Preflop

Spec · Terminal Values● Building now

Terminal Values. How a covenant’s perpetual claim settles.

Three events. One architecture. Death or incapacity, issuer-initiated buyback, and cycle close. Each runs under a different legal regime, uses a different valuation method, and creates different protections for both sides. This spec lays out the architecture.

§1 · Why terminal values matter

Every Preflop covenant carries a 1 percent perpetual claim on the issuer’s net worth. “Perpetual” doesn’t mean infinite. It means there is no fixed maturity date. Eventually that claim has to be settled. Three events can trigger settlement:

  • Death or permanent incapacity of the issuer.
  • Buyback, initiated by the issuer.
  • Cycle close, when an agreed cycle window (default 7 years for the income-share leg) completes.

Each event runs under a different legal regime, uses a different valuation method, and creates different protections for both sides. This spec lays out the architecture.

§2 · The three events

§2.1 · Death or permanent incapacity

Trigger. Confirmed death of the issuer, or court-adjudicated permanent incapacity.

Settlement basis.Estate-based. The 1 percent perpetual claim becomes a claim against the issuer’s estate, valued as of the date of death (or the date incapacity is adjudicated).

Mechanics.

  1. Heirs or executor receive notice from Preflop within 30 days of confirmation.
  2. Estate is valued under standard probate process. Real estate appraised. Securities marked to market. Illiquid private holdings discounted per published schedules.
  3. Token holders receive a pro-rata cash claim from estate liquidity within 365 days of probate close.
  4. If estate is insolvent (total claims exceed assets), token holders are pari passu with other unsecured creditors.

Legal posture. This is explicitly not a life insurance product. The covenant is a contingent debt obligation owed by the issuer (and thus the estate after death). Preflop is not a beneficiary. The estate is the obligor. This framing is designed to avoid classification under state insurance codes. Open · counsel Insurable interest doctrine in CA, NY, FL, TX requires no-action review.

Open questions.

  • Open · counsel State-by-state life insurance regulation review. Working position: contingent debt structure avoids insurance classification.
  • Open · counsel Estate liquidity timing. If 80 percent of net worth is locked in illiquid private equity, the 365-day window may need extension with statutory interest accruing during delay.
  • Open · quant Mortality input pipeline. CDC actuarial tables by age and gender are the working source. Cohort-specific adjustments (founder vs. salaried, medical history disclosures) need parameterization.

§2.2 · Buyback (issuer-initiated)

Trigger. Issuer elects to retire all outstanding tokens. Available after the 7-year income-share window completes, not before.

Settlement basis. VWAP plus premium guardrail. The minimum buyback price is set to give token holders fair-value protection.

Mechanics.

  1. Issuer files a buyback notice with Preflop specifying the buyback date and the proposed price.
  2. Proposed price must be at least:
Pmin⁡  =  max⁡ ⁣( VWAP30d⋅(1+z⋅σVHC⋅Tremaining),    face value×1.1 )P_{\min} \;=\; \max\!\left(\, \text{VWAP}_{30d} \cdot \bigl(1 + z \cdot \sigma_{V_{\text{HC}}} \cdot \sqrt{T_{\text{remaining}}}\bigr),\;\; \text{face value} \times 1.1 \,\right)
  • VWAP30d\text{VWAP}_{30d}is the 30-day volume-weighted average token price on Preflop’s secondary market.
  • σVHC\sigma_{V_{\text{HC}}} is the realized 30-day token-price volatility, annualized.
  • TremainingT_{\text{remaining}} is the remaining mortality-adjusted life expectancy of the issuer in years.
  • zz is a platform-set safety multiplier. Working value: z=1.65z = 1.65 (one-sided 90 percent confidence interval).
  • face value×1.1\text{face value} \times 1.1 is an absolute floor at 110 percent of original issuance price.
  1. Token holders have 60 days to accept or reject.
  2. If at least 90 percent of outstanding tokens accept, the buyback is mandatory for the remaining 10 percent (drag-along).
  3. If under 90 percent accept, the buyback fails and the obligation continues unchanged.

