First Look at Launch Pools
DeFi is moving so fast that we are investing in offers that don’t exist yet. Launch pools give investors a way to engage early. They combine features from escrow, SPACs, Kickstarter, and DAOs, using some magic that is only available in the world of DeFi.
Investors can put refundable stakes into a “launch pool.” This gives them votes, and a place in line, with rewards for early staking. When the investment is fully defined, they can commit to it. This mechanism can reduce startup cost, risk and time.
Back and forth with investors down at the old boys club
An entrepreneur considers a lot of up front costs and decisions before pitching an investment and accepting money. If he is putting together a fund, he wants to know if it will attract enough assets to justify the cost of setting up a compliant fund structure, which is often more than $100K. If she is raising money for a crypto startup, she wants know where the investors are, what they are allowed to buy, and whether they will accept coins or equity. A startup may need investor backing before it can attract a key hire, but need a key hire to attract investor backing.
People who are putting together an investment opportunity typically get through these hoops by going back and forth with potential investors. They may end up with commitment letters or term sheets. That process works inside a clubby old boys network. We need a different process for a crypto world that is fast paced, global, and accessible.
A SPAC tells its investors “You are buying an IPO, but I am not telling you which one.” And the pitch works.
SPACs can raise money with a vague promise because they reduce the level of investor commitment. Investors can get their money back if they don’t like the final deal. The SPAC puts their money into an interest earning account, so they get a market rate of interest while they wait. PLUS they get something extra. In return for buying the initial offering, they get warrants which can become valuable if the deal is ultimately successful.
A vague promise works when the level of commitment is low. That’s where launch pools start.
The Launch Pool process
Launch pool sponsors will guide their investors through several stages:
- Stake: An investor gets a place in line by assigning or “staking” some assets to a smart contract. The investor keeps rights to the asset and earns its return. The investor can reclaim the assets at any time.
- Collaborate: Discuss the outstanding questions about the investment offer. Make advisory votes weighted by stake value.
- Propose: The sponsor makes a specific investment offer.
- Commit: Investors can commit their stakes to the stabilized offer.
- Convert: Swap the committed stakes for the proposed investment.
- Reward: Investors may get rewards, with early stakers getting bigger rewards.
If the project does not go anywhere, then investors will pull out, at no cost. If the project starts to gain momentum, the place in line starts to have value, and the reward starts to have value. The investments become sticky.
This process combines features from escrow, SPACs, Kickstarter, and DAOs, using some magic that is only available in the world of DeFi. Two features stand out as improvements over a SPAC.
- The assets remain under control of the investor, in an escrow contract. They don’t become an investment until after commitment. This postpones organizing and compliance costs.
- Investors earn their own interest and returns. If they want to hold ETH, they can stake ETH. If they want to earn returns from a liquidity pool or a loan pool, they can buy those pools and stake the interest-earning token.
Gather money for a new investment fund before committing to legal costs.
SPACs and Search Funds. Gather funds before finding an investment target.
Build consensus for a startup funding round.
Gather funds for a startup before attracting key team members. The community of investors can help with recruiting, and the money that they commit will make the job more attractive for team members and partners. Close the deal after the project attracts the right team members and partners.
Gather interest in a DeFi startup before understanding if it can become sufficiently decentralized for a token structure.
Qualify buyers and sort them into appropriate investment structures — Reg D, Reg S, Reg A, tokens. After we know how many investors want to go into each compliance category, we can try to accommodate them.
Organize a waitlist to reduce stress in a high-demand offering.
A sample Launch Pool offer
We are asking investors to invest in launch pools as a business.
We think that it can make an important contribution to crypto startups, fund formation, venture capital, and SPACs. These markets will grow as more finance moves into DeFi. Our goal is to lead in the design of investor incentives and collaboration, and to expand the network of satisfied investors.
Participants will only commit to an investment after the product works. If this prototype attracts stakes and reaches the point of commitment, then we will know that the product works.
The leader of this effort will be Andy Singleton. The initial programming is being done by Vojtech Hromek and our new React team.
Questions to answer before finalizing an offer
What’s the business model that will support the ongoing development of launch pools? We will make three proposals. Each of these proposals will lead to a different structure.
Expected minimum and maximum total committed amount
Minimum of $100K, and maximum of $200K.
