Abstract:
A private trust used to diversify risk for holders of stock in private companies that have received venture capital funding. The private trust accepts donations of the stock in exchange for trust units. The private trust pools the stock and manages the stock to yield income for trust unit holders. The private trust holds the stock until after initial public offering and escrow restrictions have expired. The public shares are then sold at the discretion of trust managers to earn the income for the private trust. Shares of pre-approved companies may be donated to the private trust using worldwide web enabled forms. The private trust diversifies risk because income/losses from trust units flow collectively from all privately-held shares managed by the private trust.

Description:
CROSS-REFERENCE TO RELATED APPLICATIONS  
         [0001]    This is the first application filed for the present invention.  
         MICROFICHE APPENDIX  
         [0002]    Not applicable.  
         TECHNICAL FIELD  
         [0003]    This invention relates in general to automated systems for managing financial instruments and, in particular, to a method and system for diversifying risk in privately-held stock by pooling stock in a managed private trust fund.  
         BACKGROUND OF THE INVENTION  
         [0004]    At the turn of the century the valuations of new companies with unproven technology and business models reached extraordinary heights. Many companies gained remarkable valuations and substantial angel and investor capital investment. These valuations have since declined dramatically, and the usual exit opportunities such as initial public offerings (IPOs) and acquisitions have all but disappeared in the current downturn. Companies which have survived and gained new private investment are those with a clear path to profits and sound management teams. Even for these more successful entities, the exit opportunities are limited and more distant. Angel investors and founder management personnel have been shocked by these changes. Uncertain even of the timeframe and most certainly the valuation of an exit event, they are seeking a way to diversify their holdings in order to reduce their risk.  
           [0005]    It is well known that diversifying holdings is one way of reducing risk. While gains of successful mezzanine venture capital funds range from 28% to 48% annually averaged over five years, these gains are not obtained consistently. In fact, only about two out of ten of the investments yield up to 80% of the total return. In the current economy, investment turnover rates have slowed dramatically, liquidity events are delayed and uncertainty is predominant. However, when investments by venture capital investors are made, they invest substantial amounts. The venture capital deals place those companies under pressure, because a common tactic of venture capitalist is to impose “ratchet clauses” (performance requirements) and to insist upon special preferred shares that have superior rates to the shares owned by entrepreneurs and the early-stage angel investors. The founders and angel investors are therefore under threat. They are very vulnerable and while the tactics of the venture capitalist will possibly gain extra performance from the companies, the effect is to open the possibility of third-party acquisition of some of the founder stock.  
           [0006]    There therefore exists a need for a financial instrument which permits holders of stock in private companies to diversify their risk and, if required, gain liquidity prior to a liquidity event in the private company.  
         SUMMARY OF THE INVENTION  
         [0007]    It is therefore an object of the invention to provide a method and system for diversifying risk in privately-held stock.  
           [0008]    It is a further object of the invention to provide a method for diversifying risk in privately-held stock by providing a private trust in which stock is pooled by a plurality of donors.  
           [0009]    In accordance with the method, privately-held stock donations are accepted into a trust in exchange for trust units. The trust may be a private trust, at least in startup phases. The privately-held stock is held by the trust until the private company is sold, or performs an initial public offering to convert the privately-held stock to public stock. Trust managers determine when the public stock is to be sold. Income realized from the sale of public stock, and other income generated by the trust under direction of the trust managers, is distributed to the trust unit holders. The private trust may be converted to a closed-end mutual fund after the private trust has attained sufficient worth.  
           [0010]    The system facilitates management of the trust by the trust managers, as well as enabling potential donors to learn about the trust and to donate their privately-held stock to the trust. The system comprises a trust management server and a trust web server. The trust management server facilitates management of the trust by providing the trust managers with access to trust information and computing income distributions. The trust web server permits potential donors to search for and/or submit public information respecting the private company in which they hold stock. A potential donor may also use the trust web server to submit private information respecting a company in which they hold stock. The public information is posted on the trust web server, but the private information is protected with embedded security codes so that only a trust manager can view it.  
