The form of the modern corporation dates back to the tail end of the Renaissance; the earliest date to the 16th century and look familiar in numerous respects. They raised money from investors and put it to use earning a profit as a new legally distinct entity, separate from any one proprietor. Quite soon after the creation of this new paradigm for economic organization, the practices and institutions that complement incorporated firms sprouted up as well. One of the most enduring was the invention of the initial public offering (IPO). The very first at all similar to their present-day equivalents, or at any rate the most well known of these early IPOs, was that of the Dutch East India Company, held over four centuries ago.
Amsterdam at the very beginning of the what became called the Dutch Golden Age was teeming with mercantile ventures. The city was home to numerous small companies engaged in trade, retrospectively called ‘voorcompagnieën’ in Dutch, which were founded in the late 1500s. These firms were led by ‘bewindhebbers’ who actively managed the companies which were in turn capitalized by passive ‘participanten’, invited to acquire a fractional interest in the companies’ profits. Intriguingly, these firms were set up for a single voyage and liquidated immediately afterwards. A new firm would then be established for the next voyage; this way investors could decide whether or not to reinvest in new voyages or stay on the sidelines. This arrangement gave investors liquidity but meant that the voorcompagnieën had no fixed capital, limiting their growth and the predictability of their operations since they had to raise new funds after every ship unloaded at port.
Dutch East India Company
The formation of the Dutch East India Company was greatly influenced by activities in other European shipping and financial centers. In England, there were several trading companies chartered by King Henry VIII and Queen Elizabeth I in the 16th century. There was, for example, the ‘Spanish Company’, which had a monopoly on English trade with Spain and Portugal. That company was established in 1530. Then there was the ‘Muscovy Company’, formed in 1555 and given a monopoly on trade with Russia. The ‘Eastland Company’, for trading with the Baltic and Scandinavia, was formed in 1579. The list goes on.
These firms were sometimes combined into more sizable enterprises, such as when the ‘Turkey Company’ and ‘Venice Company’ were merged to form the ‘Levant Company’ in 1581. However, this firm was still nowhere near the largest and most powerful of these trading companies. That honor would go to the most famous of these firms, the British East India Company, which was founded in 1600. In each case however, these companies were established as monopolies in order to enhance their buying power over suppliers in the lands they traded in. A monopolist firm could also have the scale necessary to be belligerent when the circumstances called for it: these firms were part trading companies, part private military companies.
Given the closed and zero-sum nature of trade in a mercantilist world, the Dutch were not keen on being left behind. As a result, the Netherlands created its own East India Company, formed in March 1602 under a charter granted by the States General of the Dutch Republic, the country’s governing assembly at the time. Unlike other countries’ trading companies, this one was not started from scratch; rather, it was formed from the combination of six existing voorcompagnieën. However, rather than having so many companies competing with each other, and thus losing ground to foreign firms, the Dutch East India Company was given a twenty-one year monopoly on trade with the East Indies.
The Company was, like the Netherlands itself, somewhat decentralized, reflecting its history. It was divided into six independent operational units, one for each of the incorporated voorcompagnieën, and each with its own management. Each unit fitted its own ships which, depending on their availability, joined together for voyages. At the Company’s launch, the Amsterdam chamber of the Company supplied the most ships, at nineteen vessels. Each chamber was responsible for selling the cargo their ships returned with. However, the profit was then consolidated at the parent level for the payout of dividends.
One of the most intriguing aspects of the early history of the Dutch East India Company was the manner in which shares in the new firm were sold to the public. The launch of the Company has been often identified as the first initial public offering in history. Some identify the offering as ushering in the first stock market in history as well. To be sure, securities have traded in fairly liquid markets before 1602. Fixed income instruments had been widely traded in Venice and Genoa for centuries and equity securities traded in secondary markets too; shares in German mines, called ‘kuxen’, were regularly trading hands as early as the 15th century.
However, there had not been an offering whose initial syndication looked more like a modern stock IPO than what occurred in Amsterdam in 1602. The rough outline of what this syndication would look like was spelled out in the firm’s charter. It would be historic, not just for what the offering brought to finance, but also what it meant for both Dutch and even world history. In time, the Dutch East India Company would become the most massive firm ever in existence, larger than any other before or since. At its height, the Company had 50,000 employees, a fleet of two hundred ships, an army of 10,000, and controlled entire cities in Asia.
