Launching a Security Token Offering? Don’t Expect Anyone to Work for Tokens

This article was originally published in a modified form on LinkedIn on June 13, 2018.

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The old funding model…

Long, long ago, before the advent of the Initial Coin Offering (“ICO”), it was common for startup founders to agree to forego any sort of salary and work for equity in the future company instead. Why equity, you may ask? Simple, because early-stage startup founders often suffer from a condition known as “hypofundemia.”

hypofundemia [hahy-poh-fuhn-DEE-mee-uh]


a financial condition characterized by an abnormally low level of funding

Example — Like so many ‘techpreneurs’ of her generation who suffer from chronic hypofundemia, Kiki Gogofundme was forced to subsist on Ramen noodles for several years while trying to ‘live the dream.’

Related — flat broke; penniless; insolvent, destitute, strapped, busted, addicted to Coinstar

The question still remains, however, as to why anyone would be willing to risk their financial security on a promise of future returns that may never happen? The answer is thusly: Because the co-founders often already knew and trusted each other. Even though the success of the business was uncertain, co-founders knew one another well enough to know that as long as the company was successful, the equity they received would actually be worth something.

The new funding model…

Fast forward to today and much attention has been shifted to the “token sale” paradigm, thanks initially to the Rise & Fall of ICOs in 2017 and 2018, and now via something called the Security Token Offering (“STO”) or Digital Security Offering (“DSO”). The entire fundraising ecosystem has undergone massive disruption as a result.

With one exception.

Because for some strange reason, many startup founders still expect their employees/contractors/advisors/partners to agree to work for nothing other than a promise of security tokens in the future. This is a bad idea because nobody in this current market should be willing to do that. Here’s why:

Investors are not especially interested in STOs and DSOs at the moment

  • Thanks to the excesses and failures of so many ICOs (especially) in 2018, STOs and DSOs are viewed with skepticism.
  • STOs and DSOs lack the characteristic which made ICOs so attractive to investors who otherwise wouldn’t be willing to fund such high-risk endeavors — liquidity.
  • STOs and DSOs are still very new and have not yet proven themselves to be effective investment vehicles.

Given the foregoing, if the STO/DSO has a minimum raise (or “soft cap” to use the ICO parlance) in place, there is a very high probability that the raise will fail, and if the STO/DSO fails, that means nobody relying exclusively on those security tokens gets paid.

Paying anyone in security tokens raises numerous legal and regulatory concerns

Although not prohibited per se (unless it violates something that is beyond the scope of this Medium post), compensating anyone with securities raises a host of issues that will require the assistance of well-qualified legal and accounting professionals. If the whole reason security tokens are being offered as compensation is due to hypofundemia (see above) this is probably not the sort of expense that the founders are prepared to bear.

The people you are asking to work for your security tokens probably don’t know you

In many ways, this is most important factor and the one which I believe many founders (especially those who are recently converted from the ICO model to the STO/DSO model) fail to understand. Remember that when you are asking someone to effectively work for free until a later date, you are asking them to invest in you. In those cases where your entire team used to party with you in your dorm every weekend in college, it might make sense to ask them to invest in you because they know you (unless of course they know you a little too well as a result of that experience, but I digress). However, in those cases where you are building your team by searching for “lowest rates” on the popular freelancing websites, you can’t expect these people who don’t know you from Adam (or Eve) to have that kind of faith, and in fact they shouldn’t.


Given the foregoing, expecting anyone, especially freelancers, to work for security tokens from your own project is foolish. If you don’t have the funding available to pay people to do the work for you, then please just do the work yourself.

Note to Freelancers

If you’ve been approached by a project that has asked you to work exclusively for security tokens, please take the words of Mr. Samuel L. Jackson* to heart:

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