Web3 has ushered in new frameworks for fundraising. So far…we’ve seen some pretty cool stuff. NFT’s, SAFT, SAFTE, ICO’s, IDO’s, Liquidity Bootstrapping Pools and the industry is just getting started.
This article is a brief overview for projects looking to raise capital privately. We’ll briefly discuss Equity Tokens before jumping into raising with both Equity & Tokens.
If you are a project wanting to raise funds from the public market via a token, CHECK OUT THIS ARTICLE 👇🏼👇🏼👇🏼
Let’s call these Equity Tokens. Right now, they trade on obscure Alternative Trading Systems like tZERO, ICOCLONE or TEMPLUM.
Tokenizing assets is the way of the future and the efficiency gains the blockchain brings to the world of ASSETS is hard to describe in a few words (PROVENANCE, INTEROPERABILITY, DIVISIBILITY, PROGRAMMABILITY) but suffice it to say this is inevitable once the infrastructure and regulations are in place.
Not only that, ON-CHAIN ANALYTICS will transform the way we evaluate companies. Blockchain, IoT, AI, Zero Knowledge Proofs and more, will provide a robust new set of tools for determining the fair value of equity.
But for now, let’s put aside Equity Tokens, as they are explicitly a security and that’s not why we are gathered here today. We gathered here today, dearly beloved…
Our first culprit: ICO’s a.k.a. Initial Coin Offerings (<- link explains it quite well)
TLDR: Anyone can do it. Don’t do it. Scams, no accountability, considered a security (probably), no regulation, no commitment to provide liquidity after the sale etc… MOVING ON
Our 2nd Contender: SAFT (Simple Agreement for Future Tokens)
TLDR: “The SAFT is the commercial instrument used to convey rights in tokens prior to the development of the tokens functionality.” In this case, an investor pays money upfront (and usually receives a “discount”) for the right to own a certain number of tokens at some time in the future. This does not include equity in the company.
Coming in Hot #3: Token Warrants (Good Explainer)
TLDR: Token Warrants allow their holders to buy a certain amount of the company’s tokens at a specified price at a future date.
Key Difference: Token Warrants represent a right to purchase future tokens while a SAFT represents a promise to the investors to receive tokens at a future date.
In Arbitrary 4th place: SAFTE (colony version) (Simple Agreement for Future Tokens or Equity) or SAFTE (Aaron Li version)
TLDR: The colony version lets investors choose tokens or equity but not both, while Aaron’s version gives them more optionality.
The Truth
Truth is… we are still figuring out the business models of Web3 and how value will accrue to Tokens. This is very much a new design space.
For that reason a mix of traditional fundraising instruments (equity) alongside novel crypto instruments (SAFT, Token Warrants, Yield Bearing NFTs) can be quite appealing to investors who still have to face multiple obstacles (lack of regulation, security requirements, etc) in the Web3 space.
In this recent podcast from Outlier Ventures, they mention that projects that raised with Equity generally have a stronger runway and in a bear market, that’s important. Whilst trying to raise on a token in a bear market can be challenging.
Ownership of traditional equity provides both governance rights and revenue distribution rights.
Whose to say we don’t separate revenue distribution and governance into a Yield bearing Token and a Governance/Utility Token?
Governance tokens have not held up well in this bear market but not much has. The value people will place on it and whether it is even a good idea, is TBD.
Yield bearing digital assets…probably will work. They represent the revenue distribution portion of Equity and alot of novel innovation can be done on this side, in combination with Defi, if the regulatory environment allows it.
Lets take a quick look at our options for fundraising.
Traditional Equity
Tokens (3 sub categories)
Governance (entitles owner to governance rights)
Yield Bearing (entitles the owner to revenue distributions)
Utility (are used in the network, for services, products, experiences etc)
The three subcategories of tokens: Governance, Yield or Utility could all be combined into one token or be multiple separate tokens in a network. Yield bearing tokens, are probably considered an equity in the current environment 🤷🏼 (TBD).
Only Traditional Equity
Pro’s:
Comfortable for a larger network of investors = more capital, expertise & connections
Clear Regulatory Guidelines = sleep well at night
Lower Risk Profile for Investors
Con’s:
More middle men (tradition financial intermediaries taking their cut)
Less Liquid (technology will solve this)
Loss of control (% of ownership is given up to investors)
Only Tokens
Pro’s:
You retain ownership of what you are building until you decide to redirect that to your token holders (unless hardcoded into the smart contract, often it’s just a social contract)
Leverages the properties of on-chain digital assets (PROVENANCE, INTEROPERABILITY, DIVISIBILITY, PROGRAMMABILITY)
Easier for the public to participate in
Liquid (well compared to traditional private equity)
Con’s:
Unclear Regulatory Environment
Traditional Investors are less likely to participate due to uncertainty = smaller network to choose from & harder to raise capital
Security concerns (hacks, thefts, etc)
Higher Risk profile for investors
When we offer investors only tokens but multiple kinds (Governance, Utility & Yield) we enter into new, partially explored and uncertain territory. Chances are the investor willing to participate in these novel mechanisms for equity & governance is smaller than the number comfortable with traditional equity.
Offering just Governance and/or Utility Token(s) may not be a winning strategy for most projects looking for private funding. Yield Bearing Tokens, will most likely be the most appealing element in this Only Token basket for investor, should regulations allow it.
Combining both Traditional Equity & Tokens can be a great way to meet investors in the middle, especially during a bear market, amidst regulatory uncertainty and in a nascent industry. You get the pro’s of both assets and less of the con’s had you chosen just one or the other.
This might look like Traditional Equity & Token Warrants or a SAFTE agreement.
We are just beginning to INNOVATE on the attributes (PROVENANCE, INTEROPERABILITY, DIVISIBILITY, PROGRAMMABILITY) of digital assets. Equity as we know it, will transform over the next decade to become something modular in nature.
Right now, the mavericks are trail blazing. Times of uncertainty are also times of great opportunity as the industry looks for north stars to lead the way.
Here’s a cheers 🍻 TO THE BOLD ONES. The ones pioneering new ideas, and pushing the boundaries of what we know and are comfortable with.
Thanks for reading friends 💙