Manifesto



Natural Finance Purpose and Rationale


Introductory axioms

Possible economic gains from non profit corporations
  • Lend to it.
  • Share redemptions and Capital disbursements
  • Salaries
  • Reselling economic units part of membership (Co-op, cohousing/condo, timeshare
  • non-economic advantages: power to hire and select location, status


Economic principles (semi-controversial)
  • Interest rates are variable, and manipulated by governments, because the value of money is variable.
  • Inflation has been lower than technological growth over the last 20 years such that the value of money has remained the same throughout the period.
  • Investors should not value risk. There is no need for options or stock purchases from an armslength investor if a loan is possible.  Risk appetite is a delusion.

Investment vs Savings
  • savings is money saved up for a flexible purpose
  • An investment is savings tied up for a purpose.
  • The liquidity of an investment is a measure of the possibility to cash out/sell the investment and the relative penalties for doing so early.
  • Investments that mature soon are inherently more liquid than those that mature far away
  • Savings do not need to offer a return in order for people to save. Investments do.
  • Savers can obtain investment returns as long as they stick to short term maturing investments.
  • Investments that do not offer a liquid cash out option, still offer title to investment to be transferable or posted as collateral for a cash loan.

Artificial attractiveness of stocks
 Investors choose stocks over loans/bonds because :
  • Tax preferential returns (capital gains/dividends vs ordinary interest income)
  • Institutional delusions and lies inflate expected returns
  • Most companies eventually go bankrupt (study dow 100-140 years ago. Other national stock markets)
  • Management is in a position to make false promises to shareholder investors.
  • The capitalist investors perspective is to be paid a fair return for his risk of capital. Its the managers effort that deserves unlimited reward.
  • Capitalist interests are best served by lending in a project that offers general viability in being able to repay his loan, because ensuring management responsibility is beyond the effort of his capital.


Natural Finance introductory axioms

Natural Interest rate
Investors require compensation in order to tie up capital in an investment. Factors that affect the interest/compensation required of a loan are:
  • Liquidity (ease to resell/cash out investment)
  • Expected actual repayments of the loan

A natural interest rate is the minimum one where required investment would be made for a project. It could be called the fair interest rate. While I will propose fixed rate threshold concepts, its important to understand the features of a loan that lower its natural interest rate:
  • Quicker expected repayment is naturally more attractive (longer time is necessarily more uncertain, and uncertainty of opportunity)
  • Tangible security/collateral
  • Other lenders/financiers exist and want to lend under some circumstances
  • The existing debt level and payment obligations are low.
  • Borrower surplus (EBIT) certainty is high
  • Laddering of repayments is more attractive than a single end payment.

From a borrower's perspective:
  • fixed payment obligations at specific dates is naturally less attractive
  • if the project is distressed, exponential compound interest is less attractive, and risks causing its collapse.
  • As project success materializes, the opportunity to refinance at lower rates reflecting lower risks to success.


Queued capped soft loan system (QCSL)
A soft loan is one where repayment is based on ability to pay. Royalties, and contractual tithes on gross margins and surpluses, and specific revenue streams are set aside to repay the loan(s). Circumstances (when less expensive loans replace existing expensive ones) where tithes on future loans are set aside to repay earlier loans are also favoured. The borrower may repay the loan faster than he is obligated to.
A series of queued soft loans is one where the lenders are arranged by date of loan, and the first lenders in the queue are repaid ahead of the rest. The benefit to the lender is that no further borrowing by the project can negatively affect the borrowers ability to repay the specific loan the lender made.
A capped loan is one where a maximum repayment amount exists. 200% is a natural cap (100% total  interest - not annual interest) for capitalists.

No Franie, this is not a pyramid scheme
New investors who pay into the queue for the purpose of displacing existing investors never have their funds touched by the enterprise.  New projects and operations are funded through separate bidding processes than secondary investor repurchases.

Open Live corporate financials
An Open corporation is one that engages a comptroller/auditor to represent all of its stakeholders, and enables trust in the corporation by outsiders, by ensuring all of its contractual obligations are met, and so encourages financial creativity, and thus participation, by removing concerns that corporate manipulation might allow it to escape its promises.
Live financials  are the continuous update of key financial health indicators of the company. Key financial health indicators are cash on hand, all financial measures to which tithes are channeled to pay loans, average interest rate, expected date all loans repaid, and individual investor tracking expected repayment of their loans.


Case study #1: buying a desert island to settle it
Settling a private island will cost $500K to buy it, and $500K to develop it for its settler group. If the project has no investment, it is extremely risky to lend it $10K. If the project already has $990K gathered, it is substantially less risky. Many ideas are great if you have the funding, and stupid if you don't. Such a project might have a fair loan interest rate of 30% for the first 10K, and 12% for the last 10K

A QCSL allows the public to buy out existing lenders in one of 2 ways. 1. Directly buy the loan from the lender either through the company exchange system, or directly, at agreed exchange price. 2. Lend to the company at below its average QCSL interest rate, so that proceeds are used to discharge first loan in queue. A minimum increment below average interest rate is set by the company (should typically be .05%, and should not be more than .50%-1%). The average rate less the increment forms the natural bid rate explained below

Traditional Bond auction
Governments auction bonds regularly. A successful auction occurs when the government receives more bids than it needs, and it selects the best ones to fund its offering.

QCSL auction
The private island group purchase needs at least 500K to start operations, and another 500K in commitments soon after. The auction process uses open bids, and has the added feature that the lowest bids accepted will be first in queue to be repaid. The auction has 2 stages. 1. Date bids are binding. 2. Date payments are due.

Bids may be retracted until the binding date(1). Bids may be lowered (to gain advantage of queue priority) until due date(2). 5 business days after binding date(1), a reserve rate will be set by corporation. Payments made before due date start to accrue interest, but do not offer certainty as to queue position. Only bidders who bid below the reserve rate, can pay prior to due date. Bidders who are above the reserve rate may be displaced/rejected at any time before due date(2), typically because someone else made a better bid.

QCSL deferred auctions and bids
A startup company needs operating cash until it is ready to market its offerings. Smaller subsequent (monthly/weekly) auctions are used for that purpose. It is normal for bids for future funding to be for a higher interest rate because those accepted bids will all be placed behind the queue of existing investors, and if they wished to bid below the average company rate, they could do so and gain queue access ahead of all next auction members.

Future auctions have the binding and due dates above. With the following difference. A binding date can be set at any time by the company, earlier than originally expected. When binding date is surprise dictated by company, reserve rate is set at the maximum bid, and trapped bidders may change their bid to the maximum in exchange for the privilege to be displaced if other members of public out bid them.

Terms: natural interest rate part 2
QCSL Natural interest rate is the average rate currently prescribed on all QCSL loans
QCSL effective rate can be lower than the natural rate, if some of the loans have reached their cap.
QCSL natural bid rate is the natural rate less a minimum increment. If the effective rate is higher than this number, then the company is legally bound to accept all bids at this rate and distribute them to the QCSL investor pool in their entirety.
When the QCSL effective rate is less than the natural bid rate then the QCSL binding bid rate is the average of the effective rate and the natural bid rate.
QCSL binding bid rate legally obligates the company to accept bids at that rate for investor distribution.


