What should happen when a corporate fails its customers? You would think it would be solved by free market rules i.e. customers would stop buying what the corporate is selling unless they feel compensated for the failure. Or the regulator would intervene and penalize the company to teach it a lesson.
Robinhood Financial LLC’s recent debacle is a great example in the making. Robinhood is a hot startup providing stock brokerage services to small investors. Their claim to fame is providing small investors commission free trading and leverage. Basically they promised a free lunch and cheap debt. You know where this is going.
Following the last week market crash of 15% Robinhood’s platform failed miserably. Their users, who are actually investors, investing on high leverage were locked out of their accounts unable to take any action. Result: unhappy and poorer investors/users. Robinhood was offline on 2-Mar-2020 and 3-Mar-2020. Robinhood blamed it on record number of trades. Users/investors argued the real cause was: bad leap-year coding as it relates to “29-Feb” date. Irrespective the reality is the platform crash was clearly Robinhood’s own fault and they accepted it as such.
Robinhood has come out and said sorry in the usual corporate ways. An announcement on their blog and some twitter updates. They have announced a paltry level of compensation, a mere $15/user, in the form of three months of free service. That is NOT even $15 of cash compensation. Furthermore the company said it will offer ‘case-by-case’ compensation. No clue what that means.
Regulator has so far not done anything. They are “investigating”. As is typical in such failures in service to consumers or public, a petition has been started by some heavily affected folks. They are clearly well intentioned and justified. However nothing really come off these petition because people just do not organize themselves in front of a corporate. It is very hard to do so.
Enter OurSurplus. We argue that that there is a mechanism for users/investors of Robinhood to be fairly compensated. It obviously will come at the expense of someone else at Robinhood because there is no such thing as a free lunch. (There is cheap debt if you ask the central banks). OurSurplus has analyzed the situation and concluded that there are 3 categories of stakeholders involved here (ordered descendingly in order of importance):
- Users / Investors
Robinhood might argue that since they are a startup and therefore have no real cash to offer as compensation as they would go bankrupt otherwise. That might be technically true but they do have substantial Enterprise Value and that is what needs to be used here for compensation. Allow us to explain please.
Robinhood has a 10-million-strong user base and a $7.6 billion valuation per its last funding round. That’s a heck of a lot of value. It’s probably lower now but it is still substantial. They need to share that value with its user base as compensation for their failures. Its a fair argument because without these very users their valuation would be nothing. And therein lies users power in this situation.
Sharing that value with users would be a win-win for all stakeholders involved. Think about it: If most users leave Robinhood and go to a competitor, the users are no better off than now, while Robinhood employees and shareholders are destroyed
However if users receive a sizeable equity stake compensation, the employees are unchanged while shareholders are a little poorer because they will have to share their value with their users / customers. Additionally these users with equity will then be well incentivized to stay with Robinhood as they are shareholders.
Seems like a win-win to us. So what do you need to do. If you are a Robinhood user and would like the option to participate in this negotiation with Robinhood, please subscribe below with your email address. Please use the one you use for Robinhood a/c so that OurSurplus can help identify users when a proper compensation deal is put forward.