By issuing Conversion Notes, Kentron rewards the initiation of ideas, and the contribution of participant’s time and investor’s funds to the realisation of those ideas. This enables the growth and development of an idea without the need for a large capital outlay, reducing its chances of failure due to lack of funds. In addition to providing a mechanism for raising capital for projects through the issue of Conversion Notes, the Kentron Shareholder Agreement also defines processes for buying and selling Conversion Notes.
The value of Conversion Notes can change with time so that project members who invested time or funds early in the project life cycle can be preferentially rewarded for that early commitment. At the end of the first 6 months, the Project Leader, any additional members of the Project Leadership Team will, in consultation with the Sandpit Manager, settle on a revised value for the Conversion Notes for the project for the next 6 months. They will also set a cap on the number of Type 1 Conversion Notes that will be made available for purchase in the following 6-month period. This valuation and capping process will repeat for each active project every 6 months. Mechanisms for managing this process are provided through the Kentron platform made available to each sandpit.
Conversion Notes in a Kentron project translate into a pro-rata shareholding in any later spin-off company of that project at the time of incorporation and, in the interim, the distribution of any income accruing from the operation of that project. There are two categories of Conversion Note issued to participants in projects:
Type 1 Conversion Notes
Type 1 Conversion Notes can be obtained by:
- Initiating a new project, centred on a single idea, which is likely to lead to commercialisation. The initial Conversion Note issue is determined by the value placed on the project by the initiator of the project who then also becomes the Project Leader. The Project Leader determines, in consultation with the Sandpit Manager, the initial value of the project. The Project Leader will be allocated the associated number of Type 1 Conversion Notes, using an initial value of $1.00 per Conversion Note.
- Financially investing in the project. The current value of Type 1 Conversion Notes is set at the previous 6-monthly review. The Project Leader has veto rights regarding any potential investor, i.e. they can decline a request from an external investor to buy into the project.
- Purchasing Type 1 Conversion Notes from a seller of Type 1 Conversion Notes in the same Project Leadership Team.
- The transmission of Conversion Notes as a beneficiary under the Estate of a holder of Type 1 Conversion Notes; or by survivorship.
Holders of Type 1 Conversion Notes constitute the Project Leadership Team of that specific project and will have voting rights relating to the project according to the number of Conversion Notes held.
If the owner of Type 1 Conversion Notes would like to sell their Conversion Notes, it is their responsibility to find a buyer. The sale price is negotiated between the buyer and seller, and need not involve the Project Leader, the Project Leadership Team, or the Board of Directors of Kentron. The price on all Conversion Note trades is made known within the sandpit hosting that project and will inform the review of the Conversion Note value at the next 6-month review. Unless clauses (3) and (4) above apply, when Type 1 Conversion Notes are sold or gifted, they automatically become Type 2 Conversion Notes.
Type 2 Conversion Notes
Initially it is unlikely that there will be funds within a project to pay for services. Therefore, any individual working on a project will most likely be compensated for their time through the allocation of Type 2 Conversion Notes. The rate at which Type 2 Conversion Notes are earned, and the maximum number of Conversion Notes available to be earned is determined through negotiation between the individual earning the Conversion Notes and the Project Leader. The Kentron platform provides the required systems for recording hours on projects including the capability for the Project Leader to audit hours being charged to a project and the subsequent issuing of Conversion Notes. Type 2 Conversion Notes can also result from an individual buying (or being gifted) Type 1 Conversion Notes where that individual is not a member of the Project Leadership Team nor a beneficiary under the estate of a holder of Type 1 Conversion Notes.
While Type 2 Conversion Notes entitle the holder to their proportional allocation of shares in a spin-off company, and their share of any management fee generated by the project in any year, they do not associate with any voting rights in relation to that project. Members of the Project Leadership Team are entitled to earn Type 2 Conversion Notes like any other contributor and will be allocated Conversion Notes for any time they invest in the project as outlined above.