How to Write Up a Token Sale Agreement

Things have drastically changed in the startup ecosystem recently. Seed funding is drying up very fast, which is why accelerators are scrambling to look for funding.

There are a couple of reasons why this is happening.

First, it’s now much easier to build a startup than before. Anyone can hit the app store, and within only a few days, the need to raise millions for software and server is over. Secondly, most inventors want to see traction, and a few are willing to take risks for the relative unknowns. Given this situation, how can you raise money if your startup will require more than AWS and Django code for instance?

You must run an ICO, right?

Yeah, we have heard about this hype — it’s a great system like Kickstarter which makes it possible for you to raise millions in only a few minutes! ICOs have led to hundreds of successes, so it’s totally safe!

While all the things that have been pointed out are correct, there are some that you need to be careful with. And yes, this is how the strange world of token sale works, so let’s dig a little further.

What is a Token Sale?

Quite simply, a token sale is the process of generating and selling cryptocurrency, such as Bitcoin. Although the details tend to change from one token sale to another, this process will usually involve establishing a smart contract within the blockchain system. It also involves generating and selling the coins that have resulted from the transaction. This process will normally involve hiring lawyers and having qualified investors, as well as a final public sale. It’s like a virtual circus, a roadshow, and a community building activity.

In the process of token sale, you’re basically selling tokens that are cryptographically generated. These tokens are digital objects representing certain things in your business. In fact, you can use the tokens to represent pretty much anything. It could be a free t-shirt on a website that sells t-shirts, or perhaps, a free beer coming from a brewery. But there are also certain things that you can’t do, especially in the US, which is, for example, to use the token to sell equity. This is where most token sales will usually stop — the SEC doesn’t basically want you to horn-in on their territory. Aside from this, for the most part, everything is pretty much a fair game.

Let’s go through this with some basic truths that Americans need to learn. These transactions are not always accepted outside of the United States, and most of the founders will try to run their sales out of the country, so they don’t have to deal with the SEC and other parties. We don’t really want to encourage or discourage you from running a token sale. It’s basically all up to you. But the legality involved in these sales all over the world is still up into the air, and there’s still a fine line between penny stocks and tokens, a fact that only a few people want to admit.

Also, token sales are not entirely a funding entity, although several companies see them that way and would crow over the multi-million-dollar revenue that could explode in minutes. What they’re doing is floating the cryptocurrency in an open market. With enough planning and a bit of luck, these cryptocurrencies could increase in value, and if a token sale is well structured, companies can receive a bit more funding than what they had planned before. Remember that without proper planning, everything could turn into a mess.

The tokens should typically serve as the lifeblood of your company. Several companies have made all sorts of acrobatics just so they can get their coins to work for them and would go as far as pegging a token into a gram of synthetic horn of a rhino. There’s no judgment here. Whether you want to sell popcorn tokens or massage tokens or tokens that are associated with robotic speech generation, nobody can stop you from doing what you want. As soon as your coin is minted, the tiny crab-dedicated economy that you have built must be self-sustaining, and this is where you make your money.

Token sales are expected to replace the typical angel investors and seed rounds. It can even disrupt the virtual cash. But when and how they will do it’s still unclear.

Therefore, should you run a token sale? It depends.

Virtual Cash

If you were going to conduct a token sale, would you still raise virtual cash? What will happen to the VC in general? No one knows for sure, but we are gearing towards a general acceptance of the token sales as being a new investment vehicle, where more and more funds are soon going to integrate the sales of the token in their own investment plans.

Currently, investors are in a pickle. A lot of them want to start buying coins early, and one investor has even made ICO his core investment thesis. Others, most especially the VCs that have older funds, should be careful when making investments to avoid double dipping. They are basically set up to write checks for the founders and not for the robotic token exchange.

Eventually, whether conducting a token sale is a good idea, it will all depend upon the general acceptance of the community. So far, everything is going well. In fact, a lot of companies that are accelerator-backed have abandoned the roadshow in favor of a token sale, and many other companies believe that seed investment is going to come from tokens instead of LPs shortly.