           [0011]    A secure web form permits the potential donor to provisionally donate privately-held stock to the trust. The donation is subject to approval by a trust manager, and receipt of the private trust certificates and required permission letter(s). After a donation is approved and accepted, trust units are held in perpetuity, but may be sold with permission of trust trustees.  
           [0012]    The invention therefore provides a method and system for diversifying risk and providing improved liquidity for investors in private companies that have achieved enough success to have obtained a significant venture capital investment. 
       
    
    
     BRIEF DESCRIPTION OF THE DRAWINGS  
       [0013]    Further features and advantages of the present invention will become apparent from the following detailed description, taken in combination with the appended drawings, in which:  
         [0014]    [0014]FIG. 1 is a schematic diagram of a private trust in accordance with the invention illustrating exemplary transactions conducted between the trust and various parties that conduct transactions with the trust;  
         [0015]    [0015]FIG. 2 is a schematic diagram of an overview of components of the system in accordance with the invention shown in an environment in which the system is used;  
         [0016]    [0016]FIG. 3 is a schematic message flow diagram showing principal messages exchanged between a donor and components of the system when privately-held stock is donated to the trust using forms available on the public trust web server;  
         [0017]    [0017]FIG. 4 is a schematic diagram of a donor workstation running a web browser which is used to access web forms for donating private stock to the trust, as well as web forms used for submitting information related to a particular private company;  
         [0018]    [0018]FIG. 5 is a message flow diagram showing an exemplary message exchanged between a potential donor to the trust and the trust web server, the donor supplying publicly-available information related to a private company;  
         [0019]    [0019]FIG. 6 is a message flow diagram showing principal messages exchanged between a potential donor and the trust web server to provide confidential information related to the private company to managers of the trust; and  
         [0020]    [0020]FIG. 7 is a schematic diagram illustrating one embodiment of the invention in which the trust is converted to a closed-end mutual fund after the private trust has achieved a certain size. 
     
    
       [0021]    It will be noted that throughout the appended drawings, like features are identified by like reference numerals.  
       DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENT  
       [0022]    The present invention provides a system and method for diversifying risk in privately-held stock by permitting a holder of the private stock to donate the stock to a private trust. The private trust is managed to earn revenue. The earned revenue is distributed to owners of private trust units. The private trust units are held in perpetuity, but may be traded or sold within limits imposed by trustees of the private trust. Once the trust has achieved a certain size, it may converted to a closed-end mutual fund.  
         [0023]    [0023]FIG. 1 is a schematic diagram illustrating exemplary transactions between a private trust  10  and entities that transact with the private trust. Those entities include, for example, holders  12  of private stock who donate the private stock to the private trust  10 . The private trust  10  therefore acquires private stock without cost. In return for the donation, the holder  12  of private stock receives trust units. The trust units entitle the trust unit owner to earn income which is distributed from the trust, as will be explained below in more detail. Once a holder  12  of private stock has donated his stock to the trust and become a trust unit owner, the owner owns the trust units in perpetuity. Since the trust is a private trust, the owner of trust units may only sell the trust units with the permission of trustees of the private trust  10 , who may be required to approve the sale, as well as approve the purchaser of the trust units.  
         [0024]    In addition to private stock, contributions to the private trust  10  may be made in the form of cash by a cash donor  14 . The cash donor  14  receives trust units in return for cash donations to the private trust  10 . Each trust unit has a pre-assigned value that determines the number of trust units issued to the cash donor  14 , based on the amount of cash donated to the private trust.  
