ICO Distribution Models: Team Tokens
In the recent wave of sucessful ICOs, token distribution models have exhibited large differences in the proportion of tokens that are allocated to the team. To use some well-known examples: Polybius and Bancor allocate only 5% and 10% to their teams respectively; at the other end of the spectrum, Civic retained a whopping 33% for Vinny Lingham and his team.
This post briefly considers how investors should think about the question of team tokens in ICOs. It argues (tentatively) that the ideal case is a large team allocation combined with a long vesting schedule to limit the liquidity of team tokens. But the point here is not to supply a full and final answer to this question; it is instead to create some discussion in the community that can serve as a guide for ICO distribution models in the future.
So, what is the right approach? A natural thought is that investors would want to see just a small proportion of the overall tokens go to the team — anything more being a sign of greed and perhaps a risk the ICO will be so lucrative that the team will have little interest in the future of their own project.
On reflection, things aren’t so simple. Investors should want to see the allocation of tokens to the team satisfy at least the following 3 criteria:
(1) The distribution needs to encourange the right people to join the team — many recent ICO projects are extremely ambitious and need to attract the best talent to execute them.
(2) The team needs to retain enough control over their tokens to discourge manipluation of the market by large investors once their token hits the exchanges.
(3) The team must be incentivised to make their projects a long-term success — A team that dumps most of it’s tokens to the market in the ICO is cashed out upfront; they have less to gain from future increases in the value of their token if/when the enterprise succeeds.
These three criteria all point — perhaps counterintuitively — to allocating a large proportion of tokens to the team, who thereby demonstrate their faith in the project and retain some control over their token.
This, however, is not the end of the story: With respect to (1), a large team allocation might attract the right talent prior to a successful ICO, but what encourages that talent to remain with the project thereafter? With respect to (2), a large team allocation may give some protection against market manipulations of whale investors, but what protects regular investors against the team itself turning the market for their tokens into a manipulated casino?
In both cases the answer is that team tokens should be subject to a vesting schedule which limits the freedom of the team to sell their tokens to the market (for example, a two year vesting schedule will often be associated with a cliff whereby just 25% of team tokens are available for trading each 6 months.) Often vesting can be written into the smart contract itself, with the result that it cannot be tampered with after the tokens are created.
The need for vesting mirrors the reforms in the incentive models of traders after the 2008 financial crisis. Prior to that, traders were rewarded with year-end million dollar bonuses for making short-term profits (based on excessive risk). After the reforms, financial rewards are spread over several years to better align the interests of individual traders with their firm’s long term interests.
If this is correct, then it’s the combination of a large allocation of team tokens with a long vesting schedule that best aligns the interests of the team with their investors. With this combination, the team gets to attract and retain the best talent by offering potential returns that are very high but nonetheless strongly connected to the long-term future of the project — not just the success of the ICO. Further, the combination provides some protection from market manipluation by investors and the team themselves.
With this in mind we can compare some recent and upcoming high-profile ICOs. The following chart provides the data (Note: if a project’s formal materials don’t even mention vesting, we assume there is none. Further, the figures here aren’t perfect — overall team tokens are often further divided into advisor tokens, bounty programs etc. that can be subject to different vesting limitations):
Based on the analysis above, the distibution models of TenX, MobileGo and LakeBanker are particularly good: these teams retain at least a quarter of their own tokens but subject themselves to the longest vesting limitations. On the other hand, Mysterium, Matchpool and TokenCard all retain significant portion of the tokens without any vesting. Civic’s ICO appears to be a major red flag: a massive 33% of their tokens are retained with no liquidity restrictions whatsoever.
Nonetheless, this has not deterred investors: Mysterium raised over $14 million, Matchpool raised almost $6 million, Tokencard raised almost $13 million and Civic raised $33 million. A question therefore remains as to whether the investment community here has paid enough attention to the allocation of team tokens and the restrictions they are subject to. Time will tell.