Some people are cursed to go through life constantly under siege from strangers who always ask them the same question. In Leonard Nimoy's case, it is 'where are the pointy ears?' In the case of the management team from Totalise plc, it is 'what's the catch?'

Chris Robinson, Totalise's finance director, has the look of a man who has spent the past year explaining the same point, over and over. 'When we first launched there was an article about us in The Sun, which said "it sounds like a scam but we haven't worked out what it is yet". We had a lot of that.'

For the uninitiated, Totalise plc (www.totalise.net) began life in April 1999 as an internet service provider. Its unique selling proposition was that it gave away shares in the company to registered users of its email and internet service. Free. For nothing. The accountants in the audience may have trouble getting their heads around that last point, so go away and have a quiet sit down for a moment.

Right. Are you all back? The management of Totalise are not insane. Quite the opposite. After a year of careful research, the company was formed by Dr Peter Gregory, described by Robinson as 'a serial entrepreneur' (and winner of the 'Internet Colossus' award at the 2000 ISPA Internet Industry Awards). His initial model, for a free ISP, met with cynicism from potential backers. 'No-one was interested,' says Mr Robinson. Almost immediately a remarkably similar model, Freeserve, exploded on to the market, and was, as far as Dr Gregory was concerned, impossible to compete with. Instead, he adapted his model, inspired by the demutualisation of building societies. 'He rang me up and said, I've got this great idea. I'm going to give away shares,' says Robinson, who had worked with Gregory's previous venture, a medical recruitment firm. 'I told him that it was much more difficult to give away shares than he thought.'

After a bit more research, they first discovered that there is no such thing as an original idea. 'There were maybe a dozen companies in the US that were doing a similar thing, but no-one was doing it properly,' says Robinson. 'Some were scams. Some could have been genuine, but had not complied with US Securities and Exchange Commission regulations and were shut down. We decided that if we were going to build a business, there was no point in doing it on a wing and a prayer.' They checked with the Financial Services Authority that they were complying with regulations and decided on an OFEX flotation. 'The industry was moving so fast and OFEX was a quicker route to market than AIM.'

When the ISP service went live in July 1999, users that registered with Totalise and committed to using it for three months were immediately eligible for 250 shares in the company. Users were awarded more shares depending on how often they used the service. Figures released by the company at the time suggested that someone using the service regularly - 10 minutes on the internet a day, for instance, plus regular email use - could build up 1,250 shares over two years. The shares started life on OFEX at 20p and at one point rose to 142.5p. Understandably, users jumped at the offer. More than 5,000 regis-tered in the first 24 hours and after six months, 50,000 users had regis-tered and Totalise issued an additional 1.3m shares to keep up with demand. In December 1999, Totalise said that it was offering 'one of the best deals on the inter-net by giving an average user more than £32 each month in free, tradeable shares'.

There was method, though, behind this apparent madness. The intention was always to use the free share scheme as a replacement for the huge advertising budgets employed by many internet companies. By giving away shares in the company, Totalise hoped to attract and retain a loyal customer base from which to launch other, profitable, web-based businesses. The share marketing scheme was, effectively, a cut-price replacement for the enormous advertising budgets employed by so many internet businesses.

'The web is a wonderful place and it is easy to put a business up there that works,' says Robinson. 'But you have to have regular traffic. You could have the best business in the world but it won't work without the footfall. The ISP would give us a core user base. With advertising costs, you spend it and it's gone. With the share scheme it's there in perpetuity.'

So, is there a catch? The answer probably lies in your opinion of direct marketing. New subscribers to Totalise are asked to provide marketing-based information, which can then be used to target products and services from other Totalise businesses. Taking advantage of other Totalise businesses is obviously in users' interests, because, as Totalise shareholders, it should enhance the value of their shareholding. 'Other businesses spend advertising money in the hope that the targets will become customers. We only give shares away when people become customers. Customer acquisition costs are low and we have the added value that our customers are shareholders, so it is in their best interests to use our services.'