         [0025]    The private trust  10  is managed by professional managers  16 . In return for management services, the private trust pays management fees in accordance with contractual agreements between the private trust  10  and the trust managers  16 . In addition to determining which private companies the private trust  10  will accept stock donations from, the managers  16  are responsible for determining if and when the private trust  10  will conduct other transactions. For example, a private trust  10  may buy stock options from a stock option holder  18  who is unable to exercise the options for any one of a number of reasons. Stock options are acquired in exchange for cash paid from the private trust  10 . Once the stock options are acquired, the managers  16  manage the options to earn income for the private trust  10  by exercising the options at a time that the managers  16  deem appropriate, and selling stocks realized from exercising the options. Manager  16  may also acquire public stock from a stock holder  20  in exchange for cash. For example, a stock holder may be precluded by an escrow agreement from selling stock on the public market. In order to realize liquidity, the public stock may be sold by the stock holder  20  to the private trust at a discount, with the provision that the escrow agreement be respected. The private trust  10  may also provide bridge financing to companies preparing for an initial public offering (pre-IPO) in order to earn income for the private trust  10 . The pre-IPO company  22  is loaned cash reserves from the private trust  10 , which are repaid in accordance with a repayment schedule negotiated by the managers  16 . The companies may be, for example, companies in which the private trust  10  holds stock.  
         [0026]    It should be noted that the transactions shown in FIG. 1 are exemplary only, and do not constitute an exhaustive list of transactions that may be conducted by managers  16  of the private trust  10 .  
         [0027]    In order to manage and promote the private trust  10 , the private trust  10  owns and operates a trust management system  25  shown in FIG. 2. The trust management system  25  includes a trust management server  24  that directly or indirectly supports one or more management workstations  26 , which are used by the private trust managers  16  to manage the private trust  10 . The trust management server  24  is preferably connected to the Internet  34  in a manner well known in the art. The trust management server  24  facilitates management of the private trust  10  by providing management tools, such as memories such as disk drives for storing contact information related to holders of units of the private trust  10 ; information related to each private company in which the private trust  10  holds an ownership interest, including information defining the privately-held stock; and, information related to cash and other assets owned by the trust. The trust management server also has a processor for executing program instructions that permit all of the above information to be written, read and rewritten, as required. Programs are also provided to permit trust managers  16  to input information related to a donation of private shares in a private company to the private trust  10 , the information identifying the company, the owner of the private shares and a value of each share. The trust management server  24  also has programs for computing a number of units to be issued to the donor of the private shares, and for computing a share of income from the private trust to be distributed to each holder of the units in the private trust  10 . The share of income is preferably computed in direct relationship to the number of units held.  
         [0028]    The trust management system  25  further includes a trust web server  38  which may be implemented on the trust management server  24 , or implemented as a stand-alone public server, also in a manner well known in the art.  
         [0029]    The trust managers  16  use public information sources  30 , such as news servers, and the like, to gather information about private companies in order to determine from which private companies private stock will be accepted as donations to the private trust  10 . In general, the private trust  10  preferably only accepts donations of private stock in companies that have recently acquired significant venture capital funding. This has several distinct advantages. First, it is normal procedure for venture capital investors to perform extensive due diligence to determine whether the company&#39;s objectives and management structure warrant venture capital investment. The due diligence generally results in the assignment of a value to privately-held stock in the company. Assuming that venture capital was recently acquired by the privately-held company, managers  16  of the private trust  10  can accept the evaluation of the privately-held shares assigned when the venture capital was acquired. Thus management effort is reduced. Second, since the venture capital funding was recently acquired, the company is an above-average risk in terms of an investment opportunity. Third, when venture capital funding is acquired, the transaction normally becomes public knowledge and most of the particulars of the transaction are publicly available from public information sources  30 , such as, for example, business newspapers, magazines and other publications which provide extensive information about the company, its structure, its products and, quite often, also provide the evaluation assigned to the privately-held stock in the company.  
         [0030]    Consequently, the private trust managers  16  search public information servers  30  to acquire information about companies in which private stock will be accepted as donations to the private trust  10 . Lists of eligible companies may be compiled by the private trust managers  16 . However, those lists are preferably not made public. As will be explained below in some detail, however, a donor using workstation  32  connected to the Internet  34  may complete a form requesting that the managers  16  of the private trust  10  accept a donation of his privately-held stock. The form is accessed by accessing the trust web server  28  in a manner well known in the art.  