Natural bid rate generic increment table
the minimum increment below the natural rate forms the Natural bid rate
QCSL rates above 20% have increment level of 0.5%
QCSL rates above 14% have increment level of 0.25%
QCSL rates above 11% have increment level of 0.15%
QCSL rates above 9% have increment level of 0.1%
QCSL rates above 5% have increment level of 0.05%
QCSL rates below 5% have increment level of 0.01%

Comprehensive example: If all investors invested $1000 each at 22% prescribed rate, while 50% of the QCSL loans have reached their cap value of $2000, then the natural bid rate is 21.5%. The effective rate is 11%, and the binding bid rate is 16.25% ((21.5+11)/2)

Programmed bids and Proceeds disbursements
Loans are offered in $1000 lots to allow investors to ladder rates and spread expected disbursements. An odd lot is any amount under $1000. Lenders and bidders can leave disbursement instructions programmed either with the company, or on a private agent's computer (if non-trusting). The default instructions are to receive cash in full, but common alternatives are to reinvest at the average rate (benefit is investing at a rate slightly above the automatically accepted rate), or offer an ultimatum bid on the companies next auction (typically average rate + 0.5%). Another programmed direction can be for an investor to forgo repayment and stay at the head of the repayment queue for security reasons, if the rate on his loan is below the company's natural (average) rate.  Investors may offer differing directions for full and odd lots.

Cooperatives and Non-profits part2
A cooperative is for the benefit of its members. These can be producers (employees) or consumers or both. A non profit or pro social corporation, still needs incentives for employees. Customers can generally be incentivised by low prices or high value. High value (low prices) benefits society by creating more demand for organization's products, or letting society and consumers have more left over money to spend on other pursuits. Most mandates other than the maximization of shareholder wealth are a pro social mandate, and so any non-profit organization is prosociety, or should be understood for its pro society virtues.

Non profit mandates should fit with social profit mandates, and even qualify as a charity when they do. A simple social profit mandate is to have common shares (can be class B non voting) owned by a charity or government. It's sensible for municipalities to own utilities. It is pro community to do so, because any profits reduce tax requirements, and eliminates the evils to the community that would be inflicted by monopolies or cartels.

Natural interest rate for forced savings
Forced savings is holding your money in riskless cash until one of 3 events occurs: 1. It is purposed for an investment, at which time the investor with the forced savings begins to obtain agreed investment returns, or 2. It is returned at the holder's discretion, typically because the holder has obtained better terms for the investment. Or 3. The expiration date for the forced savings agreement expires, and the funds are released back to the investor

The natural interest rate for forced savings is set arbitrarily at 5%. A risky planned purposed investment is part of a forced savings agreement, but the holding period is a riskless investment. From the saver's perspective it is without control over its length, and conversion to investment.

Subordinate Tranches (Executive/Management/Labour/Customers/Society)
The primary goal of a corporation (profit or non profit) is (should be) to pay off its investors. A QCSL financed corporation is generally done so to keep its ownership within the founders vision (typically founders but maybe customers or society). The founders would typically be executive management.

Deferred compensation systems can also be implemented as QCSL. This aligns employee motivation far more closely with continued long term health of the organization and society, than stock, or especially option, compensation. The value of the compensation depends on sustained surpluses. Employee subordinate tranches are QCSL loans who have a lower payment priority than the investor QCSL tranche. Section below on x-prizes discusses covenants that can allow some payments to subordinate tranches before the prime investor tranche is paid in full

Customer and social tranches have no necessity. Customers can be compensated through lower prices. However, customers can be your best salespeople. Philosophical indoctrination and motivated evangelism can be accomplished through a tithe on surpluses, and especially if it confers some decision authority or input in the organization. Social tranches can be issued for political and PR purposes, for charitable contributions, tax regulation compliance, or as exchange for use of community property. These alternate tranches can serve to lower funding costs for the organization, or can help management stave off distress covenants that allow QCSL investors to dispossess its authority.  They are typically the last tranche equivalent to common shares (paid after other tranches are paid).

Different rules for Employee subordinate tranches (EQCSL)
  • Employees are paid a mix of cash and deferred compensation.
  • Deferred compensation is in the form of QCSL benefits. The EQCSL
  • The prescribed interest rate is not bid on, but set mathematically as the average between the natural (average) investor QCSL rate, and the natural forced savings rate of 5%. Example: if the QCSL natural rate for the company is 20%, then the EQCSL interest rate is [(20+5)/2] 12.5%
  • If the QCSL natural rate is below 5%, then the EQCSL rate is the QCSL natural rate.
  • The capped return on EQCSL is 300%. Compared to 200% for investor QCSL
  • Each pay period, the queue order for each contribution is set as lowest contribution receives highest priority. Ties are settled by giving highest priority to least senior employee and/or alternating between alphabetical and reverse alphabetical order.


Distress covenants
Any organizational financing is subject to adding covenants that outline conditions that all of the QCSL financers can replace management. Typical basis for covenants would be x% of loans at cap rate (50%), and y years until expected repayment, and high debt to assets ratio. The simplest definition of distress is being unable to finance current and future projects.

In a hopelessly distressed situation, there needs to be a way to push management out.  A hoplelessly distressed situation occurs when QCSL balance is so high at such a high rate, that there appears to be little hope the enterprise could ever earn enough to pay it all.  The short version of the “bankruptcy” solution is creditors (including employees) by unanimous consent of a formula (expeted enterprise cashflow discounted at rate likely slightly below distressed high natural rate) to calculate the NPV of each loan, and then voluntarily consent convert any part of their QCSL NPV value and move it to a new last priority queue before x prize management bonus.  There it grows at 5% with a cap double the original cap ($4000 for investor $1000 original loan).  Management of the company may be replaced under the reorganization, and all of his deferred salary is transferred by force to the new tranche.  The directorship transfers to those who have converted their NPV loan values proportional to those contribution amounts.  

However, balancing the fairness of distress takeover conditions is complex and not completely necessary.  The key is to pay executives well below market cash salaries, such that when they see the impossibility of ever cashing in their deferred compensation, they choose to pursue other employment.  If the enterprise has any viability for investors at the head of the queue (and it normally would), then appointment of an executive at cash salary (or even voluntary exectutive from head of investor queue) and elimination of the X prize, can also provide some chaotic continuity.

Dynamics
A company doing well has its borrowing costs naturally fall, as it becomes more attractive to other investors, and existing investors are likely to want to reinvest when paid off.
A company that is not improving continues to have unlimited access to capital without compromising its existing investors.
A declining company can benefit from the sunk costs of investors to continue operational funding at likely rising rates.
A company in distress moves to reduce its loan burden by converting as much of it as possible into new directorship entitlements.

Cooperative Financial Comptrolling Corporation (CFC)
A credit union is cooperative banking for the benefit of its members. Micro lending is matching multiple small lenders to small borrowers. A CFC can provide all of the services of a credit union, but replace or supplement loan officers with “relationship banking” comptrollers for funding organizations, thus providing matching service from small lenders to large borrowers. In addition to loan screening, the comptroller negotiates corporate covenants for theoretical stakeholders and performs necessary monitoring activities.
The borrower's duties typically involve keeping all revenue accounts with banking institution affiliated with, and monitored by, CFC, provide constant free access to all facilities, and comply with records requests.
The comptroller may offer (and prefer it be accepted) the borrower accounting and auditing services, if qualified, but no other relationship with borrower is permitted. All comptroller duties are paid for by borrower at rates prescribed at time of loan. The comptroller's duty is to enforce the covenants protecting the lenders, and other promiseholders, and to ensure accurate financial health and activity of the borrower.

The CFC may naturally manage QCSL auction and bidding system, and its affiliated bank/finance company may provide high backstop bids for future periods to assist borrower planning.

The comptroller and CFC are encouraged to participate in lending to the borrower from their own funds.

