Cofounded by Manu Kumar, eShares Aims to (Finally) Digitize Stock and Options Certificates

Sometimes, a good idea isn’t terribly sexy. So it may be with eShares, a new, Palo Alto-based company that’s asking law firms and startups alike to replace their paper stock. Specifically, the eight-month-old company aims to digitize companies’ stock certificates and later, options certificates — and to integrate with equity compensation software like CapMX so that every change to a company’s cap table can take place transparently, in real time.

Why, and why now? CEO Henry Ward says one major driver is the Jobs Act and its provision to allow small companies to “crowdfund,” or sell stock and other securities directly to the public over the Internet. Though the Securities and Exchange Commission has yet to issue regulations to put the provision into effect, when it does, says Ward, it will most certainly create a more liquid marketplace. Not only will more companies get funding, but Ward predicts that many more of them will “live right under the IPO line, with 90 percent of their liquidity needs met by the private capital markets.” That could mean a whole lot of stock certificates.

Ward also launched eShares because Manu Kumar — the venture capitalist who today manages K9 Ventures – kept pestering him to do it. “Manu pitched me twice,” says Ward, who began his career as a software engineer, then segued into software sales, then quantitative finance, before founding his last company, a now-shuttered portfolio optimization platform for retail investors. (He met Kumar while trying to raise funding for that startup.)

At first, Ward turned down Kumar, because “I didn’t think the idea was superinteresting. I also questioned how big the market is.”

That’s changed, of course. As Ward tells it, to create, FedEx, replace and store paper stock certificates costs roughly $100 a year in paralegal time, and eShares can do it for $20. Options are even more costly to process today, and eShares aims to digitize them eventually, too — again for a fraction of their current cost.

Down the road, with shareholders’ stock holdings and options digitized, eShares — which will start looking for $1.5 million seed round this spring — is promising them correct and real-time information about the value of their holdings. And it plans to add electronic transfers with restrictions to automate the secondary trading of shares — matching buyers and sellers and clearing their transactions —  for far less cost than investors pay today.

It all sounds good. The question is whether others will buy into the vision. The company has already talked with six top law firms in Silicon Valley; two have agreed to do a private beta with eShares next month. “The reaction from them was, ‘We love it.,'” says Ward. “We worried they’d perceive what we’re doing as [a threat to their business], but it turns out they can’t stand paper certificates.”

The other firms have yet to sign on, however.

“They’re interested, but they’re waiting to see what happens. As one of the biggest firms told us, ‘We see the value, but it would be hard for us to be an early adopter because we’re so risk averse. We’ll have to see others use it successfully first.’”

Photo: Image courtesy of Shutterstock.