Political Accountability from a Perspective of a Venture Capitalist

There is a great deal of chatter about the recently concluded British elections in which a posh sounding man with eyes suspiciously close together just trumped another man who obviously economically illiterate is missing a chin. During this particular circus show it’s not a leader people were picking but rather choosing which gang led by these two clowns will run the place.

It’s deeply troubling to think that the fate of Englishmen is being decided by a band of thieves whose IQ is decidedly smaller than their waistbands. And before I get hate-mail from either side let me say categorically that I consider that statement true irrespective of which of the current buffoons took the reigning spot.

Dumb and Dumber

It got me to thinking about running a more equitable, transparent and consequence driven election process. In order to do so I’m going to take some lessons learned in venture capital and see what a new and wonderful world we could all create if we could apply them to politics.

Think about this: what if voting for candidates and political parties was more like voting for a company to prosper?

If your candidate and party got in then your life should be better for it, much in the same way when we vote for a company by investing into it. If said company subsequently does well then our lives are enriched by our investment into that company.

It can all be very simple, unlike this obscure nonsense we have right now.

In venture capital, as investors we’re often taking positions in very early stage companies where risks to our capital are high. We know that statistically some of these companies won’t make it out alive – such is the nature of the business.

Since things don’t always work out as we would wish we must act to protect ourselves and our capital. One way of doing this is via anti dilution clauses. One in particular that is commonly used by VCs is called a liquidation preference.

I think this description is a good one:

A term used in venture capital contracts to specify which investors get paid first and how much they get paid in the event of a liquidation event such as the sale of the company.

Liquidation preference helps protect venture capitalists from losing money by making sure they get their initial investments back before other parties. If the company is sold at a profit, liquidation preference can also help them be first in line to claim part of the profits. Venture capitalists are usually repaid before holders of common stock and before the company’s original owners and employees.

Entrepreneurs find it easier to raise money if they are prepared to provide assurances that will go a long way to covering investors potential losses. Eliminating downside for investors while allowing them participation in the upside is a smart thing to do.

Essentially, investors have the right to get paid first, ahead of founders, and management, and even ahead of preference shareholders. For example, if a company sells for a price lower than the price the investor paid, then the proceeds of the sale on a 1x liquidation preference will go towards those investors until they’re made whole.

Now, let’s imagine what this would look like in the political circus of elections.

Voters (shareholders/investors) would vote (invest) for their party (company) and if that party wins then it’s game on.

The end of any political term in office is deemed to be the liquidation event. In other words at this point the score card is read. All the promises that have been made need to be kept. If at the end of the term they have not kept up to their promises then voters (shareholders) get to keep all of their taxes paid (investments made) and are made whole on their “investments”.

I’ll go one step further and say that if there exists a shortfall (and looking at the last few 100 years I think it’s safe to say there would be some enormous shortfalls) that such shortfall is made up by the individuals in the party, all jointly and severally liable. Sounds fair to me!

I’ll be happy to draft all the agreements for this new system and I won’t charge a dime for it. Consider it humanitarian work.

– Chris

“There’s another way we’re getting behind business – by sorting out the banks. Taxpayers bailed you out. Now it’s time for you to repay the favor and start lending to Britain’s small businesses.” – David Cameron


This Post Has One Comment

  1. Ron

    I think the winning political arrangement is what the lobbyist (large contributors) do for the candidate and of course for their corporations, especially financial firms, or other special interests before the election. Many times they play both sides to insure success. From what I can determine there is seldom a shortfall for these groups, just us individuals, unless of course you are a Zombie and then you continue to get your handout to keep you controlled and passive. If you are not one of these groups you are screwed and you’ll never get your money back. Great system and it works in every election no matter who is elected.

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