CFC contribution streams
  • membership fees (if cooperative of investors and/or borrowers)
  • comptroller services
  • comptroller issue escalation
  • fees on trades among QCSL lenders
  • interest on member account balances
  • Legal enforcement fees
  • Managing borrower/member subordinate and sub-project QCSLs

CFC cost centers
  • bidding and trading software
  • comptroller training
  • member relations

Affiliated Banking services
  • Backstop bids for fixed costs/future projects
  • Cash account transactions/security/convenience.

Separation of banking and comptroller services
A CFC does not need to be a banking institution. An association with a bank is not even strictly necessary. A financial/investment entity can provide backstop bids, and the transaction monitoring function can either be accomplished by somewhat simplified trust banking procedures, by a formal trust, or by a trust equivalent the CFC is the legal corporation responsible for revenue and expenses, and the operating enterprise a division of the CFC. This latter arrangement, simply formalizes an independent treasury that does not answer to a CEO.  The key to ensuring maximum trust in the enterprise's promises.

Comptroller function
The only corruption to the rights of investors and other tithe holders dependent on a borrower's revenue streams, is the borrower hiding revenue or diverting what should be organization revenue to outside entities for his personal benefit. Deferred income systems for employees, suppliers, and society can help uncover such corruption, because these stakeholders have vested interest in revenue being properly accounted, and the opportunity to scrutinize the enterprise closely.  Any cash revenue must have sophisticated auditing controls (smart networked cash registers).

The other danger to investor realization of deserved remuneration is the same as any corporate finance structure: if management loses hope in the enterprise, and does too little to progress the enterprise. Deferred compensation system with a low cash salary helps ensure that executives will leave if they have better opportunities. An executive cash salary that is too low or too high can hurt investors.

Success Prizes: X Prize
A Prize for paying off all stakeholder obligations given to executive in charge at the time of accomplishment is an important incentive for executives to fulfil the enterprise's mandates. If a social mandate is part of the corporate charter then the size of the prize should be modest. $4 Million would be a sufficient offer for most people to accept as a success prize prior to the funding of their idea. If society is entitled to most of the remaining surpluses, then the prize is pro social. The reward for fulfilling all financial promises is arbitrarily named the Y prize, or management X prize. The name X prize originates from a sponsored contest to develop private space travel. The Y prize is one of an arsenal of potential natural financing incentives called X prizes. All X prizes never accrue interest no matter how long it takes to achieve its associated goal, but are/should be consistent with a non-profit mandate. The Y prize is subordinate to all other financial obligations (except common shares). The Y prize is paid from future surpluses. The Y prize does not necessarily imply a non profit mandate, or social ownership. Common shareholders can appreciate the motivational advantage of a Y prize.

Success (X) prizes are appropriate for other endeavours. Speculative research can deserve a success prize upon achievement of the research goal. Amount of a success prize, and its payment rank, and funding need to be established before any rights behind it are established. Any project within an enterprise can have a success prize to motivate the project team. Such success prizes are typically just bonus deferred compensation, but can also have some cash component.

Sub-Projects
An enterprise is made up of multiple projects. Some can naturally be profit centres, for example a cohousing development wanting to pool funds together for farming equipment that is mostly needed for the use of its members, but could be rented to neighbours. Even profit centre projects have separate cost centre and revenue centre operations. Rental operations, Advertising, accounting/admin, acqusition and maintenance of the machines.

Sub projects will require an “executive” and funding. The funding part makes sense to come from the parent enterprise if the parent enterprise will receive most of its benefits. The parent will generally have better access to funding (cheaper rates). Subprojects are discussed further after an example enterprise is outlined.  The official difference between a sub-project and an enterprise is that the sub-project has all liabilities covered by its owning enterprise.


Assets, distress, enterprise value
Traditional finance has a more complex model, but I postulate that  natural economic feasibility of an asset always exists if the sum of surpluses and disposal/terminal value of the asset is 2 times the cost of the asset. Short term, non depreciable or very safe assets can have economic feasibility as well, as calculated by traditional finance models using discount rates close to risk-free rates.

When each individual asset is secured by loans tied to it, then those loans are less risky, and can be made at a lower interest rate. To enable a QCSL to give security to the lenders, and to handle distressed or other asset sales, secured QCSL pools can have their principal secured like traditional loan pools, while their interest returns are queued.

Intrinsic Natural value, vs Market value
Market value is the price goods are bought and sold. For most consumer products, the resale value once out of a store is substantially less. One measure of Intrinsic value is the resale or ebay value. Accounting standards attempt to estimate intrinsic value of assets by deducting depreciation simplistically over its life. The intrinsic value of land or limited resources tends to increase over time, but the connection to market value is not absolute. While the fashion value of a location and jurisdiction for land is transient and ephemeral, the fashion value is intrinsic as long as it lasts. Some assets can have their intrinsic value sharply increased by transformation and labour. 1 ton of steel has higher intrinsic value by turning it into a working car, and raw land has its intrinsic value increased by building power generation, drilling a well, or transforming part into a farm. The intrinsic value of an asset is its repossession value to lenders

Math properties of Investor QCSLs
Generic accounting standards use cost to approximate both market value and intrinsic value.
99.9%+ of investors would consider that a perfectly safe intrinsic value of land is at least 50% of its market value cost.
Canadian and international banks consider a 75% loan to value to merit their best interest rate offers, and not require payment insurance. The public's ability to invest in such intruments generally costs them 200 basis points in management fees. The risk profile is typically the same as a government bond.
For a startup company, the risk profile to lenders of going up to 90% loan to value (for real estate) is relatively minimal in its impact on demanded yield compared to the costs of funding unsecured debt for 15% (90-75) of the value. Banking standards still require no payment insurance, and rates are 50 to 100 basis points higher than 75% LTV.
Tools and machines have depreciating intrinsic value based on whether they are new or used (they become used after you buy them new), and whether recommended maintenance, repairs, and theft security measures are performed.
By keeping initial intrinsic value conservatively low, and depreciation formula aggressively fast, then intrinsic value or expected liquidation value can be maintained conservatively throughout the life of the asset.

Compound vs Simple interest
Compound interest is a traditional tool for bankruptcy and distress management. Natural Finance uses simple interest throughout because:
  • Marketing benefits of higher coupon print
  • Higher rate when paid early.
  • Lower effective rate when paid late provides more runaway debt protection.
  • Overall math and debt cancellation procedures are simpler.
  • As seen in next section, some payments (depreciation related) directly reduce principal.


Investor QCSL categories: Secured vs unsecured
Investor QCSLs can be separated into 2 categories for the mutual benefit of investors and borrowers.
UQCSL – unsecured has the first priority of payment. It receives all revenues less an operational reserve meant to cover ongoing expenses.
SQCSL – secured have many similarities to traditional secured loans in that they have mandated scheduled repayment amounts. Each loan is secured by a specific asset. The intrinsic value  of an asset is a conservative estimate of the asset's liquidation value and its depreciation profile (expected annual depreciation of liquidation value) as set with the help of the comptroller. The aim of the comptroller is to achieve a credit worthiness of the asset backed loan similar to the current credit worthiness of the SQCSL pool. Secured loans are queued in the order made for the purposes of order paid from general surpluses, however, each asset has its own queue, with its own natural rate, and payment terms, even if the target natural rate for each is identical.

The mandatory payment terms (1st payment stream) for each asset backed loan queue are designed to keep the loan balance at its asset's liquidation value. Each loan in an asset class (not in queue order) is paid, each period, the asset backed queue's natural interest rate (or 10% if it's above 10%) (deducted from interest on the loan) + the asset's depreciation for the period – scheduled maintenance contribution to liquidation value (deducted from principal on the loan). These payments are funded through new UQCSLs, or if the company is under distress paid with UQCSL credits issued at the cap rate (30%), if it is unable to get new funding. In a 2nd payment stream, each secured queue is also further paid down through a tithe on profit contributions closest to that asset. Tithe based payments are paid in queue order. All secured QCSLs join the UQCSL (in last queue position) if the asset is sold or destroyed with any underpaid loan balances.

