company to issue high dividends without reducing corporate assets at all.  Issuing a loan, retains the same earnings power for the company.  The interest benefit is a shareholder benefit if the loan is issued as a dividend.

A queued soft loan is a superior alternative in every way to a bond loan for both investors and the honest fair-minded corporation.  Soft loans have a certain priority to payment that can not be worsened for investors, and so corporations can benefit from lower financing costs associated with providing a better valued security.

To boost payout the highest, a cash dividend choice need not be offered.  If the company is debt free, then a QSL vs stock dividend choice results in a virtually immediate cash payment to some of the loan dividend choosers.  the company can pay its earnings towards the new QSLs immediately.

To price the QSL dividend choice benefit, the principal amount is equal the cash dividend equivalent to the fixed fractional stock dividend (1/11th stock price if fractional stock dividend is 1/10th of a share).  The interest rate could be bid on, but that requires logistical support.  In healthy public companies, because QSLs guarantee no dilution of payment priority to the loan holder, every loan has an estimated organic (from operations) payment date.  Organic expected payment date can be used to set the Dividend replacing QSL interest rate to match the government bond rates of similar duration, adding a premium of, say, 20 basis points per expected year of repayment.

A high dividend choice not only allows a naturally efficient mechanism to separate shareholders into those that want to determine purpose of the enterprise vs. those that simply want financial benefit from the enterprise, but it also helps expedite purpose-aspirational shareholders to takeover the company without paying market premiums for it, but in a fair way to all other shareholders.  By bidding on dividend increase projects through QSLs, purpose aspirational shareholders encourage the corporation to boost dividend payout even more, and provide the benefit aspirational dividend choosers with cash payments.

A typical target dividend payout ratio for mature healthy public corporations (that pay dividends) is typically 50% of earnings.  It is 75%+ for Canadian Income Trusts.  When Income Trusts have poor performance periods where there payout reaches 100% of income, their market capitalization tends to drop below their book value, and yields go higher than P/Es.  The market is scared of high payout ratios, mostly because of fear that fixed dividends will be reduced rather than the fear that bankruptcy becomes imminent.  A variable dividend can allow the income trust to pay according to target earnings, and can payout 90%-100% of those earnings targets, because when it falls behind, it will naturally drop in stock price, and pay out less.  Their dividends become self adjusting.

Because of the obvious appeal of high dividend corporations, and the announced intentions of industrial icons (Bell Canada) to convert to Income Trust structure, the Canadian Government has effectively banned income trusts starting in 2011.  Variable dividends will allow converted Income trusts and  those corporations that wanted to be income trusts to boost payouts within management agendas.

Converting Public Corporations to Natural Finance - Part 1

Part 1 of 2.   This is the basic plan for converting a healthy public corporation.  It is relatively straightforward, offers free choice, but can overpay by not taking full advantage of natural finance principles to bypass the market corruption caused by the price difference between buying 100 shares vs 10M shares.

copied from manifesto.
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Converting a public corporation is voluntary by all affected stakeholders. It can be complete, partial, done in stages, and convert bonds, preferred and common shares. Once natural finance conversion has begun, no new bonds or preferred shares can be issued, and common share issues are not recommended..

Bondholders should be given first priority to convert. Secured QCSLs most closely fit the bonds the company considers too expensive for it. If all bondholders converted to unsecured QCSLs, they would all have enhanced security (demand lower yield) by the fact that they are first in line to be paid. Unsecured QCSL conversion for bondholders is essentially a cash redemption of bonds which is sometimes an enterprise right attached to some bonds. Secured QCSLs also offer better security to converting bondholders because in a distressed bankruptcy type scenario, they get theoretically 100% of principal, and they also receive high yields including a non taxable depreciation coupon. Those bondholders that do not convert, continue to have a fixed obligation paid before QCSLs, including principal at maturity, but they lose relative priority in the event of bankruptcy. A net positive to convert. Even when converting to natural financing in a distressed enterprise situation, if the conversion buys a few years survival, bondholders are substantially incentivized to convert. Better value to bondholders through natural finance, means lower borrowing costs to the enterprise.