“All of the residents of these United Provinces shall be allowed to participate in this Company and to do so with as little or as great an amount of money as they choose.” – Charter of the Dutch East India Company, 1602
However, in 1602, the Netherlands was composed of semi-autonomous provinces; it was a country of regions. The structure of both the Company and the offering reflected this. The firm’s charter assigned to each region of the country a certain proportion of the Company’s capital it was responsible for raising. Not surprisingly, Amsterdam was assigned the largest share, at half the capital. Zeeland, in the southwest of the country, was tasked with raising a quarter, and the Meuse and North Holland were assigned one-eighth each. So decentralized were the Netherlands at the time that different regions still used different currencies. Holland used the guilder, for example, while Zeeland used the Flemish pound, which was worth about six guilders each.
The offering period ran from April through August in 1602. During those five months, investors could subscribe to shares in any of six different cities. Amsterdam was by far the largest market, both during the initial syndication and the secondary market for the shares that followed. Over 1100 investors subscribed to the initial offering in Amsterdam alone, raising over 3.6 million guilders. In Middelburg, the second largest market, 1.3 million guilders were raised from over 250 subscribers.
These numbers mean that the average investor in Amsterdam committed to an investment of over 3000 guilders. This would have been a very large sum in a time when the annual wages of a skilled craftsman might have been a tenth that. There was substantial variation in the subscription sizes though. The largest investor in the offering was Isaac Le Maire, a merchant and entrepreneur, who invested 85,000 guilders. However, some of the smallest subscriptions were for as little as fifty guilders, placed by ordinary people of modest means.
In all, the Company raised almost 6.5 million guilders in the offering. That said, in the fashion of most stock offerings before the 19th century, the equity capital was not called all at once. When an investor subscribed, he was actually making a commitment to supply his allocation over time. In the case of the Dutch East India Company, the capital raised in the IPO was to be paid in four installments, with the smallest and final one not due until 1606. To kickstart its operations, the firm borrowed money in the meantime, but the first fleet did not set sail until December 1603 anyway. Nonetheless, the shares sold began trading on the secondary market instantly, before the firm had even commenced any meaningful operations.
At its creation, the Dutch East India Company had some features uncommon in modern corporations. For one, the equity capital of the Company was redeemable, but only after ten years had elapsed from when the firm was founded. This optionality to the benefit of shareholders was stipulated by the firm’s charter. However, the provision was later done away with altogether, marking a break with the old model of variable equity capital.
Thus, unlike the old voorcompagnieën, the Dutch East India Company did not liquidate after each voyage but, after the change specified above, had a fixed capital. That said, this introduced a new problem since its obvious that many investors would want to liquidate their holdings. Under the old companies, they could just wait until the end of the next voyage but that was not an option now. This reality helped create a secondary market for the firm’s shares following the initial offering.
The formation of a secondary market for shares of the Company was nothing less than the creation of the Amsterdam Stock Exchange, arguably the oldest in the world. The process of trading shares was still cumbersome by modern standards though. Buyers and sellers had to go to the Company’s headquarters and have the transaction approved by two directors who reflected the change in ownership in the Company’s books. As such, the shares were not bearer securities but had a central record of ownership held by the firm.
Actual trading happened not in the Company’s headquarters but near the Nieuwe Brug, a bridge which crossed the Damrak, a canal in central Amsterdam where commodities traders were already doing business. Regardless, a secondary market for shares in any form was quite unprecedented at the time; by contrast, shares in the British East India Company, founded two years earlier, were not transferable. The liquidity afforded by stock exchanges enabled companies to more easily raise equity capital and lock up that capital for longer, a crucial feature of modern corporations.
The formation of the Dutch East India Company was of profound historical significance for more than just the Netherlands, but logically it was for the Dutch the most transformative. The creation of the Company, and the economic prosperity it brought, helped finance the Dutch Golden Age, a period marking the height of the country’s political, military, and cultural achievements. The way the Company was launched is also of particular importance for finance. The initial public offering conducted in 1602, the first in the world, helped usher in a new era in economic organization, one that has spread far beyond Holland in the centuries since.
More from the Tontine Coffee-House
1. A Translation of The Charter of the Dutch East India Company. Translated by Peter Reynders, ‘Australia on the Map’ Division of the Australasian Hydrographic Society, 2011.
2. Gelderblom, Oscar, et al. “The Formative Years of the Modern Corporation: The Dutch East India Company VOC, 1602–1623.” The Journal of Economic History, vol. 73, no. 4, 2013, pp. 1050–1076.
3. Petram, Lodewijk. The World’s First Stock Exchange. Columbia University Press.
4. Robertson, Jeffrey, and Warwick Funnell. “The Dutch East-India Company and Accounting for Social Capital at the Dawn of Modern Capitalism 1602–1623.” Accounting, Organizations and Society, vol. 37, no. 5, 2012, pp. 342–360.