March 20, 2021
If an investment is not committed before the expiration date, the pool will automatically refund all stakes.
We propose that investors will get warrants for additional shares or tokens with a better strike price for earlier stakers. The first staker will get a strike price of 1X the initial price, rising to a strike price of 2X for the last staker. [Strike = initial price * (1 + staking percentile)]
This is not an investment offer. Stakers may get a future investment offer after receiving specific information about the proposed deal. Some stakers may not be eligible to receive the offer because of securities laws in their home countries.
Detailed notes about the Launch Pool process
Investors can “stake” assets by transferring them to a smart contract that will hold the assets in escrow. They can reclaim the assets at any time.
DeFi gives us a magic feature that is not available in the world of legacy SPACs and escrow. Investors can stake the asset that they want to hold. I wrote that “investors are not giving up much return, because the SPAC invests in treasuries,” which is fine if their investors leave money lying around in treasuries earning 1%. But, our investors are smarter. They have high earning loan pools, coins they HODL for appreciation, and a desire to postpone taxable transactions. With DeFi, they can hold their own asset and stake it into the launch pool.
Sponsors should actively respond to questions and suggestions about the proposed investment. Sponsors can test the waters with their own questions and advisory votes. We will run votes on Snapshot.
Sponsors will need to propose a specific investment with terms, structure, legal agreements, and smart contracts.
Investors get three choices:
- Do not commit (default)
- Commit. Indicate that you will trade your stake for the investment offer.
- Commit if enough other people commit. This is a set-and-forget feature.
If the commitment does not reach a minimum value, the proposal fails, and the group can try again, until the expiration date.
Before accepting a commitment, the pool will probably need to do investor qualification, checking things like KYC, AML, jurisdiction, and accredited and professional qualifications. The investment may not be a legal offer to investors from certain jurisdictions or qualification levels.
- During the collaboration phase, the sponsors will be trying to satisfy all of the interested investors. If they have interested investors in several categories, they may have an opportunity to create multiple structures or offers.
- Qualification can come at the end of the process when everyone is sure that the effort is worthwhile.
If enough investors commit to the proposed investment, then we:
- Claim the stakes that are committed
- Liquidate them to get funds to invest
- Buy the investment
- Deliver shares of the investment
We will be working on technology to value and liquidate a variety of stakes.
Reward with something extra
Investors will get the return from their stakes, converted into the initial value of the investment. It’s a good idea to give them something extra. For example, SPACs will usually offer warrants for investors that buy the IPO. Even if those investors redeem later, they still get the warrants as a reward for their early commitment.
Launch pools can increase the speed and stickiness of investor commitments by offering increased rewards to early stakers. If the project starts to gain momentum, the reward starts to have value, and the place in line starts to become valuable. The investments become sticky.
I have advice about how to offer something extra, and not something stupid.
If you are raising a fund or a SPAC that will buy an investment with a specific NAV value, it is important to offer rewards that do not dilute later stakers. You want to avoid a situation where you are setting up a fund, and giving extra shares to early stakers, so that the early stakers get $1.10 of fund assets for $1, and later stakers get $.90 of fund assets for $1. You will not get any later stakers and the funding will fail. Instead, you could give everyone $1 in the fund, and give early stakers shares in the fund operator (like the GP). Or, you can offer warrants (like a SPAC) with lower strike prices for earlier stakers. Those are “something extra”, not something dilutive.
You might also consider offering your product as the “something extra,” like the premium product packages from Kickstarter.
If you intend to raise startup money with a SAFE or convertible, you can offer a lower valuation cap to early stakers.
If you are raising money for a startup with scale and network effects, you might be in a situation where the value of the startup rises as more people invest in it. In this case, you will be justified in offering extra shares, tokens, or options to people that stake earlier. Later stakers may get the benefit of value created by early stakes.
Launch pools accelerate investor engagement by mixing DeFi magic with features from escrow, SPACs, Kickstarter, and DAOs.
The current minimum viable offer is just an honor-system simulation. You tell us what assets you might want to stake, and we’ll give you a place in line, and voting power.
In the next few weeks we expect to have a beta implementation with an open source ethereum escrow contract, and a UI to stake, unstake, and commit. We will also set up a Snapshot space for advisory votes.