Preferred shareholders are the only group that are economically-forced to convert in order to keep their relative security and payment regularity. Secured QCSLs match the payment regularity most closely. Non maturing Preferred shares are in fact a scam on its buyers, because the principal is never repaid. The odds that a non-liquor company will eventually (or within 200 years) go bankrupt are over 99.9%. Preferred shares tend not to have sufficient premium over bonds to understand that risk as properly considered. From the enterprise's perspective, paying a pre-profit coupon inflated by the inverse of its untaxed profit rate is equivalent to a preferred coupon. For example, at a 25% tax rate an 8% bond coupon is equivalent after tax to a 6% preferred share coupon (for same maturity date). From the investor perspective, forcing the exchange is forcing a net benefit of additional bond security, and forcing a net benefit is a gift. In most countries, on average, there is an equivalent after tax return to the securities as well. Offering the same optional conversion options to (converted) bondholders after the exchange, provides the same optional choice to preferred shareholders.

Common shares can be converted by either an internal “takeover” bid by management, a partial substantial issuer bid (bid for up to x shares). A company with net assets of 500K, making 100K per year, 10000 shares outstanding, and P/E of 10 has a $100 share price. If half the shares are sold in exchange for QCSLs loans at 10%, then after 8 years (QCSLs are repaid), without any operational improvement by the company, net assets are back to 500K, and the 5000 shares remaining at a P/E of 10 are worth $200. Every rational person who doesn't have direct oversight of management, and therefore cannot vouch for its confidence, would prefer to hold QCSLs (ignoring tax differences) because they are paid faster and more certainly even if the return is the same. From the enterprise perspective, if it can pay less than 10% interest rate (almost certain given profile), then it is net positive to the enterprise and remaining shareholders. Most successful public corporations should be able to achieve natural rates close to “riskless” government bonds (under 5%-6%).

Pensions are a scam/motivational technique on employees designed to keep them needing work. There are tax advantages for both parties, but administration fees and restrictions on cashability are net negatives compared to direct loans/deferred compensation. A pension system can continue under natural financing and invest its assets back into QCSL backed projects, but management may find employees willing to invest more if they provide them with higher returning and more flexible direct deferred compensation.

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QUEUED Soft Loans - enhancing predictability

Queued soft loans (QSLs) are soft loans that are setup in ordered payment priority.  All principal and interest of the first loan is repaid before any payment on the next priority loan is made.

This a followup to recent Soft Loans introduction.  Part 2 of 3.

The distinct advantage over traditional bond-loans are that there is certainty of leverage for the investor.  If you have no debt whatsoever, and high income, you could get a small loan at the lowest possible interest rate if you promised not to get any other loans.  That promise is never made or asked for, so lenders are forced to assume you may get a lot more debt later, and price their loan more expensively.  With QSLs the leverage rate at the time the loan is made is known precisely, and can never worsen for that investor, and improves every time another investor is paid.  The lender can furthermore estimate a date he will be repaid based on expected operational profits.

A Queued (capped) Soft Loan Regular Exchange (RE) is a market much like stock or bond markets where individual traders may buy and sell specific QSLs.  It is almost always a bad idea to buy a QSL for more than its accrued value, because it can always, and often, be paid off early.  The RE exists to help QSL holders to cash out at less than full promised returns, by offering up his QSL.  The company is unaffected financially by these trades and need not be involved in the exchange.  The RE collects a commission on these trades.

A QSL Perpetual Offer Exchange (POE) is typically offered by the same organization running the RE.  It allows any entity the opportunity to buy into the queue of soft loans (at the end) by accepting the natural bid rate which is a small increment below the queue's natural rate (which is the average interest rate in the queue).  The proceeds from the new buyer go directly to whichever investor is at the head of the queue.  The POE does not collect regular fees on these trades, though is part of Comptroller entity fee based duties.

A QSL Future Operations Market (FOM) is a market where investors and the company agree on funding the company's future weekly operations and special and new projects.  For weekly operations the company is forced to accept bids at the natural rate, and use any excess revenues (over reserve of usually 1 month) to repay QSL queues.  For projects, the company may arbitrarily set a maximum interest rate that it will accept initiating the project for.  Potential investors may make a standing bid for the next weekly operations slot at the natural rate at time of bidding, and if so their bid may be accepted even if the natural rate falls below that bid (and there are not enough better bids).  It is yet to be determined if investment banking fees will be incurred in this market.  There are comptroller fees for reviewing and packaging projects for offer, but weekly operations are included in standard comptroller duties.

