Loans
Exploring how loans could be used in contributionism
Organisations may not have the capital available to pay for a contribution that has been provided. Organisations could also have capital available but would still prefer to pay the contributor back in the future. Loans are a commonly used financial structure that could be used for compensating any contribution over a period of time.
Relevant contributions for loans
Contributions that are not relevant for risk adjusted loans would include donations as they are given without an expectation of return and consumption as a consumer in a market economy is exchanging their money for goods and services.
Capital
Under capitalism, capital invested is commonly converted into share ownership. Investors receive benefits such as voting rights, dividends, profit from organisation growth and appreciation, assets claims in liquidation, protection against dilution, legal protections and limited liability. Contributionism advocates for the abolishment of capital based share ownership. Loans are able to achieve near equivalent benefits and outcomes that share ownership provides. Capital investment in contributionism results in permanent ownership over the contribution, temporary governance rights and temporary incentive rights. These temporary governance and incentive rights will last until the loan has been repaid. Investors can still achieve a large return on investment, protect their capital invested and be involved in the governance of an organisation until their investment is repaid.
Labour
People that provide their labour will usually receive a certain amount of income as a financial reward for their contributions. Sometimes an organisation does not have enough capital to pay people a fair market salary. In these situations the organisation could raise capital from investors. Alternatively the workers could decide to accept a loan with the organisation itself. This loan would total the amount of income that can’t be paid to the worker in the short term. The worker would then benefit from the same interest and benefits that a capital investor would have received due to the delay repayment of the loan. Some workers may be happy with this arrangement as they will receive a larger future payment by sacrificing an amount of their income in the short term.
Temporary governance rights
Under contributionism, capital investment does not translate into shares that have perpetual governance rights. Capital invested is converted into a loan and optionally this loan could be given governance rights that enable the lender to be involved in certain governance decisions.
Loans can achieve a very similar outcome as capital based shareholder ownership:
Voting rights - Temporary governance rights can be given to investors so that they can protect their capital investment and have an influence in governance decisions within the organisation until the loan can be repaid.
Asset claims - The loan agreement could include provisions that give the investor priority access to liquidated assets in the event of bankruptcy.
Protection against dilution - The return on investment and interest rate of the loan could be agreed ahead of time and similar to shares that couldn’t be diluted by the organisation.
Legal protections - The legal system would protect the loan agreement. This loan would be enforceable under law.
Limited liability - Investors would not have liability for the actions and finances of the organisation they lend their capital to.
Loans would also have some differences with capital based shared:
Dividends - The investor would usually only receive the agreed return on investment and any interest on the loan that has accumulated until the loan has been repaid. Capital would be rewarded with a fair return on investment instead of returns that could be infinite and excessive. In certain circumstances the investor may be given incentive rights for a capital based investment. For instance, intellectual property might be a reason that an organisation decides to give an investor temporary contribution dividend rights due to the unique value the capital has which can’t be found elsewhere.
Profit from company growth and appreciation - Investors would only receive a return on investment that is fair and reasonable based on the risk of the organisation failing and the length of time it takes until the loan is repaid. If the loan is not repaid on time the investor could benefit from the ongoing interest that accumulates on the debt.
Capital is mostly invested into an organisation to solve a specific problem such as the need to pay for contributors, fixed costs or any other area that requires investment, maintenance or improvement. A lot of the value in the capital is how well it is utilised by labour within the organisation. Risk adjusted loans are a suitable structure for rewarding capital based contributions. The long term value of an organisation is more heavily influenced by how it is operated and maintained by labour contributions. It is the workers that will determine how effectively the capital will be utilised and how effectively they are able to use their time, resources and assets to make a successful organisation.
Organisation financial priorities
The following are some example financial priorities that an organisation will need to handle:
Revenue share agreements - Income that comes in that is attached to a revenue share agreement should be respected and paid.
Capital loans - Investments into the organisation that have been converted into a capital based loan need to be repaid once they are due. Many loans could have a delayed start date for the first repayments. In these situations the loan would not be the immediate priority for the organisation until the repayment start date is approaching.
Worker unpaid income loans - A worker may end up receiving less than their agreed rate due to a weaker revenue performance and a lack of capital in the organisation. In these events the organisation has the responsibility to repay any unpaid income to the worker once the funds become available.
Contribution dividends - An organisation is responsible for rewarding historical contributions that have helped the organisation achieve the success it has achieved so far. Contribution dividends are how surplus income can be used to reward these historical contribution efforts. Any unpaid loans that are due for repayment would be higher priority than contribution dividends.
Bonuses - A bonus helps with rewarding current workers in an organisation. Bonuses can be a part of the income a worker receives to pay their agreed rate. Bonuses could increase beyond the market rates of each role once the organisation becomes more profitable.
Loan parameters
There are a large number of parameters and variations in how a loan can be created depending on the requirements and preferences of the two parties that make the agreement. The following are some example parameters that could be involved when setting up a new loan.
Lender personal details
Personal details about the lender. An organisation may need to do background checks on potential investors if they are going to give them influence in the organisation in the form of temporary governance rights.
Risk factors
Both parties may want to define the risks that are involved in the organisation that might prevent the loan from being paid. These factors could help with determining a more accurate and fair return on investment. Organisations might be held accountable for ensuring they disclose all of the known risks they are aware of that might prevent or delay the loan from being repaid.
Financial history
Historical financials and any credit history about the organisation should be shared and disclosed so that both parties are aware of what the organisation's current financial situation is before any loan parameters can be agreed and finalised.
Loan purpose
For capital investments the lender might want to know how the investment will be used and for that to be agreed beforehand. For some organisations this added clarity could translate into agreements where the lender doesn’t require temporary governance rights in the organisation as the loan itself has specified how the investment can be utilised.
Agreed return on investment
The loan could state what the expected return of investment is by a specified date. Riskier loans that get repaid after a longer period of time could result in a return on investment that is many multiples of the original investment. Organisations may also add provisions that give a different return on investment amount depending on how long it takes to repay the loan.
Interest
Interest could be added onto loans based on the current cost of borrowing more broadly or using a fixed rate. Loan interest could be an additional part of the loan or it could be used as an alternative to an agreed return on investment amount.
Repayment dates & duration
The loan could define the start date for when the organisation must start repaying the loan and how many instalments will be used to complete the repayment. Alternatively there might not be a fixed repayment start date and duration and the organisation may be able to decide when they want to start repaying it. Delaying the loan repayment would just mean that the organisation would likely be responsible for paying a larger amount through interest or a higher agreed return on investment that is based on how long it takes the organisation to repay the investor.
Default & late payment penalties
Lenders that require repayments by certain timelines may decide to include penalties for when an organisation defaults on the loan or makes late payments. Example penalties could be one off fees or added interest for everyday that the late payment hasn’t been made.
Governance rights
Lenders could be given temporary governance rights in the organisation so that they can protect their interests until the loan has been repaid. The decisions the investor is able to influence and how much voting power they have should be made clear in the loan agreement.
Exchange rights
Some organisations might only want specific people to invest and have governance rights in the organisation. Exchange rights could define the conditions in which a lender is able to sell some or all of their loan to another person and what this would mean for any existing governance rights. Some organisations may want the governance rights to lapse if the loan is exchanged. The loan's incentive rights would never lapse as this is the financial agreement that must be honoured.
Loan covenants
Any other specific conditions or clauses included in the loan agreement to protect the lender or that might be needed by the organisation.
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