Fundraising dilemmas of startup founders
Equity financing and utility token sale are not the only options. We discuss the decision criteria and alternatives
For a long time, there was only traditional equity. Then came blockchain token issuance which revolutionised financing while itself experiencing a significant evolution in 2017. This year, things may change again. In 2018, new regulatory developments and evolving market expectations (notably from institutional investors) are making startup founders think hard about the most suitable fundraising method for their venture.
Some of the key goals in their mind when making a decision are:
- obtain sufficient funding via an efficient fundraising procedure,
- minimise regulatory risk for founders and investors,
- legally keep and use the funds for paying expenses, including opening a bank account,
- ensure effective governance and decision making,
- provide strong economic incentives for the team to deliver,
- acquire future user base for the product/service.
We looked at some of the fundraising methods (utility token sale, equity financing, DAICO, security token sale and equity sale combined with utility token distribution)and how they support the above-stated goals. Here’s a recap of our findings:
It is apparent that a sale of security tokens, as well as a combination of equity financing and utility token distribution, are two attractive fundraising options to consider:
- Legal clarity of the two models simplifies the registration procedures at banks and crypto exchanges.
- Economic incentives for delivery are in place. In the first case, clearly defined value generating mechanism of a security token makes founders work hard on the rational price appreciation drivers. In the second case, external shareholders make sure the team is focused on generating a viable business while the token price is more connected to its actual utility (as founders don’t need to be occupied with speculative expectations).
- Governance roles are clearly defined and give founders the flexibility to pivot if necessary (which is a drawback of DAICO).
Overall the two models seem important for founders to consider and we would like to see further discussion on how they fit founders’ expectations.
For details, please refer to our full analysis.