iConsumer, discounts plus upside?

Earlier this last month, I sat down with Robert Grosshandler the founder and CEO of iConsumer (Non-Referral) (Referral link).  He graciously agreed to put up with my questioning about what iConsumer was and how it worked.  Below is the interview edited for clarity and what I personally think is interesting.  Additionally, you’ll find a link to the original sound file.  iConsumer is basically a discount portal, the interesting quirk is that, in addition to cash, you also get shares of preferred stock in the company.

Adam: Alright, can you tell me a little bit about iConsumer?

Rob: Well so, iConsumer is a way for the 99%, or ordinary people, to get a piece of the pie; a piece of the economic pie. To participate in the fabric of our economy simply by doing what they normally do which is go shopping at 1700 great stores. When they go shopping at these great stores in addition to getting stock in iConsumer they’re also going to save money and even better they’re going to get cash back rebates. So you’ve go shop at REI, Nordstrom or Macy’s you’re going to get 1%, 2%, 3% cash back.  Different stores have different rates. You’re going to save money because we have lots of stores doing this so they’re offering up great deals, and you’re going to get stock in iConsumer you’re going to become a shareholder…the more you shop the more stock you’ll earn.  The more shares of stock in iConsumer you will earn.  So you’re becoming a bigger shareholder, a bigger stockholder the more you shop in addition to getting great cash back.

Adam: How does someone actually shop through iconsumer?

Hopefully it’s really easy. Once you become a member, which takes 5 seconds and is free, you use one of the links on our site to go to the store you’re interested in.  Everything about accounting for the stock and cash back you earn happens in the background you don’t do anything special you don’t have to use any special coupons. Fundamentally, the process is invisible and easy.

Adam: Can you use a credit card?

Rob: Exactly, that’s exactly what you are doing. If Macy’s accepts bitcoin go ahead and use bitcoin, use paypal, use your credit card.

Adam: Okay great, So what companies are you working with, any specific examples, I know you mentioned REI?

Rob: There are really are over 1700. The ones we’re not working with are the car companies. If you want to go travel and use expedia, travelocity, or orbitz use one of those. You can buy flights on american airlines if you’re looking for clothing, there’s Macy’s, Nordstrom, JCPenny, Land’s end.  If you’re buying computer hardware it could be oh how about Apple how about Newegg or best buy.  So literally more than 1700 stores offer you great prices, cash back, and of course you’re earning stock in iConsumer every time you buy there.

Adam: So how do you guys create these discounts?

Rob: We work with the stores. The stores are in iConsumer as a way to create customer loyalty. They work with our team to make sure that people who have said, “Hey I wanna shop at some store.” We make sure that they offer up great deals, so sometimes they offer a free shipping deal,  or a coupon deal.  Sometimes there’s no deal at all and you are just getting cash back because you shopped through iConsumer.

Adam: Okay, so you’ve mentioned when you buy from iConsumer you get a certain number of shares how many shares do you get, how are these shares created and are they traded on any sort of exchange.

Rob: That’s a great question,  so you get a dollar for dollar number of shares so right now we’re still in the process of this the SEC has not yet said go, when we become SEC qualified then all of this actually happens. It looks like it is going to happen in December. We’re pricing shares at 9 cents per share, so if you have a dollar of cash back you’re going to get a dollar’s worth of shares, which is about 11 shares give or take.  These are tradeable shares they are going to be on the OTC markets, they will be over the counter shares, that you have the right to sell if you want to.

Adam: How do people end up holding these shares? How do they actually get the shares?

Rob: So it’s all electronic.  You’ll actually get a share of stock delivered to you electronically and you can choose to hold that in an account we create for you with one of our partners or if you have a broker you prefer like Ameritrade or eTrade you can transfer the shares into you’re existing trading platform, or you can just let us keep track of it on our site.

Adam: Just to clarify again. When these shares are iConsumer is saying…Are they sort of created then do they come out of some fixed pool of shares…

Rob: Right, so in order to go public we have to register this offering. So when we register this offering we say that we have set aside X number of shares to be given to member’s when they shop.  So I don’t actually remember the number, but there is a fixed pool of shares.  If we are successful and we have given away all our shares we could go and make another offering with the SEC to create more shares to be given to even more shareholders.

Adam: Any plans for dividends

Rob: So you pay dividends when you’re profitable, you can pay dividends when you’re not profitable but that’s a bad idea. If we become big and valuable and there is more cash than we need to run the business then we are in a position to pay dividends.  The stock that people are getting is preferred stock so the preferred shareholders get a dividend before anyone else gets it.