How to Run a Token Sale

First, you need to determine if your requirements and situation are conducive to a token sale. That’s totally fine since this isn’t a one-size fit all solution. However, perhaps new systems could be developed that can assist token sellers to work faster. What will follow afterward is a basic process that few startups we have seen have gone through to be able to raise some money.

There’s no proper way to run a token sale. If you want a higher level of understanding of things, one thing is for certain — there’s a proper way to do it, and there’s also a wrong way.

In the end, utmost care should be taken in order to avoid encountering any legal issues in the future. Those who are interested in token sales are now fully aware of the pitfalls and its benefits, and anything that’s untoward is immediately determined.

What to Do When Running a Token Sale

So, here’s what you should do when it comes to running a token sale:

1. Create a product — First, you need to come up with a product which should allow you to use your token. Perhaps, you no longer need to launch a beta and then a sale, however, assume that you will need to raise a bit of equity investment in order to get your company to a good start. On average, you should have between $100,000 and $150,000 in order to get things going. And yes, you need money in order to make more money.
2. Create a token — In its core, you’re simply going to create a token within the Ethereum ecosystem, which can figuratively or literally represent something that’s needed for your business to survive. Tokens within the Ethereum ecosystem could represent any tradable good, which includes loyalty points, coins, gold certificates, in-game items, IOUs, and many more. Since tokens need to apply some basic features in a more standard way, this also means that your token is going to be instantly compatible with the Ethereum wallet, as well as other clients that make use of similar standards.
3. Get a legal opinion — Every time you must mess with other people’s money, you must make sure that you are legally covered. Every token sale must begin with a pre-sale and a legal planning. However, you also need a legal opinion as well as a legal description of such sale so you will not get in trouble with the SEC. There are two law firms who are known to deal with token sales again and again. They are Cooley and Perkins Coie. Both these law firms are well-established and have dealt with cryptocurrency practices many times before.
4. Write a white paper — After doing the steps above, you need to write a white paper next, or simply, a deck. White papers are basically prospectuses. They contain descriptions of financial plans that include the description of a product, team, and the strategies for token generation. The first paper will be a traditional one that will be written in the same way as a scientific treatise. The next one will be written in the same way as a brochure. Both these methods are highly effective and the main purpose of the white paper is to describe the product clearly and explain the use of tokens. Finally, you should also include how you are going to distribute the coins.
5. Create a community — A community is very important during the early days of the token sale because this community will support you. This can be in the form of a chat room in Discord or Slack, where you can easily communicate with your potential investors. It’s a sad fact, but most of the token sales are in fact driven by initial hype. Thankfully, such hype is bolstered by a real community, and if you don’t create such a community early on, you’ll find that your token falls off fast. Furthermore, you need to ensure that early investors will not end up selling their coins very quickly.
6. Get your tokens on exchanges — After you have mined your coins, the next thing to do is to reach out to some exchanges in order to carry your coin. Doing so will allow people to be able to purchase and sell your coins in an open market and at certain exchanges. Remember that it’s important to get some strong exchanges to accept your coin. Most of the time, token sales have a pre-sale round with accredited investors. This is to prevent getting in trouble with the SEC. This initial sale could mean that the public will miss out on the good initial price. However, in the end, most of the token sales will have to go public, giving everyone a chance to buy and sell the tokens. When this happens, the coin should fend for itself in the market, rising or sinking, depending upon opinions, news, and rumors.

The Future of Token Sale

One thing is clear to me after writing this piece — the token sales are the new seed. Startup companies could face some challenges in raising an equity-based capital and will try to shoehorn themselves to the framework of a token sale, but this is totally fine.

This will ultimately contribute to the embrace of cryptocurrencies as being the glue of the financial world. There are plenty of spaces for various token sales, including those belonging to the same industry and we’ll soon be seeing shakeouts and changes in the market. However, I have a feeling that angel investment might soon move into token investment as time goes by.

This is merely the start of a new and distinct fundraising model that could result in many winners and losers. It’s basically an egalitarian method of raising cash to be used for new ventures. For now, it’s all up to the designers, makers, and programmers, as well as the dreamers, to make all this possible.