         [0031]    [0031]FIG. 3 is a schematic diagram of information exchanged between a potential donor and the trust management system  25  when the potential donor submits a request that the private trust  10  accept a donation of private shares. The process begins when a potential donor using the donor workstation  32  accesses the trust web server  28  by entering an appropriate universal resource locator (URL), in a manner well known in the art. The trust web server  28  may respond to the request for access by examining a cookie previously stored in the donor workstation  32 , also in a manner well known in the art, in order to determine whether the donor is a repeat visitor and requires specialized or personalized web pages (step  42 ). The trust web server  28  selects an appropriate page and downloads that page in step  44 . The donor workstation  32  displays the downloaded page in step  46 . Assuming that the potential donor is a first-time visitor to the trust web server  28 , the donor may begin by requesting information stored on the web server about the potential donor&#39;s company (step  48 ). The trust web server  28  responds by retrieving stored information accumulated by the trust manager  16  (step  50 ) and downloads the information (step  52 ). The information is displayed by the potential donor&#39;s workstation  32  (step  54 ). After reviewing the information, the potential donor requests (step  56 ) a donor form by selecting an appropriate button from the page downloaded by the trust web server. The button (not shown) may be selectively displayed with information about companies from which the trust managers  16  are willing to accept donations of private stock. In step  58 , the donor form is retrieved by the trust web server  28  and downloaded (step  60 ). The donor workstation displays the form (step  62 ) which is completed by the potential donor (step  64 ). The completed form is uploaded (step  66 ). On receipt of the completed form, the trust web server  28  analyzes the content of the form (step  68 ) to determine whether information is complete (step  70 ). If the information is not complete, an error message is returned (step  72 ) and the process is reiterated in a manner well known in the art until the form is correctly completed, or the potential donor abandons the process.  
         [0032]    When the form is correctly completed, the trust web server may consult an internal unpublished list of current companies from which private stock will be accepted. The list also preferably includes the names of all holders of the private stock in the respective companies known to the managers  16 . If the company is located in the list and the potential donor name is also located and determined to be a holder of private stock in the company, the trust web server  28  may record the donation of private stock as a provisional donation (step  74 ), pending review and approval by the private trust managers  16 . The trust web server may further compute the provisional trust units (step  76 ) and generate a provisional trust certificate (step  78 ), which is returned to the potential donor (step  80 ). The potential donor then prints the provisional trust certificate (step  82 ).  
         [0033]    Concurrently, the trust web server sends the provisional trust information (step  84 ) to the trust management server  24  where it is brought to the attention of the trust managers  16  by an alert displayed on trust management workstation  26  (FIG. 2). The provisional donation is logged in step  86  and reminder dates are created (step  88 ) which provide reminders at predetermined intervals to prompt the private trust managers  16  to follow up on the provisional donation. A provisional donation is not finalized until the private stock certificates and attendant permission letters are received by the trust managers  16 . After the private stock certificates and attendant permission letters are received, the trust managers  16  operate the trust management server  24  to convert the provisional donation to a private stock donation and to issue trust unit certificates to replace the provisional certificates generated by the trust web server  28 .  
         [0034]    It should be noted that the above-described automated process for donating private stock to the private trust  10  is only one example of how the process may be conducted. As will be well understood by those skilled in the art, holders of private stock may prefer to deal directly with trust managers  16  and the donation process may be a verbal or off-line process conducted by written or verbal communication rather than the on-line process described above.  
         [0035]    [0035]FIG. 4 illustrates a donor workstation  32  which is used to complete the provisional donation web form described above with reference to FIG. 3. When the potential donor requests a provisional donation web form  90  using a web browser  92  to access the trust web server  28 , the provisional donation web form  90  is preferably downloaded as a secure page to ensure that information provided by the potential stock donor cannot be intercepted or appropriated by third parties. The provisional donation web form may be populated by the trust web server with information about the company and the value of the privately-held stock. In that case, a potential donor may only be required to fill out personal information and supply the number of private shares to be donated to the private trust  10 .  