QSL holders have some options to faciliate reinvestment in the company, whenever they are about to be paid for their loan:  1. They may guarantee an accepted bid in the company's next Future Operations Market auction at the natural rate.  2.  They may repurchase into POE at a slightly advantaged average of the natural bid rate and the natural rate, and 3.  If (and only if) their QSL rate is below the natural rate, they may pass on being repaid.  Choosing instead to continue maintaining their safe position at the head of the queue, while accruing interest.

The natural rate is the average interest cost to the company.  By allowing automatic bids below the natural rate to be accepted, the interest cost to the company tends down, and individual investors are repaid much more quickly than they would if only organic (internal to company: revenue surpluses) payments were made.
By allowing for programmed orders from QSL investors, the natural rate can rapidly cascade down as a result of improved outlook in the company.  For example if 100 investors are each willing to lend $1000 to the company at 9%, but the company only needs a total of $100K in financing, then the negotiated rate could be closer to as much as the company may bear (15% for sake of example).  But if 1 extra investor is willing to invest $1000 at 9%, then the natural rate will quickly cascade down to 9% because every investor who is offered repayment will choose to reinvest.

The unlimited supply of loans created by the POE satisfies the perfect competition ideals of Adam Smith, for enterprise financing.  Open loans, means that whoever provided the first acceptable finance terms doesn't forever encumber the enterprise with high rates.  (Investors who prefer not offering open loans have free reinvestment options).  Expensive loans can be easily replaced.  Its an advantage to investors as well because in a $100M project, putting in the first $10M is much more risky than putting in the last $10M.  Namely, the risk that the other $90M won't be raised, or incur delays.

Part 3: Capped QSLs

Introducing Soft Loans - A new corporate security

Natural Finance uses Queued Capped Soft Loans.  This is first of 3 part post series.  This is meant as a concept introducing post, but the official statring point is here .

Purpose Holders of a traditional corporation are its shareholders.  Management has a duty to maximize shareholder value.  The Founder of a corporation typically conceptualizes and executes its function through management of it, but if he needs more money than he is able/willing to risk, he must, most commonly, negotiate away much if not most of the purpose-holding to stock investors.  If it is most of the purpose-holding, then he completely loses control of his concept and mission for it.  If it is less than most, then stockholders are helpless captives to nearly every management whim.

Soft loans are loans with no fixed date/amount repayment terms, but rather based on ability to pay.  They are similar to royalty streams with the major exception that they expire as soon as all of the principal and interest is repaid.  They are much more similar to interest accruing accounts payable, or a promise to suppliers to pay them when some sales are made.  Soft loans are transferable the same way any lender could assign your borrowing obligations to be paid to someone else.

From an investor perspective, a soft loan must have tight accounting controls that prevent the borrower from interpreting or managing his "ability to repay" obligation.  The lender never wants to have to call and request for payment time frames.  These trust issues explain why soft loans have traditionally been unpopular for lenders. When trust is verified, soft loans are much less risky than owning minority stock.

The capitalists role is to get a return of and on his capital.  The most direct way is through loan interest.  His role is not to interfere in how to provide that return, or demand and delude himself into promises of unlimited returns on his capital

Queued Soft Loans have significant advantages to both minority stock or bonds/traditional debt to investors (details comming).  soft loans share bond-loans predictability of repayment.  While bond predictability is affected by likelihood of default projections, soft loans are not only necessarily less likely to default (details comming), but have an expected date of repayment, which usually, even when it misses expectations does not affect the return to investors.  Stock returns have no tangible predictability.

From management's/purpose-holder perspective, soft loans have the same benefit as share capital in that you never have to consider paying them back unless you are able to, and the advantage over bond-loans that you are never forced to pay unless you are able to.  When trust is verified for stakeholders, and controls on management spending and salaries in place, soft loans become an enterprise currency, where suppliers, customers, and employees can be provided with assets with much more tangible value than stocks or options.  Tangible value that is much less affected by unknowable management possessed information and competencies.

Part 2 Queued Soft Loans