I have been spending a lot of time talking to startups about this, so I thought that I would put together a post.
ICOs are wild. They are innovative. They are crazy. Everyone thinks they can get free money. I personally don’t like when greed drives markets, however, as an entrepreneur I completely understand why you would want to host a token sale. A startup gets:
- Non-dilutive capital
- Marketing
- Potentially a better way to incentivize more customers
How do you treat your past investors in a token sale?
In the last six months, startups in the Boost VC portfolio raised upwards of $1B. A majority of this money has been due to the recent ICO activity. Companies of all categories are starting to do token sales for ICOs, and every ICO structure comes out different. For example Aragon, used these terms:
70/15/15 distribution: 70% will go to purchasers, 15% to the Foundation, and 15% to the founders and early contributors who have worked on the project. The founder and early contributors will all have vesting.
Uncapped, but with a hidden cap + hard cap for security
4 weeks long: It will run for 28 days, or when it reaches the hidden or hard cap
Two price stages: 100 ANT = 1 ether the first two weeks, then 66 ANT = 1 ether. Like the Ethereum’s sale.
We plan to also accept other cryptocurrencies by using ShapeShift
Now, as early investors, all we ever want to do is be treated in alignment with the founders. In Luis Cuende from Aragon’s case, he presented an offer to align our interested with his own, and we felt that was fair. This was also an early agreement in the ICO ecosystem, not much had been done in the ICO world yet, so to Luis’ credit, this was a forward thinking way to look at the agreement.
What do I mean by alignment? I mean that if the founder and management team get issued additional tokens for working on this project, the investors should be issued an equivalent percentage of the tokens.
Boost VC might be in the minority of investors a lot of ICOs in our belt and another 15 upcoming from past portfolio companies, but I think that this is a very real conversation that should be had between the startups and their previous investors.
A large number of investors might not even realize how this works, how tokens can be issued separately from equity. How management teams could get rich over night, without a dime going to previous investors.
As more non-crypto companies ICO, it’s important to figure out the relationship with your previous investors. These investors were your biggest believers when no one else was there. And ideally you have a good relationship with them.
Companies — Don’t get swept up in the hype and forget about those who were there for you at the earliest stage.
Investors — Know that this is a new medium of fundraising, and the startups don’t have all the answers, but you should ask the question: what are you doing to align the incentives?