Adam: What is the plan for iConsumer to become profitable?

Rob: Well, that’s a great question.  You’re actually the first person to ask me these great questions, which are very fundamental questions.  We’re modelled after some other companies you may be familiar with like eBates. eBates sold for $960 Million to a Japanese company a couple years ago and they did that with 2.5 million members. So our goal is to become big.  We get enough people using this thing, if we’re a fifth of the size of eBates, the company should be making money, the company should be in a position to make a profit should be in a position to pay dividends if it doesn’t need the cash, and therefore traditionally people think that those companies are worth more, they certainly are worth more than what you paid for your stock.  In this case you didn’t pay anything for your stock.

Adam: What is the timetable on this sort of going to market?

Rob: Yes, we’ve actually filed with the SEC. While there are no guarantees our expectation is that in December the SEC will qualify our offering.  At which point we’ll be in a position to transact on the stock side of things. We’re actually up and running today, so if you look at iConsumer today, you’re getting credit on the iConsumer shares you earn today. We have good computers with big storage so we’re keeping track of how many shares you’re earning in addition to the cash back you’re earning.

Adam: My other question would be that if I am an early adopter of iConsumer and I start using it all the time, why should I not be concerned that in the future when you scale up to a million users all those future users are going to end up diluting me out of my share of the company.

Rob: Part of what we will be doing is that we will be watching the value of those shares.  So while they’ll always be getting a dollar of stock in addition to a dollar of cash back, that will be for fewer and fewer shares. Because the price per share, as we become more successful we expect to go up.

Adam: Suppose instead that you become more successful, people don’t want to sit on the shares and just immediately go to market and sell them causing the price to be lower than you expected and you have to keep printing more shares to keep up with that dollar value. Is there any concern there?

Rob: Well so, there is certainly is. When you’re running a public company you have to be concerned with those kinds of issues.  We’re doing something for the first time, there’s never been a company that has been built because people are being given shares for free. We’re aware of this concern.  We hope that our valuation will continue to go up.  We will be very aware of managing that number.  Managing how many shares go to shareholders because they’re shopping.  From  a how many people bought shares and paid cash for those shares, that offering is a max of $2 Million.  For at least the first million people we don’t foresee any problem. But it’s a great question.  It’s one of the interesting unknowns what we’re doing how we’re going to manage it. If that’s something you are concerned about…the stock is tradeable so sell out of it.

I later followed up with Rob and asked him a few more questions about how the preferred stock and the common stock actually work, his response:

Our preferred shares have three attributes that distinguish them from common.  A liquidation preference, a dividend preference, and a voting rights preference.  The structure is designed so that the common does not receive benefits the preferred haven’t already received, other than voting rights.  I do not expect the common to be traded.

1)      Liquidation.  Preferred comes first, after that the same as common.  Ergo, if there is a liquidation event (e.g. sale, dissolution) the preferred stock gets first dibs, then common gets second dibs, then the remainder is split equally.  As of this writing, it is calculated at $.09 a share (what the original purchase paid for the stock on original issuance, or the value ascribed to the stock when it was issued “for free” to a member).

For example, if there are 100,000,000 preferred shares issued, and 100,000,000 common, and the company is sold for $100,000,000.  The first $9,000,000 would be allocated to the preferred, the second 9,000,000 would go to the common, and the remaining $82,000,000 would go equally to the preferred and the common.
If the company is sold for $9,000,000, all of the proceeds would go to the preferred.

2)      Dividend preference.  Effectively, the company cannot pay a dividend to the common without paying the same or better dividend to the preferred.  The company does not promise to ever pay a dividend, only that if dividends are paid, we need to pay them to the preferred before paying them to common.  Paying at the same time and in the same amount is ok.

and:

The number of authorized preferred shares is currently equal to the number of authorized common.  The authorized number of either class of shares can change. iConsumer can create new classes of shares (it is not uncommon for that to happen) as its financing needs change.

What’s really more important than authorized is the issued number of shares of any class.  All of the common is issued, very little of the preferred is issued.  As people buy iConsumer stock, after the SEC Qualifies our offering, the number of issued preferred will go up.  As people become members, and as people refer members, and as people get cash back, the company will be issuing them preferred.  In other words, the common will own a smaller percentage of iConsumer as it grows.