Analysis
The natural interest rate of an asset is the average of all current accepted bids and resales. Because each investor is paid the natural rate instead of their bid rate, even if the total pool balance remains equal to the backed assets liquidation value as a result of the 1st payment stream, lower than average bidders at the head of the queue have their loans paid down slightly, while high bidders have their loans accumulate slightly.
If the asset seller agrees to take part in financing (20% of intrinsic value) the asset at an agreed liquidation value and depreciation schedule it adds critical market based credibility to the price paid, and liquidation value. This credibility for other investors is especially enhanced if the seller agrees to a position at the back of the queue.
The secured position of investors is in queued order. So even if the assessed liquidation value is inaccurate, those at the head of the queue are safe. Since expected interest rates are lower for secured debt, it is to the enterprise's advantage to maximize the secured loan by attempting to secure the asset for more than its intrinsic value. Extrinsic market secured value allows the enterprise and investors willing to to take moderate risk to take advantage of the opportunity. A $100K purchase cost asset could have an intrinsic value of 80% of its cost, but an arguable market value of 100% its cost. If the average intrinsic bid (first 80k) is for 8%, and the average bid on the last 20% of “extrinsic” value is 12%, then the intrinsic natural rate is 8% and the extrinsic natural rate is (6.4+2.4) 8.8%. The 1st payment stream uses the instrinsic natural rate for periodic payments to all queue holders. Organic pay downs (2nd stream) of the queue move all queue-holders forward. New investors to the queue may choose to either buy in to the intrinsic or extrinsic queues (through appropriate natural bid rates). A new investor buying into the intrinsic queue gets placed at the 80% percentile in the queue. For an investor at the 81% percentile in the queue, he would move forward into the 80th percentile if either a 2nd stream organic paydown, or an extrinsic buy in of $1000 is made. Subsequent intrinsic buy ins would move him forward additionally.

Asset Protection/insurance
Protecting assets from damage and theft is key in being able to fund loans on those assets at low rates. An alternative to expensive full replacement value insurance is to have other stakeholders liable for self-interested protection from damage and theft, and to focus on giving asset backed lenders business continuity. The likelihood that a car is stolen is under 1% per year (in USA). Car theft insurance is priced at 3-5% per year. The likelihood of a collision is 1 per 500k miles driven, 3% per year for average driver. Guestimating damage per collision, 2% of car value at risk per year due to collision. Collision insurance rates likely priced at 4-6% per year. A risk of 300-400 basis points on the assets backing a loan, cost 700-1100 basis points to insure externally.

Asset Operator incentives to not lose or break the asset is essential to having lenders accept some risk for such an event. Success prizes for the asset outliving its depreciation schedule, and operator ownership of 20% of the asset, achieved through deferred compensation contributions if necessary. Insurance for liquidation value can be optional, and an individual investor decision. Claims can be paid directly to insured investors, and asset replacements bought with new loans. An advantage of this insurance arrangement is that perverse insurance motives (destroy property for claim benefits) are avoided: Management still owes loan amounts after loss of uninsured asset, and so cannot profit from asset destruction.

Natural Financed Resort example

Comprehensive Example
A resort is to be opened in 2 years. It is expected to earn an average of $100K in surpluses per year, and costs $1M to develop.
Development costs:
500k land, well drilling, building foundations.
200k wind power generation and energy storage. This will generate $40k/year in power, of which $20k will be sold to neighbour utility grid during low season. $100k in parts replacements are due every 20 years.
100k finishing (floors, walls, plumbing), landscaping, kitchen heavy equipment. 10 year depreciation
50k misc entertainment and guest services equipment (linens cutlery), furniture. Will require $5k per year in replacements
150k in labour

Operations projections
500k revenues
200k in external expenses (food, drink, energy, advertising)
200k in labour

Analysis
800K is being spent on land and fixtures. 500K (land) keeps its intrinsic value for nearly all buyers. $100k (finishings) keeps most of its value, but it depreciates over time, and its value is based on a buyer wanting to keep a resort business and having the same aesthetic tastes as the borrower.
$200k (power) is a profit centre that has low operational risk, and low operational effort. It can allow a high intrinsic value to investors. This profit centre can be separated from the resort land fixtures by giving it “right of possession” to its own space on the land so that this profit centre can be sold independently from the resort or the land.
Without changing the whole 800K in land and fixtures, a 50K right of possession for the power centre makes power costs 250K and land costs 450K.
The 50K in sundries would tend to be “thrown in” with a resort sale, but has very low intrinsic value.
150K in labour is the expected cash value of the labour. The employees would agree to 100k cash and 75k deferred loans, or 50k cash and 200k in deferred loans. From the lending investors perspectives, all savings in cash are welcome, even if it leads to higher expenses for the enterprise.

Back of the envelope calculations show that if the investor were 1 person:
The yield per year can be over 11% (100/900).
If the capped payout of 1800K is reached in 18 years, then the very last bond in queue would have received an ROI of about 5%/year. If it were a single investor, he would actually have done much better, as the 1800K cap would never be reached: At a 10% average interest rate, after one year, loan balances are (900*1.10) 990K – 100K = 890K, but principal repaid is (100K / 1100 = 90 loans * 1k) 90K, and so remaining cap is (2 * (900 – 90)) 1620K. The following year, 81K in principal is expected to be repaid, and so the remaining cap will fall to 1458K.
The ROI for a single investor would be 10% (non compounded) at a 10% interest rate. After 7.2 years, the unpaid loans reach their cap. ROI would still be about 10% at a higher interest rate because the higher rates would make the loans at the middle and end of the queue cap sooner, and offset the higher returns from the loans at begining of queue.
If the interest rate was 100%, then the full capped amount of 1800K would be paid in expected 18 years. The first 50K in queue would earn 100% in 1 year. The 2nd 50k would earn 100% in 2 years and so on. The average non-compounded return would be 20.23% per year. The last 50K returns 5.5%pa non compounded.
At 10% interest rate, investors in positions about 430-480 (out of 900) would receive a non compounded return of 14.28%pa for 7 years. All of the investors in first 480 positions would receive 10% compounded return. Those in positions past 480 would have their returns capped. The very last $20k investors will have been paid in 16 years: 6.25%pa non compounded.
An 11% interest rate changes little. Positions 422-470 are paid in full after 7 years, and the last $30K investors are paid in 16 years.

Because queue orders are set by lowest bids get first positions, and early positions are likely to receive the full return rate, maximizing investor return involves bidding under the expected company yield rate. Bidding lower than others is worth it as it makes your position safer, and your payment safer. The highest bids are likely to receive the lowest returns, if no new investors buy them out.

Analysis of deferred salaries and operating costs
The 200K in annual cash labour costs could be lowered by offering partly deferred salaries. Payment of investors would be significantly faster if cash labour costs were 50K/year lower. Doing so is inherently a gift to investors. Factors influencing deferred compensation:
20% of company “owned” by executives/employees is a good incentive for them to care and not walk away.
A priority of returning a natural yield to investors is needed.
Natural or minimum wages are not designed to offer much savings room.
High middle class wages (100K) have substantial investment room.

