Tuesday Reddit’s CEO Yishan Wong announced a radical new way the company will be giving back to its community. The investors in Reddit’s latest round of fundraising have agreed to allocate 10% of the shares from their $50 million commitment directly to Reddit users. To give the new shares liquidity, investors plan on issuing stock to users in the form of a unique cryptocurrency.
A Real Challenge
By floating shares on a vehicle akin to bitcoin’s blockchain, Reddit stock could easily be traded back and forth between users without the need for a traditional stock exchange. This could be one of the first endeavors into a revolutionary new way to trade securities. Reddit has not ironed out all the details of its plan, but floating equity as a cryptocurrency will be challenging legally and technologically.
Few details of the plan have emerged, but even if Reddit can get the ball rolling on its plan to bestow equity to users, choosing a fair method of distribution is going to be next to impossible.
Here Are A Few Ways Reddit Could Proceed
1) Distribute equity proportionally based on karma
Karma is Reddit’s way of keeping score. When a user posts a link or a comment and others upvote their contribution, the poster receives Karma. Karma is a measure of how much good a user has done for the community, but currently points don’t have any real world value.
Users can also gain karma from reposting content from months ago that others may not remember. Reposting articles is controversial and generally frowned upon for causing stagnation. Awarding shares for karma gains going forward would perversely incentivize reposts and gaming of the system, damaging the value of the platform.
Fred Wilson’s sharp blog post from 2011, “Don’t Forget Your Logged Out Users” highlights another major problem with distributing equity based on content contributions. Wilson laid out the 100/10/1 rule of thumb for social services like Reddit. As he put it, “1% will create content, 10% will engage with it, and 100% will consume it. “ If Reddit only gives equity to the “10%” of users curating content on its platform, they will leave 90% of the community high and dry. Neglecting logged out users is problematic because the 90% make up the majority of advertisement views and constitute the lion’s share of Reddit’s value.
2) Distribute equity evenly among all (174,088,361) unique visitors
The fairest way to distribute equity might be to divide it evenly among all unique visitors. According to Reddit’s ‘about’ page they had 174,088,361 unique visitors in September 2014. The investors in the latest round are allocating 10% of their $50 million worth of shares to the community, that leaves the Reddit community with $5 million bucks. When you do the simple math, each user’s piece is worth about 2.9 cents (pre-tax) at Reddit’s present valuation. Would anyone bother to engage with the complexity of a cryptocurrency to recover 3 cents? Fat chance.
3) Follow the Blockchain Model for Distributing Bitcoin
Reddit will probably follow the blockchain model no matter how the company chooses to distribute equity. The bitcoin ecosystem requires its community to dedicate computing power to process transactions on a public ledger called the blockchain. Individuals who commit their electricity and hardware’s computational power to processing these transactions are compensated in bitcoin through a process called “mining bitcoin”.
If Reddit wants its community equity to function as a cryptocurrency, it will require resources to process equity trading on a public ledger. To incent users to commit the necessary computational power, Reddit will need to withhold some of the shares. This requirement makes it unlikely that Reddit will issue a lump sum of $5 million to its community on day 1, so forget about getting that 2.9 cents.
4) Distribute equity to users who have purchased or donated Reddit Gold
Reddit has long had difficulty making as much money as it should. Push back from its community against traditional monetization techniques helped lead to the creation of Reddit Gold, a premium subscription which enhances the user’s browsing experience. On top of additional features Reddit Gold also includes a suite of discounts from business partners (Reddit does not get paid for accepting partners).
Reddit Gold is commonly gifted from one user to another as a tip for an inspirational comment or a contribution to the community that goes above and beyond the call of duty. One way that Reddit could try to make some extra money would be to distribute equity to individuals who purchase or donate Reddit Gold subscriptions. With this model Reddit could ramp up its monetization efforts by giving an extra reason to donate Gold while simultaneously encouraging users to do good.
Afterthought
Reddit’s latest round of fundraising attaches a $500 million price tag to the company. It’s a hefty sum, but as we wrote in a piece about Yahoo's (NASDAQ:YHOO) potential takeover targets last week, Reddit’s price is not as steep as it could be. Last month alone the news and content site received over 6 billion pageviews. With that amount of traffic Reddit ought be fetching a higher valuation.
The initial reaction from the Reddit community has been highly favorable toward the equity sharing plan. And for Reddit’s prominent investors including Sam Altman of Y Combinator and Marc Andreessen from Andreessen Horowitz, giving away some equity through a cryptocurrency makes a lot of sense.
These venture capitalists have other investments riding on the success of the blockchain protocol. For the investors there’s no better way to raise awareness and increase the public’s understanding of the blockchain technology than by giving away something cool on it for free.
Will Reddit’s equity sharing plan be significant? Will it be successful? Regardless it’s a fascinating way for a company to give back to its community. And if Reddit can realize its dream of floating equity as a cryptocurrency, this could be a landmark achievement in equity trading and open the door for others to follow.