The Preference Put: Startup stock with crypto features

Tokenized securities need to create new kinds of value. This article presents one bite-sized idea that has direct relevance to early stage investors. It’s the Preference Put — a way to represent liquidation preferences.

Problem — You don’t want multiple classes of stock

You only want to issue one class of your tokenized security. This makes it possible for you to add community features like membership, and it provides more opportunities to trade.

However, investors will want a new series of preferred stock with each early stage round of funding. For example, a Series A stock might have a price and a liquidation preference of $1, and a Series B stock might have a price and a liquidation preference of $3. The liquidation preferences are important for reassuring investors that you aren’t going to run off with their money. But, the multiple classes of stock can’t easily be used for exchange or any other community features.

Solution — the Preference Put

We propose to offer at least one important type of preference — the liquidation preference — as a separate security. A buyer of an early stage series of stock would get normal common stock, which could later be used for exchange and community features. The buyer would ALSO get a non-tradable “series X” put option. In a liquidity event, the investor can trade the option, plus 1 share of common stock, for $X. This will give investors both the useful security, and the $X liquidation preference.

Tokenized securities are more than just dead stock certificates

It’s likely that tokenized securities will be useful ONLY when they have new features made possible by their crypto heritage. For example, common stock can also be used for membership and staking. If you own the security, you get the rights to some product or service. The membership privilege goes back to structures like the New York Stock Exchange, where participants invested in buying a “seat”. Investors will want access to those types of privileges without having to convert their early stage stock into something more community friendly. The common + preference put gives them that value.

Our understanding of how to use tokenized securities will improve over time. As an issuer, if you sell common + preference put structure early, you keep an option to create value later by using the crypto form of the security to build community and liquidity.