Royalty tithes and deferred compensation formulas
Natural base payment to investors is defined as 5% of investor principal (900K)
All Gross profits up to the natural base payment “should be” paid to investors
While employee QCSL participation is under 10% of investor principal, enterprise matches 100% of employee contributions to EQCSL. While under 20%, matches 50% of contributions, and under 30%, matches 20% of contributions.
Contributions to Investor QCSLs (not EQCSL) by employees are matched at half the rate.
Employees paid over 30K/yr have a mandatory 10% deferred contribution on cash salary above 30K. 25% on cash above 50K, 50% on cash above 75K, 90% on cash above 100K.
If the natural base payment to investors cannot be made through mandatory and voluntary deferred contributions of employees, then mandatory scaling up of mandatory employee contributions up to doubling them is made with 200% matching by enterprise (If an individual employee's mandatory contribution was $20K, up to an additional 20K would be subtracted from his cash salary, and 60K would be credited to his investment account. If total employee mandatory deferred compensation was 200K, the amount short of making the natural investor base payment was $5K, then only $500 would be subtracted from this employee's cash salary, and $1500 credit given.)
If enterprise repayments to investors reach yields of the natural rate or 10%, then any employee contributions to EQCSL are used to repay EQCSL investors.

Example #1 spreadsheet (clickable link)
has a few simplifying math assumptions and missing features: Deferred labour compensation is not included (would make investor proposal more attractive). Miscellaneous assets (furniture/sports equipment) are treated as a homogeneous maintained depreciating pool instead of replenished with new equipment.  It also uses an impractical, but mathematically easier, reserve of revenue model for dealing with funding continuing operations for analysis, before we introduce a more practical solution.

Revenue/Accounts Payable Tranche
An enterprise needs to fund short term day to day operations. Much of it is often interest free through suppliers. Some part-time direct labour could also be included, though it isn't in this example. Rules for what qualifies are set during the enterprise's charter, with some permissible generality, and the guideline that it pertains to costs incurred in generating revenue. 80% of such costs qualifying for short term repayments reflect conservative assumptions that 20% is general unsecured QCSL obtained from suppliers or others.

Customer Purposed Projects
Purpose holders  of a profit corporation are its shareholders. In a naturally financed enterprise, the executive decision making is separable from the financial benefit-holders. Ultimate (unlimited profit ) purpose does not necessitate decision making input, as shown by government tax collections. Substantial obligations may be made by the enterprise ahead of the ultimate purpose/benefit holders.

The most interested stakeholders in any project are its users/customers. The cost of a project per customer, is usually significantly higher with 1 customer than with 100. While financing a project is often viable with a single user, it is more financially viable with many users, though direction by a single user is more likely to optimize results for that user.

Customer or Social Purposed projects are euphemisms for ultimate and unlimited profit rights for the social and customer purpose-holders. For those rights to be meaningful to the purpose-holders, constraints on employee cash and deferred remuneration must be in place either through regulation/contract or purpose-holder input. For a purpose driven company to have a meaningful purpose, the chance of ultimate payout to the purpose must be credible. The comptroller can have an initial rule in declaring the purpose credible, based on compensation schedules.

Revenue reserve rates and Backstop bids
Having a low revenue reserve rate (percentage of revenue set aside for recurring costs) is only feasible if there is a very liquid lending market for future loans, which is rare for startups or low revenue companies. The 2 main strategies to obtain liquidity in future loans, are incentives for reinvestment of repaid loans, and backstop bids.

A backstop bid is a contract where a lender will offer to lend up to x$ open for up to y years either at a fixed interest rate, or at an offset to the enterprise's natural rate. This serves to guarantee that an offer is present for up to x$ in loan needs. The backstop bidder's obligations are fulfilled when a total of x$ in bids are accepted and x$ in backstop loans are still outstanding, or if y years elapse. The backstop bidder can lower backstop bid interest rates temporarily, or make initial bids on secured tranche projects to help meet his x$ threshold. Backstop bidders can compete with each other for the right to be positioned as the backstop bidder for various tranches.
Consideration given to backstop bidders can be in the form of x-prizes which can be regulated to not be excessive based on x$, y years, and competitive interest rate. Such consideration is given when the backstop bids are at the request/for the benefit of the enterprise to ensure its operational solvency. The other important reason for a backstop bidder to materialize is if it's part of a larger agreement to invest in and encourage an enterprise's project. Typically, a customer for a project that the enterprise has more (or complementary) expertise in implementing than the customer has.

Facilitating customer project initiatives
Natural financing permits investors with an interest in direction and projects of an enterprise to influence that direction by funding that direction. A potential customer interested in a product the enterprise could produce for him can fund related investments and expenses at a rate equal or below the enterprise's existing natural rate. An enterprise will naturally focus on the projects it has funding for, and should favour projects it can fund more cheaply.

Competition for and from social purpose privileges
That an enterprise has designated that its purpose is external to it (management/labour), does not guarantee any meaningful benefit to purpose holders. On the other hand, an enterprise that is well managed with reasonable payroll is attractive to purpose holders. While purpose holding can be a gift, it can be re-gifted to another purpose if it was not contractual.   Permanent purpose holding can be contracted for, but more typical is to contractually grant an x-prize based on actual support given, but temporarily and whimsically grant ultimate purpose holding based on future whimsical intentions.  Social Purpose is granted by social purpose category.  Specific (gifted) recipients within that category are reassignable unless contracted.

Noble purposes include non-executive labour and customers, but more noble (higher nobility) purposes, in roughly increasing order of nobility/selflessness, include community, innovation, wider society, the disadvantaged, and humanity. Divisive purposes include political and religious purposes. The recommended purpose allocation for a purpose driven corporation is to allocate a minimum percentage of purpose to higher nobility, with a maximum (if any) percentage to divisive purposes. Dealing with government impositions counts as higher nobility. A purpose driven corporation may of course set part of its purpose to fixed benefit rates for customers and labour. It is recommended that the corporation retain flexibility in choosing specific purpose beneficiaries.

The value of a purpose beneficiary to an enterprise is how that beneficiary helps the enterprise, and the beneficiary's PR value: Its nobility and administrative purity of purpose. The value of an enterprise to a purpose holder is its ability/likelihood to benefit/pay them.

Employee Compensation Regulation
Investors only care about the cash compensation given to employees. Purpose-holders or ultimate shareholders are impacted by high overall compensation for labour and management by having less left over to pay towards the purpose. At the startup phase, the promise to purpose-holders is meaningless, because the success of any enterprise is always uncertain during startup. In fact, the ultimate purpose must always be delayable in case of distress, and the possible necessity to introduce new benefit streams for survival.

Simple Regulations once the investor tranches are certain to be repaid include limiting prices (if customer purposed) to limit margin and employee compensation rates, capping deferred compensation return rates, and tithing general margins for the purpose(s).

A simple set of regulations in a purposed corporation, after investors have been paid:
Cap cash compensation at $100K per individual.
Cap cash compensation at 40% of contribution.
Cap total non-R&D payments of compensation at 70% of contribution.

The above simple rules promise a 30% post investor return to the purpose holders. This is a return comparable to established enterprise tax rates.

Evolution of payment and reserve rates
A company that is operationally profitable can reserve a portion of revenue for continuous operating expenses, and so not need to continuously obtain new funding for existing operations. A less profitable enterprise could both justify a higher reserve (to avoid more new funding) and a lower one (to pay back investors and thus have lower interest funding).

A better approach than a reserve rate on revenue for the enterprise, is for it to keep 1 month of operational costs in cash or promissed loans below or equal to its natural rate, and pay out the rest.

Payout rates can actually be higher than investors prefer. Investors enjoying a high return from a borrower with good cash flow, prefer slow repayments. When expected organic repayment time drops below 5 years, 2 years and 1 year respectively, then 20%, 50% and 80% of excess repayments (respectively) can be paid to the next tranche (employee deferred compensation) in queue.