Legal posture. Buyback is a contractual right of the issuer, exercised under a published pricing formula. The VWAP-plus-premium structure ensures backers receive market-fair value or better. This avoids coercive-buyback claims and aligns with standard securities buyback practice.

Open questions.

  • Open · quant Calibration of zz. Working value of 1.65 protects to one-sided 90 percent. Quant review needs to confirm this is the right confidence level given liquidity assumptions.
  • Open · quant Floor multiplier (1.1×). Currently arbitrary. Should be derived from a model of issuer credit risk and platform fee structure.
  • Open · counsel Drag-along threshold (90 percent). Standard private equity drag-along is 75 to 80 percent. Higher threshold gives more backer protection. Counsel to confirm enforceability and SEC posture.
  • Open · product Partial buybacks. Working position: all-or-nothing. Partial buybacks introduce moral hazard (issuer cherry-picks low-cost retirement of distressed token holders).

§2.3 · Cycle close

Trigger. End of an agreed cycle window. Default cycle is 7 years, aligned with the income-share leg of the covenant. The 1 percent perpetual continues by default unless explicitly settled at the cycle boundary.

Settlement basis. Optional rollover or close-out, at a published recommended price.

Mechanics.

  1. Six months before cycle close, Preflop publishes a recommended close-out price using the cycle-recursion formula below.
  2. Issuer and backers each have 90 days to elect rollover (continue) or close-out (settle).
  3. If both elect rollover, the covenant continues another cycle at the same terms (7 more years of 5 percent income share, plus the existing 1 percent perpetual).
  4. If either elects close-out, the buyback mechanic from §2.2 fires at the published recommended price.
  5. If neither elects within the window, default behavior is rollover with a 12-month opt-out window for backers.

Cycle recursion math (preview).

VHC(n+1)  =  f ⁣(VHC(n),  Var ⁣[income(n)],  μ(age+n⋅T),  cohort prior(n))V_{\text{HC}}(n+1) \;=\; f\!\Bigl(V_{\text{HC}}(n),\;\text{Var}\!\left[\text{income}(n)\right],\;\mu(\text{age} + n\cdot T),\;\text{cohort prior}(n)\Bigr)
  • VHC(n)V_{\text{HC}}(n) is the token value at the end of cycle nn.
  • The variance term captures how noisy the realized income share was over the cycle.
  • μ(⋅)\mu(\cdot) is the updated survival probability at age plus elapsed cycle time.
  • The cohort prior is also updated with the cycle’s realized data.
  • Specific functional form of ff is pending quant review.

Legal posture. Rollover is treated as a contractual extension of the existing obligation, not a new issuance. This avoids re-triggering Reg D 506(c) accreditation verification for existing backers. New backers acquiring tokens via secondary market are subject to the standard secondary-market accreditation regime.

Open questions.

  • Open · quant Specific functional form for ff. Working sketch: weighted update of cohort prior with realized cycle data, mortality-adjusted discount.
  • Open · counsel Does rollover require fresh consent under securities law? Working position: contractual extension, not new issuance, so no.
  • Open · product Default behavior on no-election. Working position: auto-rollover with 12-month opt-out. Alternative: auto-close-out (opposite default-effect bias). To be tested.

§3 · Cross-cutting design principles

§3.1 · Symmetric guardrails

Both sides have terminal-event protections.

Issuer protections.

  • Floor on buyback price prevents coercive backer demands.
  • Death settlement runs through standard probate, not accelerated by backers.
  • Rollover doesn’t require fresh accreditation re-verification for existing backers.

Backer protections.

  • Estate claim enforceable in probate.
  • Buyback minimum-price guardrail prevents below-market exits.
  • Rollover requires affirmative consent (default-rollover with opt-out, not opt-in to roll).
  • Death-settlement valuation date locks at the date of death, not later.