One Totalise subscriber expressed some exasperation with the stream of offers and marketing associated with the service - but Totalise is by no means alone in trying to sell other goods to internet users. Anyone surfing the web these days can expect to be bombarded with advertising, often from their own ISP.

The plan of launching successful internet companies off the back of the ISP still seems a good one. Three companies were launched in the first year of operation and have already shown an ability to generate turnover for the company. Eurekar 'imports' right-hand drive cars from the Continent and has so far sold 1,000 cars and signed a supply agreement with Direct Line's subsidiary, jamjar.com. Flowers2send, a purely internet-based flower delivery service, was set up at the suggestion of a Totalise subscriber and is already at break-even, and Totalise Telecommunications, which provides discount telephone calls, has signed up 10,500 accounts since its launch in December 1999.

In November, the company floated on AIM. This will fund the next step for Totalise, an online banking service that will be run as part of InterMutual, the company's financial services arm, and is expected to go live early in 2001. Initially run in conjunction with a North American banking partner, the intention is that the bank will apply for its own banking licence in the future and become the first online bank to be partly owned by its customers. InterMutual has already launched a credit card, and a corporate health insurance plan will be on offer this month. A survey of Totalise users suggests that 46% would consider banking with the company. 'That's our advantage - users already know and trust the brand,' says Robinson.

Even so, Totalise has not had a particularly easy ride so far. It was, by Robinson's own admission, set up when 'every man and his dog were setting up internet companies' and has since suffered from the cold injection of reality into the industry. At the beginning, ambitious plans were afoot - 2m subscribers within two years and 2.5bn shares in issue. To date, Totalise has attracted just over 140,000 subscribers, although this base is growing at a rate of around 6,000 a month. The company has also overhauled its share structure, partly as a result of an article in Investors Chronicle, which suggested that Totalise's existing structure could result in the directors unfairly gaining from the issue of new shares since their shares were not diluted as new users joined the service. Not the intention at all, says Robinson, but the article served to reinforce concerns already raised by analysts that the company was difficult to value because its shares were constantly diluted. The decision was made to propose a new share structure.

Fifteen resolutions were voted through at the AGM, which effectively capped the number of shares that will be issued to users at 200m, with the aim of keeping that number below 150m. There are currently 37m shares in issue and 15m more are subject to completion of the registration procedure. Totalise now plans to issue an additional 25m shares to new users, bring up the ISP customer base to 250,000, and then phase out the marketing shares. 'The changes will make the shares much easier to value,' says Robinson. The changes will ultimately leave 33% of the company in users' hands, compared with the original plan for 67% to reside with users. 'It's what the shares are worth that is important,' he says, pointing out that the resolutions were carried unanimously. 'Our user base is very astute.'

The company's first set of financial accounts, for the year ended 30 April 2000, showed a loss of £1.95m on turnover of £870,217. Start-up costs amounted to £709,604. Not as rosy a picture as the management hoped for in the early days, perhaps, but not as bad as many inter-net start-ups, thanks to a much lower advertising and marketing spend. Turnover has been rising steadily and reached £709,000 in the first four months of this financial year. When we spoke, Totalise was about to float on AIM so profit forecasts were out of the question, but Robinson stresses that 'profit has always been our aim'. A week after the AIM flotation, the shares stood at 16p.

The plans for Totalise are still ambitious - competing with enormous global brands in the online banking market is hardly small-scale - and there are plans to replicate the company model overseas. An inter-net and email service has already been launched in Australia. The company intends to use some of the funds raised by the AIM flotation to invest in brand awareness, which will be essential if Totalise is to reach a wider audience. Even if it meets its target of 250,000 regis-tered users in the UK, that is hardly a large enough customer base to take over the world. The management, though, is confident that its unusual formula is a long-term winner. 'I can't think of a better business model,' says Robinson. 'No-one has managed to achieve what we have achieved with the amount we've spent. The only thing that surprises me is why more people haven't done it.'