Sub-projects and profit tranches
In the example#1 spreadsheet, the wind power electricity generation project is a profit tranche. It has revenues and costs directly attributable to the project. This is distinguished from land, well and other assets as integral to the business, though theoretically sports equipment rentals could also be a profit tranche/sub project if it wasn't an integral free service or semi-integral where revenues did not recoup full direct costs. Other subprojects that can exist in an enterprise are a real estate division in a law firm, any manufacturing facilities, and new product models.

All sub-projects are greed purposed: ultimate surpluses benefit shareholders. A socialy purposed enterprise remains socially pure if it owns a greed purposed project, because any surpluses it obtains remain destined for social beneficiaries.

Sub-projects are naturally financed, have a tithe on their contributions for loan queues tied to the project, but the loan queues are fully guaranteed by the parent enterprise.

Sub project managers should be given an x prize for successfully paying off investor loans, and project employees should hold 20% of the loan value. Sub-project managers may be asked to buy a percentage of shares (title to percentage of contributions above QCSL tithes), depending mostly on their involvement in sales and generating business outside of core enterprise function.

An alternative to a sub-project is to subcontract or join venture. The enterprise loses complete control of the sub-project, but doesn't need to invest in it, or be liable for its poor performance. Even if it can gain agreement to a priority of supply, owning the sub-project will usually be desirable if it can gain better financing terms, and has the competence to supervise the manager.

Selling the enterprise
Most profits made by traditional shareholders including founders and private corporation investors are made when the company is taken over. Selling a natural financed socially purposed enterprise is selling its direction authority. It is sold for a severance package if there is a management change. Keep in mind that greed purposed sub-projects could be sold instead, and/or granted purposes which are rights whose beneficiaries can resell, could be sold. The buyer, if it is an enterprise, is responsible for all of the sellers obligations, so a competitor wishing to sabotage the company must still pay investors, as must a company only interested in the seller as a customer or supplier. A buyer who is an individual should be approved by investors/comptroller for potential conflicts of interest, but individuals paying for an asset are presumed to care for it.

The motivation for a buyer can be hard to understand. The benefits are salaries, right to success x prize, and control over projects and hiring. The seller likely has a lot of deferred compensation, and so remains vested in the continued success of the enterprise. A rational buyer must either believe he can bring success to the enterprise more competently or wishes to direct the enterprise to serve other interests, most honourably (as opposed to interest in destroying the enterprise for competitive purposes), projects that serve other enterprises controlled by buyer. The former tends to incur risks for little benefit unless the purchase price is well below a net present value of potential benefits destined to the current directors. In the latter motive, the buyer can avoid liability completely by purchasing or funding one of the enterprise's existing or new sub-projects, and doing so can bring benefits to the enterprise as a whole, especially its investors, but also its directors in that future benefits become more likely sooner. So, the most rational motive for the seller to sell is for succession: he wants to do something else. A succession plan can be orchestrated without outside sale of the directorship. So in a socially purposed corporation, selling the directorship could be discouraged.

A greed purposed corporation can be sold because unlimited profit potential can justify taking the risk to achieve it.

Valuation of potential future benefits
Net Present Value (NPV) is the fundamental traditional finance concept. A discount interest rate is used to calculate today's value of future cashflows. Low discount rates mean future cashflows are worth more today than high discount rates. A company's natural (average) rate is the appropriate discount rate to evaluate its future cashflows.

A company with an operating surplus of $100K per year, and $500K loans at 20% interest, has purpose holder value of 0 (excluding value of hope for improvement) because operations are forever projected to simply service loan holders. If the loan interest drops to 10%, then all loans will be repaid in under 8 years, and an interest rate of 5% would eliminate loan balance in 6 years. 30 years payments of 100K starting in 8 years at a 10% discount rate is worth over 483K today, and 30 years of payments starting in 6 years at 5% discount is worth over 1.204M today.1 This means a purpose-holder can create almost $500K for himself, by simply lending and being repaid in full in 8 years at an attractive 10% interest rate.

Similarly the value of any deferred compensation is also 0 at the initial 20% interest rate environment, because it is never projected to be paid. If 100K in annual deferred compensation (@10%) is introduced, then the annual pay-down amount becomes 200K. The present value to labour of the deferred compensation is that compensation because it grows each year, and will be paid. The purposeholder benefits start flowing in the same 8 year period if they buy out 20% investors with 10% loans, but their loan is repaid in 3 years instead of 8.

A subtlety in determining discount rates in this model, is that it's appropriate to use the attractive natural rate (10%) to discount the uncertainty of reaching the payment stream, but once the payment stream begins to kick in, the appropriate discount rate is much closer to the riskless (5%) rate since payment is near certain. A 4M x prize paid at 100K/year starting in (hopefully) 8 years is valued under this model at $840K2. Purpose holders with benefits junior to the x prize have benefits valued at only 18,571, (@10%) or 173K at 5% discount rate. Its noteworthy that a fixed x prize can be worth more than a junior purpose-holder right to unlimited profits.

Forcibly Converting to Greed Purposed to sell enterprise
If I grant society at large 50% of shares in my enterprise, I have provided society a gift. If I change specific institutional social beneficiaries, the gift remains even if the recipient doesn't. If consideration is provided by the purposeholder than it is no longer a gift, but a contract, and something more tangible than purposeholding should (recommendation) be offered, such as an x prize. If purpose holding is a gift, then putting a condition on that gifted financial right that the world is allowed to purchase it from the gift holder at twice its appraised value is not an encumbrance that would make a rational person refuse the gift. A socially purposed corporation remains socially purposed even if its purpose holders transfer their benefits to evil cannibal Dick Chenney followers.

The formula for dispossessing social purpose holders is for the buyer to pay them 2 times the maximum of [unrecommended consideration paid for their purpose holding, the present value of purposeholding as measured by rolling last 12 month period, the present value based on average 12 months over the last 3 years]. The point of this option is to allow sales of companies by other companies that can do better, while protecting social purpose holders. It also incentivizes purpose holders to support the value of their benefits by helping the enterprise keep an attractive natural interest rate.  

A rational motive to pay twice the present value of an enterprise benefit is anticipation that profitability will grow significantly. If the purposeholders also believe growth is likely, they should bid down the enterprise's natural rate. Doing so increases the sales price a takeover must pay.

Sale, Succession, and Distressed takeover/abandonment
A succession plan is encouraged because its most likely to keep the interests of stakeholders aligned with intentions of founders that forged those relationships. Loyalty and indoctrination alone are sufficient forces to maintain continuity. After x years of service, a director can name a successor who is preferably an employee or other committed stakeholder. A portion of the present value of the x prize the director would have been entitled to, can be paid (deferred) by the new director.

To encourage succession over sale, a sale can cause any deferred compensation owed to selling director to move to the end of the employee QCSL, and even half could be queued after the management x-prize.

Pushing out a director who is performing poorly is mainly done through his choice. Forcing very low cash salaries while the company makes very little (under 1%, 5% and 10% of investor principal), means that when investors lack the confidence to reinvest, or fund new projects, then the cost of borrowing becomes too high, and the prospects of ever seeing cash salary increases, or payment of any of his deferred salary or x-prize vanish. So alternative projects he is exposed to, even if they might be considered as enterprise sub-projects, are necessarily more attractive to him. The difference between succession and abandonment need not be substantial. Under abandonment, NPV of any director benefits is 0. Distress and poor performance can put all deferred compensation after the x prize in queue if not cancelled by uncooperative abandonment.

After abandonment, a short transition period exists, where other employees take interim management control, while unsecured lenders decide who should lead the enterprise, or whether it should be liquidated. People willing to invest more in the enterprise will be heard louder.