         [0036]    As is well known in the art, most venture capital contracts include “ratchet clauses” which are performance requirements that must be met by the company within specific, predetermined time periods. If the targets are not met in accordance with the provisions of the ratchet clauses, the company is normally required to issue more stock to the venture capitalists. In order to ensure that the value of stock held by the private trust  10  is not diluted by the exercise of ratchet clauses, the donator of the private stock may be required to determine whether the ratchet clauses will apply, for example, by completing an appropriate section  94  of the provisional donation web form  90 . If the potential donor elects not to have ratchet clauses apply, the potential donor may opt to specify a preferred discount rate which is completed in another special section  96  of the provisional donation web form  90 . As will be understood by those skilled in the art, the private stock donations are frequently interactively negotiated between the potential donor and the private trust managers  16 . The provisional donation web form can, however, provide a framework for the negotiations, and may be used to complete the transaction.  
         [0037]    In addition to using the web browser  92  to perform provisional donations, users may also submit information respecting their private company using a private company submission web form  98  that is accessed from the trust web server  28  in a manner well known in the art. The private information submission web form permits publicly available information about the company to be submitted by, for example, entering an URL which points to a source of public information about the company. For example, the URL may point to a magazine or newspaper article detailing the provisions of a venture capital funding round, or the like. The private company information submission web form  98  may also support the attachment of articles, brochures, or other electronic documents, tables or other information.  
         [0038]    In some instances, a potential donor or other interested party may wish to submit information to the trust managers  16  which is not to be made public or accessible from the trust web server  28 . In that case, the potential donor or other interested party may select a private company confidential information submission web form  100  which initiates a secure session that opens the confidential information submission web form  100 . The web form  100  preferably supports the attachment of documents, such as venture capital contracts which may be used by the trust managers  16  to examine ratchet clauses, etc. Alternatively, a sub-page  102  may be used to enter ratchet clause recitations or other provisions imposed by a venture capital contract.  
         [0039]    [0039]FIG. 5 details the process in which a potential donor, or other interested party, submits public information to the trust management system  25 . The public information is used by trust managers  16  to determine whether donations of shares by holders of private shares in the company will be accepted by the private trust  10 . In a first step of the process, the potential donor using donor workstation  32  accesses the trust web server  28  in step  150 . As explained above, the trust web server  28  may examine a cookie passed by the donor workstation  32  in the process of determining an appropriate page to download to the potential donor (step  152 ). An appropriate page is selected using any predetermined criteria, and the page is downloaded (step  154 ). After download, the page is displayed (step  156 ) and the potential donor selects an appropriate button to request information about the company in which the potential donor holds stock (step  158 ). The trust web server responds by retrieving the company information, if available, (step  160 ) and downloads the information or an appropriate message (step  162 ). The information or message is displayed by the donor workstation  32  (step  164 ) and the potential donor scans the information (step  166 ). Subsequently, the potential donor requests an information submission form  98  (step  168 ), which is retrieved by the trust web server  28  (step  170 ) and downloaded (step  172 ). The form is displayed in step  174  and completed in step  176 . The completed form is uploaded (step  178 ) and inspected to determine whether the information is complete in step  180 . If it is not complete, an error message is returned in step  182 . If the information is complete, the information is saved and forwarded to the trust management server  24  (step  184 ), which queues the information for evaluation by the trust managers  16 . The trust managers  16  evaluate the information (step  186 ) and may determine whether the company is one from which private shares will be accepted as donations to the private trust  10  (step  188 ), if the submitted information proves to be material in that decision. If it is determined in step  188  that shares from that company are not to be accepted as donations to the private trust  10 , the managers  16  may instruct the trust web server to delete the company information in step  190 . Alternatively, if the company is accepted or if the information is inadequate to permit a decision to be made, the information may be logged (step  192 ) and the trust managers  16  may send a request to the trust web server (step  194 ) to update the company information with the new information supplied by the information submission form  98  in step  168 . If so, the trust web server updates the company information file in step  196 , and the process ends.  
