Cashing in points for equity


There are a wide variety of awards available for point redemption, from travel to gift cards to commercial goods. And apparently now it is time to add corporate equity to the list. Stock for points is coming and there are a couple companies working on making it happen.

The idea is pretty much the same as any other transaction – assign the points a cash value and exchange them for equity at that price point – but there are a whole bunch of differences that make it much more interesting than it appears at first blush. One of the companies that has built a system to power such transactions is suggesting that the stock "purchase" is a purchase being made with points that are not taxable (i.e. earned as a rebate) so the purchase is a non-taxable transaction. No word on the cost basis, but there could be some interesting value there.

The other interesting bit is that it appears the system is designed to only allow trading the points for stock in the company which issued the points. So it isn’t like the points become true currency for any stock transaction. This also means that when the company redeems the points they get to cut their liabilities against the outstanding points AND increase the equity value of the company at the same time. No doubt that this is a good thing for the companies.

The real question is whether it is at all useful to consumers. There is plenty of up-side to the company, but that’s not what will necessarily drive the success of the product. A reasonable valuation of the points for the transaction would be one component that would make the option a success. I’ve seen no examples of the product in the wild yet, so it is hard to tell what the valuation point is going to be, but it is reasonable to expect that it will be more towards the gift card price point than the price the companies sell the points at.

And then there’s the part where stocks are an investment vehicle that can easily lose value. The systems are designed to prevent flipping of stocks and to otherwise slow the transaction process so these aren’t going to be quick sale opportunities.

It is great to see new ideas coming out and even better that some of them are actually getting a chance in the industry. But it is hard to see the value until there are a lot more details available and the product is actually in use somewhere.

Read more:

http://www.loyaltyshares.com/2012/02/our-stock-loyalty-solution-is-better-for-the-company-and-the-consumer/

http://adage.com/article/digital/forget-rewards-give-loyal-consumers-stock-company/232700/

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Seth Miller

I'm Seth, also known as the Wandering Aramean. I was bit by the travel bug 30 years ago and there's no sign of a cure. I fly ~200,000 miles annually; these are my stories. You can connect with me on Twitter, Facebook, and LinkedIn.

2 Comments

  1. Thanks for putting the discussion up. I did respond to your comment on our own site and to clarify a couple of points here…

    1. You’re right – there is a tremendous benefit to the company to move their point liability to stock. That is one reason we think companies will want to look at this as an option.

    2. The point valuation is critical. It makes no sense to offer this option and then have the points worth some miniscule amount.

    3. The system is NOT designed to keep people from flipping stocks. There is a 30 day waiting period but that is function of the rules – not a company issue. No one is trying to “lock” someone into the stock.

    4. It won’t be a good redemption option for everyone. There are many people who only get enough points to get a vacation or a couple of tickets back to see the family. Those folks won’t find value in this option. But for a large number of people, who never, ever use all their points – AND – like the company they are loyalty too… it might make sense to buy some of the stock with their points.

    It won’t be for everyone. But we think there are enough loyal customers, who are loyal to the company not just for the points/miles but also because they like the service and the product.

    1. I appreciate the feedback, Paul. I agree that there might be some value for orphaned points if the share price is low enough but otherwise I’m not so convinced. I am also concerned about the cost basis for the owned shares when it comes time to sell. If the initial acquisition is a tax-free event then the full value would likely need to be declared at the time of sale, not just the value difference, right? Certainly better to only take the hit as ca[ital gains than normal income, but there is still a tax implication there.

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