Should token holders demand all the revenue?

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The world’s first publicly traded company tried to rug its shareholders.

When the Dutch East India Company sold shares to investors in 1602, it promised to liquidate the entire concern and return all capital to shareholders in 1612.

That was standard practice at the time: Shareholders invested for a set amount of time, after which they expected to have their capital returned, plus some additional yield.

By 1609, however, it was clear that the company — known locally by its Dutch initials, VOC — had no intention of returning investors’ money, mostly because they didn’t have it.

In addition to trading in spices, the company acted as a de facto navy for the Dutch Republic, tasked with projecting power in the Far East.

But building forts and projecting naval power abroad required long-term investments; so rather than return investors’ money as promised, the company simply kept it.

Shareholders, accustomed to financing single ships for a single voyage, were understandably unhappy.

Protests against the decision to unilaterally convert temporary capital into permanent capital were led by Isaac Le Maire, a former director of the VOC, who publicly campaigned against company management and petitioned the government to force the company’s liquidation in 1612, as scheduled.

It was a long shot: The government was never likely to compel the company building its navy to liquidate. 

But the company recognized that Le Maire’s campaign would impede its ability to raise capital in the future.

To placate investors, it offered dividends.

This was not easily done, because while the VOC was doing a brisk trade in spices, its high investment needs meant that it was chronically short of cash.

So it paid the dividends in spices instead.

Between 1610 and 1612, the VOC awarded dividends totaling 163% of equity, according to one study, but mostly in spices like mace and nutmeg.

Shareholders were skeptical. 

Many refused these in-kind dividends, holding out for cash instead — spices were hard to sell and impossible to sell at anything like what the company said they were worth.

But, if nothing else, it was a gesture to reassure shareholders that they had a claim on the company’s earnings.

It was a long while before shareholders were convinced.

In 1616, some of the company’s unpaid dividends were converted into interest-bearing loans. 

In 1620, the company was flush enough to pay a 37.5% dividend in cash.

But in 1623, short of money again, the company paid a 25% dividend in cloves.

Dividends continued to be paid partly in spices until at least 1643, after which they were paid in cash and, when the company was short of cash, bonds.

Shareholders continued to grumble, but it did work out for them in the long run: One historian estimates that the VOC’s annual dividends averaged out to 18% of its paid-in capital over 200 years.

200 years! 

VOC’s original investors did not value the shares as a function of 200-year cash flows; they thought they’d have their money back in 10 years.

But the company’s early dividends — paid while it was still a money-losing venture — helped convince investors that shares can have value even if the paid-in capital is never intended to be paid back.

On this point, crypto still has some convincing to do.

Spicy buybacks

In the debate over what percentage of revenue, if any, crypto projects should pay out to token holders, Tom Towbridge, co-founder of Fluence, takes an extreme view: 100%.

Towbridge reasons that the portion of revenue used for buybacks is a measure of a team’s trust and alignment with token holders, so a team that pays out 100% of revenue is perfectly aligned and presumably trustworthy. 

80% of revenue is still pretty good: “Not a lot of misalignment, but there might be some.” 

But when a team pays only, say, 20% of revenue to token holders, “now trust and alignment is very different because management is taking 80% of revenue to do something else with it.”

By that logic, there should be a lot of distrust and misalignment between the owners of pump.fun and the owners of its new token, PUMP. 

Unlike in equities, these two groups are not the same because PUMP holders have no legal claim on pump.fun’s earnings or assets.

Still, investors value the token at $4 billion, presumably because pump.fun’s owners have promised to use 25% of the platform’s revenue to buy PUMP.

It’s possible, of course, that the 75% of revenue retained by pump.fun’s owners will be invested in a manner that ultimately benefits token holders. 

But it might also be invested in a new business line that the owners decide is unrelated to the PUMP token. Or in houses and yachts for the management team. 

There’s no telling. 

It’s therefore probably best to value the PUMP as a multiple of its current cash return — much like the VOC’s pioneering investors did.

From the VOC in 1602 until about US Steel in 1901, investors tended to value stocks only by the dividends they received, assigning no value to a company’s retained earnings.

Ignoring retained earnings made sense because before US Steel set a new standard of disclosure by releasing full financial statements; investors had no idea what companies were doing with them.

Today, token investors are not much better informed, so it similarly makes sense to value many tokens by the rate of their current buybacks and nothing else.

That’s not exactly what people are doing. 

Based on revenue for the month of June, PUMP is trading at 40x its annualized buyback.

That equates to a 2.5% yield at the current token price — not crazy by crypto standards, but also seemingly pricing in something more than the current rate of cash return.

By contrast, VOC’s early shareholders effectively demanded all of the company’s cash flow, because they were rightly suspicious of what management was using them for (self-dealing and empire-building, as it turned out). 

Even in those early, money-losing years, the company paid as much as it could possibly manage (albeit in mace, nutmeg and cloves), because it had to prove that VOC shares had value.

It’s since been established that shareholders have a claim on earnings, so valuation is easy: Every stock is worth the discounted value of its future cash flows.

Until that’s established in crypto as well, token holders should probably demand bigger buybacks.

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