         [0040]    [0040]FIG. 6 is a schematic diagram illustrating the principal messages exchanged when a potential donor submits confidential information to the trust management system. In step  200 , the potential donor, using donor workstation  32 , accesses the web server  28 . As described above, the trust web server  28  may optionally examine a cookie provided by the donor workstation  32  (step  202 ). The trust web server  28  selects an appropriate page and downloads the page in step  204 . The page is displayed by the donor workstation  32  (step  206 ). The potential donor selects a button to request information related to a private company in which the potential donor owns private stock (step  208 ) and the information is retrieved by the web server  28  (step  210 ). The information is downloaded (step  212 ) and displayed (step  214 ). The potential donor scans the information (step  216 ) and decides to submit confidential information related to the private company.  
         [0041]    The potential donor therefore requests a confidential information submission form (step  218 ) which is retrieved by the trust web server (step  220 ) and downloaded (step  222 ) to the donor workstation  32 . The donor workstation  32  displays the form (step  224 ) which is completed by the potential donor (step  226 ). The form is, for example, the private company confidential information submission web form  100  described above with reference to FIG. 4. After the form is completed, the completed form is uploaded (step  228 ). When the completed form is received by the trust web server  28 , the form is examined (step  230 ) to determine whether it is complete (contains information added by the potential donor, for example). If it is not complete, an error message is returned in step  232  and an iterative process ensues, as is well known in the art. If the form is complete, confidential information is forwarded in step  234  to the trust management server  24 . Security codes are preferably embedded in the confidential information, or it is encrypted, before it is forwarded to the trust management server  24  so that only trust managers  16  can view the confidential information. Alternatively, the security codes can be inserted by the trust management server  24  after it is received.  
         [0042]    An alert is sent to the trust managers  16  who retrieve the information (step  236 ) and inspect it. The information is then stored in the trust management server  24 . Confidential information is not made available to the public on the trust web server  28 .  
         [0043]    [0043]FIG. 7 illustrates the evolution of the private trust  10  as donations of private stock and cash are contributed to the private trust  10  by donors  12 ,  14 . As the private trust  10  grows, the accumulated managed assets eventually reach a critical mass which permits an initial public offering (IPO)  240  to be tendered to permit the trust to evolve into a closed-end mutual fund  242 . Public trading  244  is thereby enabled. This provides donors  12 ,  14  with more liquidity and enhances the ability to publicly trade in shares of the closed-end mutual fund.  
         [0044]    With respect to private shares held by the private trust  10 , the private shares may be disposed of in at least one of two different ways. First, the private company may be bought out by another company, in which case the private trust  10  receives payment for the private shares in cash or in shares in the acquiring company. As is well understood, the managers  16  may negotiate with the buyers for a price acceptable to the managers  16  of the private trust  10 . Second, the private company may be converted to a public company by making an initial public offering (IPO). As is well understood in the art, when a private company becomes a public company through the instrument of the IPO, the private shares are converted to public shares. A trading in the public shares is frequently regulated and the shares are held in escrow for a predetermined period of time. During the escrow period, the private trust  10  is not permitted to dispose of the shares on the public market. Consequently, the trust management server  24  is preferably programmed to accept the input of an escrow date that is associated with the privately-held shares associated with a particular company. The trust manager server is also preferably programmed to generate at least one reminder to the trust managers  16  when the escrow period has expired. After the escrow period has expired, the private trust  10  may dispose of the public shares as the managers  16  deem appropriate. When public shares are sold, any profits are preferably dispersed to trust unit holders prior to an end of the fiscal year in which the sale was completed, in order to avoid tax liability on the part of the private trust. Thus, a donor of privately-held shares diversifies risk while receiving a share of profits realize from a plurality of sources.  
         [0045]    The embodiment(s) of the invention described above is(are) intended to be exemplary only. The scope of the invention is therefore intended to be limited solely by the scope of the appended claims.