Our plan is that the number of issued shares of common will approximately equal the number of issued shares of preferred at about the 1,000,000 member level.  So, if that plan comes to pass, and market or other forces don’t cause us to change that plan, if the company were sold to a third party, and assuming that the sale price were in excess of approximately $18,000,000 (given the current plan), common shareholders would receive approximately half the proceeds, and preferred shareholders would receive approximately half the proceeds.

Also interesting is to speculate what the company might sell for at the 1,000,000 member level.  Our guideposts are what other companies sold for.  eBates sold for $960,000,000, with 2,500,000 members, about two years ago.  That valued each member at about $400.  RetailMeNot and coupons.com are also good guideposts as to what the future value of iConsumer might be, as they have similar economic models.

So, is iConsumer, the website a good deal?  I’ve used the website a little myself for purchases I was going to make anyway and it’s saved me about 5%. This is on top of credit card rewards that I was expecting anyway.  My alternative, eBates, would have offered me an additional 1%.  Depending on the transaction fee for trading the stock, I think that I am likely to come out ahead.  The stock could fall in value by 80% and I’d break even compared to eBates.  Though, in all honesty, I had no idea that there were these kind of discount portals to begin with, so without iConsumer I wouldn’t have saved any money at all.

The second question is, does the stock represent a good deal? My suspicion is that the stock (offered at 9 cents per share) isn’t a very good deal and I would recommend against buying it on StartEngine.  Though, I would probably recommend against buying any stock offered on StartEngine.  What is iConsumer stock probably worth?  Let’s look at a few different scenarios:

Cool idea, didn’t work

In this scenario, either iConsumer fails to gain enough users to become profitable or their users mass sell the stock causing the stock price to spiral to zero as the company is forced to print more and more shares.  Shares in this case are worth $0. Startups fail, this is kind of a gimmicky premise that I don’t think very many people will understand, or want to participate in.  I therefore assign this case a probability of 60%.

Great idea, totally worked

In my view, the maximum value of the stock is $2.  That number comes from assuming that the company is sold at $400 per user and each user only owns their starting 100 shares of stock (management owns 50%, the common and would get $200 per user in this hypothetical sale, then the remaining $200 per user would be divided among the preferred shares.  If the average user owns 100 shares, then that’s $2).  This, would mean that all the users did was sign up, then not use the portal.  Obviously that doesn’t make very much sense, but it does give us an idea of an absolute upper bound.  The dream that you’re going to buy the stock and its going to go to $20 per share is basically impossible.  So what is a reasonable good-case upside?  Let’s assume that on average each user accumulates 500 shares of stock.  The company executes correctly and is bought out at $400 per user, like eBates was.  That works out to $0.40 per share.  I’ll assign this scenario a probability of 5%.

Okay idea, muddled through

The liquidation preference for the preferred stock matters a great deal.  The preferred has first claim on the assets of the company up to $0.09 per share.  Almost any kind of stable scenario, one that’s not great but not bad is going to give us a value of 9 cents per preferred share.   This is probably the most likely “good” scenario.  Even if no one makes a bunch of money at least iConsumer’s users enjoy a really stable price for their shares, they can use the portal and basically get double cash back compared to comparable portals.   They can sit on shares and sell them all at once in large batches to save on transaction fees.  Management makes a decent amount of money, everybody is happy, except for the guys who bought shares on StartEngine, they don’t lose money, but they don’t make money either.

Overall

Assuming these guesses are reasonable the expected value of an iConsumer share is probably about 5 cents.  Actually paying money for the stock probably isn’t worth it.  I will likely be a net-seller of iConsumer stock once it begins trading. (Possibly this month).  The unfortunate part about this company is that if the stock price goes below 5 cents, that might be a buying opportunity for another company.  Obviously if the stock is worth 5 cents and you can buy it for 2 cents you’re getting a great deal.  However, because the company’s operations depend on its stock price, a low price is likely to be a self fulfilling prophecy.  The good news is that using iConsumer as a discount portal is a great idea.  You’re probably earning more than comparable discount portals.  Obviously you don’t want to buy extra stuff just to get a 5-10% discount (after the shares are included), but I don’t need to tell Thousandaires that.

Here are the links to iConsumer (Non-Referral) (Referral link) again. You get 100 shares to start with via both the non-referral and the referral link.  If you sign up with the referral link I also get 100 shares.

Here is a link to the interview audio.