Intellectual Property and semi social purpose
A lot of readers might not care about alternatives to greed purposed enterprises. But they overlook the power of customer purposed enterprises. Intellectual Property (IP) such as patents, songs, software have various legal protections. Software and song writing are licenced universally, with industry trade groups to enforce them. Patents are licensed capriciously in bilateral contracts. More general ideas have limited legal protections. All IP depends on its customers to be accepted. There are alternatives to every idea.

An IP corporation is recommended to be a single part time employee/director/IP owner corporation with negligible assets and expenses (unless it was an R&D project), that has IP licensing revenue, but permits its director to consult for the licensees for his own benefit. Licenses are encouraged to be standardized, especially on price, though administrative fees may reflect all individual clients. A $4M x prize is paid by license fees above administrative expenses. Each customer gets an x prize equal to the license fees paid (including admin expenses). Its normal that administrative fees would increase slightly after the founder's x prize is paid. Its possible for the founder to be motivated to resign after his x prize is paid, but he may not be particularly needed anymore. Administration and Comptrolling of an IP corporation is (can be) minimal. A banking agreement can take care of distributing revenues, very few expenses if any. Website admin can be outsourced. Natural financing of investor loans can come into play usually only if legal action needs to be financed.

The above structure serves the inventors need for reward, customers desires to likely get their licensing fees reinbursed, and society's need to both foster innovation and prevent monopoly control of ideas.

Taxes
Traditional greed purposed corporations pay taxes sometimes. There are deductions for interest, salaries, depreciation and other expenses, as well as losses from other years.

Its hoped that a social purposed naturally financed corporation qualifies as a non profit for tax purposes (no income taxes). X prizes (bonuses) are obvious expenses when paid. Deferred compensation to employees would prefer to be deductible when declared, and taxable to the employee when received. Pension analogies allow this, but limit the amounts that can be invested. Calling deferred compensation a deferred interest accumulating bonus is deductible when paid. Fair and reasonable. Aggressive accounting could use the percentage complete contract accounting method, since we can estimate a date all creditors will be paid based on current surpluses, then an amount owing to an employee scheduled to be paid in 10 years, can have 1/10th its value deducted each year.

Secured Investors have interest and depreciation paid regularly. The depreciation payment is return of capital untaxed to them. Secured QCSLs should be sharia investing “kosher”. Unsecured investors interest is expensed as it is accrued. Investors would normally have to realize it as it accrues as well, but can use the uncertainty of payment to argue they shouldn't have to, until paid. A more complex accounting arrangement is possible that would treat investor gains as capital gains (investment is for eventual promise of $2000 discounted for early payment), though should not be necessary if tax authorities agree with the above fair treatment. When new investors bid into the queue, even if no money passes through the enterprise's control, an accounting entry exists paying off an old bond and issuing a new one.

If I were to design national corporate tax policy, I would replace corporate income tax with automatic government ownership of 25%-30% of enterprises. Governments would be paid when dividends are paid. Corporations would avoid taxes the same way they do now: by hiring and starting more projects instead of paying back investors. I would more aggressively  allow investments to be deductible from income, and all returns (including principal) be income, with all revenue and expense recognition occurring on a cash basis.

Direction after x prize
Bureaucracies are entirely capable of managing mature organizations, without a profit incentive for that bureaucacy. Once the management x prize has been distributed in an external purposed (non management/labour purposed) corporation, the founder's motivation to stay may be insufficient. It makes sense for directorship to transfer to purpose holders after x prize has been paid. If so, since the director would be reluctant taking on new projects once he commences collecting x prize (because it would delay collection of it), it also makes sense for purpose-holders to offer or authorize further incentives for new projects, and further incentives for management.

Converting a public company to natural financing
Public companies are external greed purposed. Shareholders elect a board to direct management. Minority shareholders are completely powerless, even if they can sell if they are unhappy, it will be at a likely price (low) that a powerless buyer would be equally unhappy owning the stock at. Private external greed corporations put shareholders in an even worse position in that they cannot monetize their stock easily.   Public corporations have expensive reporting, compliance, and fundraising costs. Natural financing permits management and directors the benefits of a private company, while putting investors in the paid-first position they deserve to be.

Converting a public corporation is voluntary by all affected stakeholders. It can be complete, partial, done in stages, and convert bonds, preferred and common shares. Once natural finance conversion has begun, no new bonds or preferred shares can be issued, and common share issues are not recommended..

Bondholders should be given first priority to convert. Secured QCSLs most closely fit the bonds the company considers too expensive for it. If all bondholders converted to unsecured QCSLs, they would all have enhanced security (demand lower yield) by the fact that they are first in line to be paid. Unsecured QCSL conversion for bondholders is essentially a cash redemption of bonds which is sometimes an enterprise right attached to some bonds. Secured QCSLs also offer better security to converting bondholders because in a distressed bankruptcy type scenario, they get theoretically 100% of principal, and they also receive high yields including a non taxable depreciation coupon. Those bondholders that do not convert, continue to have a fixed obligation paid before QCSLs, including principal at maturity, but they lose relative priority in the event of bankruptcy. A net positive to convert. Even when converting to natural financing in a distressed enterprise situation, if the conversion buys a few years survival, bondholders are substantially incentivized to convert. Better value to bondholders through natural finance, means lower borrowing costs to the enterprise.

Preferred shareholders are the only group that are economically-forced to convert in order to keep their relative security and payment regularity. Secured QCSLs match the payment regularity most closely. Non maturing Preferred shares are in fact a scam on its buyers, because the principal is never repaid. The odds that a non-liquor company will eventually (or within 200 years) go bankrupt are over 99.9%. Preferred shares tend not to have sufficient premium over bonds to understand that risk as properly considered. From the enterprise's perspective, paying a pre-profit coupon inflated by the inverse of its untaxed profit rate is equivalent to a preferred coupon. For example, at a 25% tax rate an 8% bond coupon is equivalent after tax to a 6% preferred share coupon (for same maturity date). From the investor perspective, forcing the exchange is forcing a net benefit of additional bond security. In most countries, on average, there is an equivalent after tax return to the securities as well. Offering the same optional conversion options to (converted) bondholders after the exchange, provides the same optional choice to preferred shareholders.

Common shares can be converted by either an internal “takeover” bid by management, a partial substantial issuer bid (bid for up to x shares). A company with net assets of 500K, making 100K per year, 10000 shares outstanding, and P/E of 10 has a $100 share price. If half the shares are sold in exchange for QCSLs loans at 10%, then after 8 years (QCSLs are repaid), without any operational improvement by the company, net assets are back to 500K, and the 5000 shares remaining at a P/E of 10 are worth $200. Every rational person who doesn't have direct oversight of management, and therefore cannot vouch for its confidence, would prefer to hold QCSLs (ignoring tax differences) because they are paid faster and more certainly even if the return is the same. From the enterprise perspective, if it can pay less than 10% interest rate (almost certain given profile), then it is net positive to the enterprise and remaining shareholders. Most successful public corporations should be able to achieve natural rates close to “riskless” government bonds (under 5%-6%).

Pensions are a scam/motivational technique on employees designed to keep them needing work. There are tax advantages for both parties, but administration fees and restrictions on cashability are net negatives compared to direct loans/deferred compensation. A pension system can continue under natural financing and invest its assets back into QCSL backed projects, but management may find employees willing to invest more if they provide them with higher returning and more flexible direct deferred compensation.

Project stages
Concept: Important but not likely funded.
Set up: Design completion, acquiring partners and resources for startup phase.
Start up: product development, pre-launch preparations
Launch: door opening, and initial marketing budget.
Presence/ramp up: Secondary projects, more marketing facilities. Growth preparations
Growth/Harvesting: Further projects/growth could be funded organically, but faster not to.