§3.2 · Mortality-adjusted discounting

Fair value of a 1 percent perpetual claim depends on the issuer’s expected remaining life. Discount factor:

D(t∣age)  =  e−rt⋅μ(age+t)μ(age)D(t \mid \text{age}) \;=\; e^{-r t} \cdot \frac{\mu(\text{age} + t)}{\mu(\text{age})}

Where μ(x)\mu(x) is the cohort survival function at age xx, drawn from CDC life tables. This makes the 1 percent perpetual claim on a 30-year-old more valuable than the same claim on a 60-year-old, conditional on net worth trajectory.

§3.3 · Engine v2 implications

Terminal value architecture changes the Preflop pricing engine in three ways:

  1. Cohort priors must include life-table mortality keyed to the issuer.
  2. Discount rate model needs a survival-adjusted term structure.
  3. Token-level fair value computation must marginalize over the three terminal events.

Engine v2 implementation sprint follows the spec freeze.

§4 · Worked example

Setup.

  • Issuer: 30-year-old founder. Total expected backable (TEB) at issuance: $200,000.
  • Covenant terms: 5 percent of pre-tax income for 7 years, 1 percent perpetual on net worth.
  • Token supply: 10,000 tokens.

Scenario A · Death at year 12

  • Issuer’s realized net worth at date of death: $50 million (assumed P50 outcome for a strong technical-founder track).
  • 1 percent × $50M = $500,000 total estate claim.
  • Per token: $50.
  • Token holders receive proportional cash from the estate within 365 days of probate close.

Scenario B · Issuer-initiated buyback at year 15

  • 30-day VWAP at year 15: $80 per token.
  • Realized σVHC\sigma_{V_{\text{HC}}} over trailing 30 days: 0.25 (25 percent annualized volatility).
  • Mortality-adjusted remaining life expectancy at age 45: ~37 years.
  • zz (90 percent one-sided CI): 1.65.
  • VWAP-plus-premium minimum: $80 × (1 + 1.65 × 0.25 × √37) = $80 × 3.51 = $281 per token.
  • Face value × 1.1 floor: $25 × 1.1 = $27.50. Not binding.
  • Final minimum buyback price: $281 per token.
  • Total buyback cost: 10,000 × $281 = $2.81M.

Scenario C · Cycle close at year 7 with rollover

  • Income-share leg complete. 1 percent perpetual continues.
  • Recommended rollover reference price (per cycle recursion formula): $55 per token.
  • Both issuer and backers elect rollover.
  • New 7-year cycle begins. Same terms. Same token holders. Same 1 percent perpetual continues.

§5 · Open questions

Consolidated open list

Counsel (5)

  • State life insurance regulation, especially CA, NY, FL, TX insurable-interest doctrine.
  • Estate liquidity timing extension.
  • Drag-along threshold enforceability (90 percent).
  • Rollover as contractual extension vs. new issuance.
  • Auto-rollover default behavior under securities law.

Quant (5)

  • Calibration of z (buyback safety multiplier).
  • Floor multiplier on buyback (1.1×).
  • Specific functional form for cycle recursion ff.
  • Mortality input pipeline parameterization.
  • Realized volatility window (30 days vs. 90 days).

Product (3)

  • Partial vs. all-or-nothing buybacks.
  • Default behavior on no-election at cycle close.
  • Notice periods and election windows (current: 60d / 90d / 6mo).

Engine v2 sprint

  • Cohort prior integration with mortality.
  • Survival-adjusted discount rate term structure.
  • Marginalization over the three terminal events in fair-value compute.

Related specs

Human Capital

Defines V_HC, the wealth construct that the perpetual claim settles against at terminal events.

Open spec →

Discount Rate v1

Cohort-conditional r. Will absorb survival-adjusted term structure once Engine v2 ships.

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Raise Mechanism

The auction. Sets the issuance price that the buyback floor (1.1× face) is computed against.

Open spec →