Airbnb wants its equity to work more like a token
A case study on the most appropriate compensation and incentive schemes for digitally native multi-stakeholder organizations
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While much has been written about some tokens’ likeness to securities, it’s worth noting that some companies are also pushing for their securities act more like tokens. Airbnb is one example of this phenomenon.
In its recently released S-1, Airbnb walks through a Directed Share Program it has set up for its hosts. Hosts will be able to purchase some Airbnb stock (ABNB) at the IPO price with no commission charged directly prior to the stock’s debut. This program, unfortunately, comes with some significant limitations. There is a fixed amount of stock available to hosts, and only certain hosts - those who have hosted in the past two years, are U.S. residents, and are not Airbnb employees - can participate.
The Directed Stock Program is a watered down version of Airbnb’s earlier plans to reward its hosts with equity. In 2018, the company penned a letter to the SEC proposing a series of adjustments to Rule 701. The changes laid out would have allowed Airbnb to compensate its hosts with Airbnb equity without undergoing onerous reporting requirements. In the request, the company noted that these changes “would further align incentives between such companies and their sharing economy participants to the benefit of both.” [1] Unfortunately, these changes were not made.
So while Airbnb’s original desire was to *compensate* hosts with equity for their contributions to their platform, securities laws stopped them short. The company could only allow hosts to *purchase* equity at the time of the IPO.
CEO Brian Chesky has been one of the business world’s most vocal proponents of stakeholder capitalism. This is not charity on Airbnb’s part. Giving hosts an equity stake in the business increases their opportunity cost of delisting or moving to another platform. Further, becoming a shareholder further incentivizes good host behavior and signing on friends and family to the platform.
Times have changed since Milton Friedman wrote his op-ed on shareholder capitalism, an ethos which stands in stark contrast to the stakeholder-focused alternative, in 1970. The reality of businesses on the Internet today is that they are at core multi-stakeholder. Their most valuable assets no longer sit as a desk or in inventory - they’re owned by independent third parties. They are humans with free will, who make the decision whether or not to contribute to your platform. Compensating network stakeholders (and turning them into shareholders) is actually highly aligned with long term profit maximization.
Imagine that rather than merely granting hosts the *opportunity to purchase* IPO stock, hosts were compensated with some ownership of the Airbnb platform in return for their participation. This would include all hosts globally, not just in the U.S. Imagine that Airbnb hosts with sustained five-star ratings received a proportionally larger stake, and that the stake increased with the hosts’ tenure. And imagine that with that ownership stake, hosts were able to weigh in on the platform decisions by which they would be most impacted.
The compensation mechanism that Airbnb wanted to put in place kind of looks like the incentive structures programmed into many decentralized networks. These networks, built on blockchain infrastructure, take Web2’s sharing economy model a step further. The corporate entity either takes purposeful and measured steps back from day-to-day maintenance and governance over time, or is removed from the equation entirely. Network stakeholders - the suppliers of capital, storage, computing power, or some other core resources - are compensated with some token in exchange for their services. Often these tokens grant the stakeholders governance power over the protocol.
There has been considerable experimentation in these decentralized network incentive schemes, and this experimentation has accelerated rapidly over the past few months. It is early, and best practices are far off, yet the common theme here is that these mechanisms focus on incentivizing and rewarding stakeholder behavior.
If Airbnb had it their way, their stakeholder compensation schemes would look a lot like the incentives programmed into these decentralized networks. On that note, it’s interesting that their S-1 has called out “[o]ur future success will also depend on our ability to adapt to emerging technologies such as tokenization, cryptocurrencies…. distributed ledger and blockchain technologies”. [2]
While much has been written about many tokens’ problematic likeness to securities, it’s worth noting that some of today’s leading technology companies are also pushing to make their securities look more like tokens. While the development of securities law is unknown, what is clear is the demand for new means by which to distribute value to network participants over the Internet. And decentralized networks are very good at that.
[1] Airbnb Letter to the SEC. Airbnb.
[2] Airbnb S-1.
I am not a lawyer or legal expert. If I have made any misstatements on securities law in the text above I welcome clarification.
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