Conditional Automatic Funding
In short
Especially in early phases of companies, there is sometime a bit of a chicken and egg problem when it comes to funding — whether it is about getting funded, or getting a better deal. That is where Conditional Automatic Funding (CAF) kicks in.
Investors put some money on the table and verifiable objectives are set. The company automatically gets the money if it delivers. If conditions are not met investors automatically get their money back. Investors derisk their investment while scooping project earlier. The company boosts its credibility, feel secure and focus on what’s matter: delivering. Super flexible, it can be used in many different ways, for classic startup funding (e.g. with SAFE), or for ICO and the like. Smart contract and blockchain allow to make it automatic and secure, which is pivotal here.
Now, let’s having a closer look.
Some more details
Whether it is a company and investors discussing term sheet, or a company preparing a CAF based ICO, first thing is to set some clear verifiable objectives, the timeline to get to the goal, and decide the ways to verify them. And there is room for flexibility and creativity.
That can be one key objective — like getting a similar term sheet from another investor or closing a key partnership ; or a set of objectives, like hitting some target for both Customer Acquisition Cost and Net Monthly Recurring Revenue. It is definitely easier to get some quantitative objective, but qualitative ones are also possible (like onboarding a A team CTO) but requires more detail on how to check on it.
At first the verification will probably be “centralized”, like asking Deloitte to check if the objectives are met or not. Later the verification could be “decentralized”, getting different people to verify it, with a random twist and a game theory design super reducing risks of fraud (Augur is one of different project working on things not too dissimilar).
All this, clearly written down, will then be embedded in a smart contract, as well as the terms of the conditional automatic funding. This is triggered by the investor sending the set funds to the Smart Contract. All this happen on the blockchain, that implies usage of crypto-assets, for example a highly liquid stable coins representing dollars.
The smart-contract makes the beauty possible. As it is code based, you have a lot of flexibility on how you design this special contract. And once it is set, it is set: it is automatic, and no party can pull out. That secures both sides, and reassures potential clients, partners and employees.
Easy for organization 100% on the blockchain, this is a bit more challenging for classic companies. But with a little creativity it seems 100% SAFE compatible, and we’ve seen also some companies tokenising their shares, or even their SAFE.
For sure this kind of funding does not fit everybody but I believe it can unleashed some energy and some money for many, tackling problem for both startups and investor.
For now this is just a concept, but it does not seems too hard to create some open source templates of smart contracts (possibly based on Ethereum) and to share experience about it, with a lawyer somewhere in the loop. Perhaps later a full service with a super simple user experience and more decentralization (here I think Komodo would be better) could be interesting.
Many of you have experience on startup, funding (“normal” and blockchain based) and investing ; do you think Conditional Automatic Funding makes sense?
