People like to know what they are buying. Whether it’s used cars or corporate securities, buyers don’t like surprises. They will pay less for something if the seller has more information than they do. This is called the market for lemons problem resulting from information asymmetry.
When it comes to the market for lemons in corporate finance, no security creates more trouble than equity. Equity represents the perpetual residual – the net result of every element of the business. The gulf between what management knows and what investors know is enormous and impractical to close.
Seats, on the other hand, represent claims on discrete events. Will the company hit the revenue and when – that’s all the investor needs to know. Management still knows more, but because the event is simpler, the amount of possible information asymmetry is less. This should result in less discounting on the part of the investor and a lower cost of capital for the firm.
In additional to this structural attribute of Seats, Seats Programs are designed to maximize information sharing between buyers and sellers. Seats buyers do not vote, so information transparency is critical. Management must communicate corporate actions and plans very well in order to promote a healthy Seats market.
Our vision is to create an information sharing platform that will allow Seats investors to underwrite the probability of each Seat being hit with much more accuracy than equity underwriting. By slicing the lemon, we will make it more attractive to everyone.
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