A PRIMER ON CORPORATE FINANCE FOR DAO TREASURIES
It seems a lot of the discussion about the relative merits of a buyback hinges on the proponent’s assessment of how much buy pressure it will induce.
This post will suggest an alternative view of DAO treasury capital allocation
SETTING THE SCENE
DAO Treasuries, like startups and other corporates must decide how best to apply finite resources towards a goal. What should that goal be? Jeff Bezos who might know a thing or two about business set a good one at Amazon, “maximise the free cash flow per share”.
So then, DAOs theoretically in general (not specific advice) COULD apply the same thinking to maximize the free cash flow per token. The expenditure of scarce treasury resources is thus evaluated on the Net Present Value (NPV) of each option.
A DAO following that process would:
- set out its options
- calculate the NPV of each option by estimating their future cashflows and then applying a discount rate and then deducting the upfront cost
- If the options are MUTUALLY EXCLUSIVE (eg DAO lacks resources to do both) then do the one with the highest NPV. If they are not then do any that have a positive NPV because they are capital accretive.
WHAT ARE THE OPTIONS FOR MOST ENTITIES?
- Spend on further product development
- Mergers and Acquisitions
WHY DON’T STARTUPS DO BUYBACKS OR DIVIDENDS?
Building their product is usually the highest NPV activity for startups. Their equity is also illiquid which typically prevents buybacks. They also don’t pay dividends because they can reinvest the capital in growth at high rate of return.
HOW COULD DAOs THINK ABOUT BUYBACKS?
NOT as a way to influence price.
Instead, a DAO is spending $X and over a 7 year horizon can earn $Y yield per annum from staking the token, and at the end of 7 years could sell the token at a terminal value of $Z (typically a multiple of Rev/Fees/Yield). The NPV of the buyback is the discounted sum of the $Y staking cash flows and the terminal sale price of $Z, minus the initial cost of $X.
Therefore the assumptions that a DAO should weigh and consider are:
- what yields it will receive over the timeline
- the multiple of rev/fees etc that it could trade at end of timeline
- its discount rate (higher for startups, lower for mature orgs)
If in the mental arithmetic of DAO members, these numbers resulted in a positive NPV and the DAO had the resources to do both continued product development, and the buyback, then such a move would make sense within that mental framework.