Financing for each stage is relatively independent. The baggage of previous investors accumulates, so the viability of a natural financed project depends on being frugal at the early stages, ensuring value on all spending.

Concept and setup funding
The comptrolling organization (CFC) could function as a concept registry, but such a project is secondary, and not expected to appear until natural financing is mature. The concept and set up stage are to find out if you want to make a start up. The setup phase would normally be very short, but getting financing and partners for startup is not guaranteed fast.

Advice from a business lawyer or natural finance comptroller can be useful, even if you delay comptrolled natural financed organization (CNFO). You can prepare for CNFO recognition/registration by self comptrolling early activities as follows:

Record any expenses paid out of pocket. You may grant yourself up to 25% QCSL rate.
Count up to ¼ of an hourly wage you can command in your local market for your qualifications, as deferred labour, growing at a rate of up to 15%.
If you have found an investor to support a cash salary, it should be modest to not scare future investors with potentially high baggage, and so help with negotiations including .

Officially registering as a CNFO can have its advantages even at the setup stage. It can give other potential investors or suppliers you might wish to partially pay in QCSLs the confidence that your obligations to other investors are accurate. Any arrangement with an initial investor is more secure for that investor, and the initial investor can act as temporary comptroller. Advantages to founder are that more exposure to the enterprise can occur, and opportunity for lowering natural rate and repaying initial investor early.

X prize(s) revisited
The management X prize is called the Y prize.
A W prize can be inserted in priority just before the Y prize, at management's discretion provided that management is not a recipient.
X prizes for completing startup and launch goals are also possible as long as they are established at time of CNFO registration, prior to general QCSL funding. Letters used, should reflect their sequence priority.
The only other X prizes that may be set after company is registered, are for sub-projects. These must be approved by the comptroller.

Natural financing is compatible with common shares. A socially purposed corporation is equivalent to one where the common shares are owned by social groups. A socially purposed corporation remains entirely socially purposed, if the purpose-holders grant management a percentage. After the Y prize is paid, there is a motivational vacuum for management. After that event, the purpose holders gain directorship. A socially purposed corporation remains socially purposed if it grants surplus percentage rights to others including management. There is even a way to make those rights time or amount limited...

Common share alternative: Perpetual rollover Z prize – Queued Dividend Streams
If common shareholders were paid dividends in a rolling queue, $1, $5, or $10 at a time, all of the traditional rights of shareholders are respected, as long as the queue order is fair (easy but description omitted). Turning the right of dividends into a coupon, makes individual dividend receipts tradeable, and further makes inserting into the stream temporarily possible. The Z prize stream is any X prize that has junior priority to the Y prize. Purpose holders (not management) have full authority over the Z prize, including the power to insert tranches within the queue at any position for non-purpose-holders, or by systemic formula.

Once the Y prize has been paid, and by definition, all deferred labour payments have also been paid or are current (paid shortly after issued), the best way to motivate management and labour in a manner aligned to the future health of the company, is to assign them X prizes targeted to mature in 1,5, and 10 years. If the purpose-holders decide that a 30% profit incentive to management and labour is appropriate, then if the enterprise made $1M this year, then the Z prize stream is updated with $100K inserted after the first $900K (expected payment one year later), $100K inserted after then next $4M (5 years later), and $100K inserted after the next $5M after that (10 years later). New management and labour benefiting Z prize insertions will be made again next year based on the year's performance. From the purpose holders perspective, they actually forego 10% for first 4 years, 20% year 5 to 9, and 30% year 10 onward.

One can argue significant corporate tax advantages by distributing perpetual z prizes instead of dividends to shareholders, since one can argue that it can bring corporate income to 0, and so be non-taxable.

Note also that assigning non-directorship labour a percentage of the enterprise fulfils the social purpose mandate. It can be antisocial if the percentage is too high, as greed and overconfidence in competence to self manage can easily destroy the enterprise.

Partial social purpose vs social purposed enterprises
An astute reader could note that a founder could choose to make his enterprise 80% socially purposed, keep 20% for himself, and so after it matures (Y prize paid) approximately the same arrangement of profit sharing is kept as the previous section (perpetual rollover Z prizes) outlined. Doing so would either keep 20% of directorship with founder, or he could structure enterprise such that directorship would never pass on, and just issue 80% of surpluses to the other purpose/benefit-holders. Both of these options are permissible under natural financing. A partially social purposed corporation is a partial greed purposed corporation though, and its behaviour is fundamentally indistinguishable from a fully greed purposed corporation.

Its rational to found a socially purposed corporation, because the promised eventual transfer of directorship means that helping achieve the Y prize is a victory for all of the stakeholders. Its especially apparent in the IP licensing corporation, where customer and social acceptance is vital to success. But most innovative products or technologies require any and all acceptance boosts available to it. Retailers can substantially benefit from customer purposing. Natural resource extractors can pretend to care through environmental and community purpose, but would tend not to gain necessary benefit from fully social purposing.

Purpose holders vs benefit holders
Purpose holders are those with ultimate/eventual decision authority. Benefit holders are those with Z prize claims, but are powerless. Though purpose holders might theoretically not be benefit holders, there is no rational motivational scenario that would justify the arrangement.

Replacing government taxation rights with passive benefit holding rights has substantial social and corporate benefits. Customer purpose-holding makes more sense than benefit holding if some customers are much larger than others, and you are rewarding past customer activity rather than encouraging future activity. Labour minor purpose holding can balance profitability with safety and stress/ comfort issues. Community purpose holding can balance profitability with job creation, air, noise, blight, and water quality. The Greenland Anti-Melting Project Foundation likely is satisfied with beneficiary rights from a corporation 1000s of miles away since there is little the corporation can do directly for it other than funnel it a portion of surpluses.

Socially purposed corporate action
There is a mechanism to enable socially purposed actions by the corporation, even when only social benefit rather than social purpose holders exist. A benefit (or purpose) holder may forgo up to 2 years of expected Z stream payments, to force an enterprise related project with a net cost of 150% worth of the foregone benefits. For example an environmental beneficiary expecting $100K in “dividends” over the next 2 years could initiate a cleanup (mess caused by enterprise, or enterprise equipment designed for cleanup) or emission reduction project with a NPV cost of $150K. The company can also elect to cancel specific Z prize streams for 80% of the cost of a project that is deemed to benefit the benefit holder. For example, sponsoring a youth sports team for $10K would allow the enterprise to cancel $8K of community benefit stream payments.
One of the most important company initiated Z prize cancellation is for an innovation purpose.  Where it can engage in speculative R&D funding, which might otherwise be hard to finance if the success chances are low. 
The purpose of these mechanisms is to profit from the PR value of serving and fulfilling social purpose for its beneficiaries. Its easy for social benefit holders to behave identically to greed benefit holders when they just collect money for remote or unverifiable purposes, and visibility for the enterprise's social purpose/benefits makes its social commitments tangible to stakeholders.


1 +/ ((t# 0) , y# 100) % r ^ i.(y+t) [ r =. >: 0.1 [ t=. 8 [ y=.30
483.75
+/ ((t# 0) , y# 100) % r ^ i.(y+t) [ r =. >: 0.05 [ t=. 6 [ y=.30
1204.47
2 +/ ((t# 0) , y# x) % (t#1) , (r ^ t)* 1.05 ^ i.(y) [ 'r t y x' =. (>: 0.1);8;40;100
840.508
+/ ((t# 0) , y# x) % (t#1) , (r ^ t)* 1.05 ^ i.(y) [ 'r t y x' =. (>: 0.1);48;40;100
18.571

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