Cap Tables & Private Company Stock on Provenance Blockchain

How Figure Equity Solutions was built on Provenance Blockchain

Introduction

A novel application of blockchain could be as the source of truth for a company’s capitalization table (cap table). Figure Equity Solutions is a cap table management tool built by Figure that does just that. It provides various features that simplify and formalize cap table management. Core features such as the tracking of stakeholders, how many shares they hold and of what type, as well as exercising option grants, leverage the Provenance Blockchain.

First, we will dive into the functionality that Figure Equity Solutions (FES) provides. Then, discuss how the platform interacts with the Provenance Blockchain. Finally, we will walk through a specific use case of selling private company shares on Provenance Blockchain on an Alternative Trading System (ATS).

What does Figure Equity Solutions (FES) do?

FES provides the ability to define stakeholders and share classes while tracking security distributions between them. Companies have investors, employees, founders and various other types of stakeholders who all maintain ownership on this cap table. There is a powerful front end for company administrators to define their assets and stakeholders. Investors and employees also have a front end interface for viewing their holdings, exercising option grants, and tracking other company events such as transfers and repurchases.

Share classes can broadly be lumped in to one of these three categories:

• Common Stock
• Preferred Stock
• Equity Plans

All of these share classes are memorialized on the Provenance Blockchain as digital tokens. Coins belonging to each digital token are distributed to each stakeholder representing their ownership stake of the company. Eventually all share classes convert to common stock. We will now dive into the details below.

How does FES use Provenance Blockchain?

FES company cap tables are a ledger of activities that can be represented as transactions on a blockchain. Each company’s share class in FES has its own Marker on Provenance. Stakeholders are represented by a Provenance Blockchain account that holds coins issued out of this Marker. FES manages the minting, burning, and transferring of these coins between accounts.

Share class markers are grouped into two categories:

• Convertible (Equity Plans and Preferred Stock)
• Non-convertible (Common Stock)

When a company admin instructs FES to create a share class, a new Marker is created with an initial supply based on the authorized size of the asset . This share class Marker is administered by a Provenance Blockchain account managed by FES.

First, let’s take a look at a non-convertible Marker:

Asset definition for Figure Common Stock

https://explorer.provenance.io/asset/figure-technologies-inc.cs.stock

Account with admin privileges for Figure Common Stock Marker

https://explorer.provenance.io/accounts/pb1fmm648xf4pp97upx5068cawvdcq05zvk6a0tkf

You can see that the pb1fmm648xf4pp97upx5068cawvdcq05zvk6a0tkf account is frequently executing Withdrawal-type transactions on Provenance Blockchains. These FES-managed transactions represent issuances of new certificate securities to its stakeholders.

Next let’s look at an example of a convertible-type Marker.

Asset definition for Figure Preferred Series A

https://explorer.provenance.io/asset/figure-technologies-inc.psa.stock

Address for admin privileges for the Figure Preferred Series A Marker

https://explorer.provenance.io/accounts/pb1qhqw7ra3hq63uj2ca72afdlwhe6cynhep46new

You may notice something different about the Preferred Marker: the pb1qhqw7ra3hq63uj2ca72afdlwhe6cynhep46new address holds Figure Common Stock coins as an asset! An equivalent amount of common stock required for conversion from the preferred share class is held by this account when the convertible share class is created. This allows common stock to represent the fully diluted market capitalization of the company.

A secondary offering scenario

Now that we’ve established that Markers can represent share classes and Provenance Blockchain accounts can hold digital coins representing private company ownership, what benefit does asset representation on Provenance Blockchain provide for companies that are on the platform?

Private companies may want to perform a secondary transaction to provide liquidity to their employees and investors. Settlement of these funds and exchange of shares on a traditional platform use a third-party middleman, and is expensive to execute. Provenance has a bilateral exchange smart contract which makes this process instantaneous, allowing bilateral settlement with zero counterparty risk at a fraction of the cost. For more information on trading coins and bilateral settlement on Provenance, see this blog post.

The following diagram shows how a stakeholder on FES who has been issued common stock can sell their shares as digital tokens on Provenance Blockchain for a USD digital token on the Figure’s ATS.

Figure has successfully performed multiple secondary offerings using a smart contract and execution engine for real-time bilateral settlement on Provenance Blockchain. Let’s step through the diagram:

• Seller - an existing investor holding common stock. Investor submits a sell order with an amount of common stock held by the ATS smart contract in escrow for settlement. FES handles Provenance Blockchain account-based connect to the ATS for account access of investor digital assets for trading. FES validates specific orders before submission to ATS smart contract, and assigns each trade against specific security issuances for tax reporting.
• Buyer is a Provenance Blockchain account with attributes identifying user them as an accredited investor. They Investor submits an amount of USD digital token with their order directly against the ATS smart contract.
• ATS provides the order book execution engine and administration of the ATS smart contract.

When the ATS detects a matchable bid and ask order, the ATS execution engine executes a match against the ATS smart contract. The smart contract handles sending the escrowed common stock to the Buyer, and the escrowed USD digital token to the Seller . FES watches for these Provenance Blockchain transactions and update the Buyer's and Seller's holdings. By leveraging Provenance Blockchain, FES is able to accomplish real-time settlement for secondary offerings of its digital assets, as well as automatic cap table reconciliation.

In Conclusion

With this brief exploration, we have explored how you can use Provenance Blockchain to manage and track cap table ownership. We have also demonstrated how a secondary offering can be performed using a smart contract for bilateral settlement. By digitizing private company securities on Provenance Blockchain, we reduce the complexity and resulting cost of traditionally complex transactions.

CORY DISSINGER

Cory is a software engineer working on Figure Equity Solutions. His primary focus is on pushing pixels (frontend UI engineering).