Nov 1, 2019
The main nature of entrepreneurs should be to start businesses and create jobs. This can sometimes be very difficult and painful, but there is not only a dark side to entrepreneurship; although, many entrepreneurs facing more and more challenges like mental health, depression and other indirect, less visible obstacles.
Besides creating value for the economy, employing individuals and supporting job creation, entrepreneurs are constantly fundraising; either that or you are one of the lucky ones who were able to bootstrap a business from scratch with funds from your own sources, family and friends funds.
Tokenizing equity of an Aktiengesellschaft (LLC) in Liechtenstein
So what benefits would an entrepreneur have if he were to tokenize his business on the Ethereum Blockchain?
- better visibility means we could reduce the dark pool trading in the long term if in the future, more and more entrepreneurs would use newer technology and start tokenizing their equity early on.
- increased loyalty — employees could see their tokenized shares on a blockchain explorer, like etherscan.io with a current market value. Work hard everyday to deliver enough value that investors appreciate it, and ultimately, employees and every investor will benefit from it. (Ross Campell also created a brilliant post about the automation of vesting shares.)
- less compliance & admin costs — yes, you read it right. I believe with the right compliance tools, software and algorithms we will have less fraud and can act earlier if and when certain players want to abuse the system. The way shares are currently handled in certain jurisdictions is just very inefficient and expensive. I envision a future where we will have borderless exchanges trading every type of asset. (there are many other types of financial instruments beside equity or bonds)
- increased liquidity — especially if you are early, everything from incorporation funding to Series A or other funding rounds are always in the hands of VCs, PEs or institutional investors, depending on the field you are working in.
- easier collateral — let's assume that you would like to use your current shares of an early-stage startup (until Series A); it's its a pretty difficult (if not impossible) way to find lenders who will use the collateral with reasonable valuation and fees. This, however, could change if you are able to also approach peer-to-peer lending platforms where they accept such tokenized shares as collateral.
I also had a great discussion on this one in the https://www.startupschool.org forum. Here is a quick overview of the conversation, for anyone who is interested.
The biggest concern I would have going down this path is limiting the investor pool I can access. Most seem to be avoiding/risk averse to tokenized ownership in startups. I’m doubtful that this would go over well outside of those interested in the crypto scene.What's your experience been?
Hey Tony,
From one point of view, you are limiting the so-called investor pool to those who understand how to create a wallet, for example with MetaMask out of the browser. Of course they also have to understand the importance of private keys, but in this case, once you get those people properly educated : they are the owner of the asset.
Especially with the Blockchain Law now in Liechtenstein, the legal fundament is created for those token economy. That being said, investor rights are always properly secured. Other jurisdictions will also hopefully go in this direction, for example in Singapore.
There are also ways that you can accept CHF/USD payments for your offering (prospectus required, of course), so this also increases your reach, but it's always tied to your Ethereum Wallet as your token gets distributed (attached to its rights e.g preferred share, other financial participation). So as long as you have access to your wallet (like your bank account), you can receive dividends, vote, or receive interest payments depending on the financial instrument.
So, I see this is getting more and more broadly accepted, especially if you follow the latest prospectus requirement of the EEA (European Economic Area) where you need to obtain the ISIN for the prospectus; this will give also every prof./inst investor a good base to invest in your product.
So, to summarize:
make your prospectus as good as possible with your lawyer (we can help to identify top performers, e.g in your jurisdiction if it’s outside Liechtenstein or Singapore)
be honest with your investors, for example with internal data in your investor dashboard
make sure you take care of your KYC/AML duties (e.g. outsource this to leading companiesin to do it for you)
structure your offering to be as creative as possible online on your website
make sure you promote your offering within the EEA once the prospectus is approved in Liechtenstein and notified in other European Union jurisdictions; this allows you to promote your offering to everyone in those jurisdictions. However, keep in mind that each ad should be written off by your lawyer, just to make sure you're protected legally and prevent anybody from taking legal action to you
further, execute your product and keep your investors up-to-date. Ask them to vote on important issues; if you structure your token, you can easily do this via your investor dashboard at any given time
I believe for founders that this would and will be the way to go in the future to determine the best valuation for your startup, if you go this approach — you'll have a way bigger audience than VC, PE, and angels only.
So the faster and better we can reduce all the costs on the legal and compliance fron, the more attractive it will be for early-stage startups or ofc SMEs. I hope Mini IPOs will change fundraising for entrepreneurs.
I was curious as to how other founders see this topic and e.g how we could achieve to have one tokenized equity startup going through the Startup School 2019; that would be my personal dream and it might also be a good headline for the future for YC and the startup itself.
I'm more interested in professional investors as they bring more than money to the table, i.e. a network and experience. I find them to be preferable to a bunch of small investors that are more like shareholders post-IPO.I’m not keen to tell investors, if you lose your key, you lose your investment and stake. This is one of the biggest UX issues in blockchain, and I let Coinbase manage my wallets. It all seems like a bunch of overhead and complexity, although it also seems to be easier money.I’m US-based, so the legal environment is different and quite productive with the current investment models.Also, did you know MetaMask uploads all your failed transaction details to Segment? I started https://github.com/verdverm/bastet to create an OS level signer. I left active involvement in the space before releasing a beta.(Tony Worm
)Hey Tony,
Trust me, institutional adoption into this space is happening already. So, of course, creating access to this network—that’s what everything is trying to achieve and those who claim to have done so, need to prove it.
If you lose your token now, it's true it will be lost forever, but for example, the legislation in Liechtenstein will cover this in the new blockchain law so that you can force the issuer to reissue the token and blacklist (e.g the lost tokens in your wallet). This needs to be initiated by the district court. So, there are now platforms like Coinbase or similar who will also handle these types of situations is.
I also see that if you are on the investor's table, you might not want to even consider changing the "running wheel"; however, if good deals in the future were to progress the same, then you might think about adopting a different approach. I think entrepreneurs, startups and SMEs will be dictating the way they want the offering to be structured in the future.
I didn't know this about Metamask yet— which implications can it have? I mean, every user will choose in the future, of course, the party he's most comfortable with. But as Robert Kiyosaki says in his new book Fake Money, Fake Teachers, Fake Assets, it’s only as good as long as the counterfeit party stays liquid and solvent.
So, keeping your digital assets on a cold wallet like a Ledger Nano S or anything similar will make sure that you're always subject to the right you are entitled to, as long as the distributed ledger network is intact where the digital assets are based.
How is the law compatible with immutable leaders and consensus? Like in Bitcoin, there are only so many coins. They cannot just reissue, plus it’s totally against the ethos.I doubt startups will be negotiating major terms like how equity is recorded. Beggars don’t get to be choosers. I prefer smart money to easy money any day (as it relates to funding startups by the masses)!(Tony Worm)
Hey Tony,
it's a rule based on the legal framework today; if you lose something you should have a place to try to recover it or replace it. For instance, in Liechtenstein, if you lose a share certificate, the trustee/custodian needs to deal with a request to replace it if you are able to prove you were at that time the owner of said certificate (e.g custodian needs to check if you provided it somewhere as collateral, etc.).
So, the district court will be able to rule token issuers to reissue a certain number of tokens if they are lost and the procedure is 100% completed by the person claiming they lost access to the tokens. Also, the token issuers need to keep this in mind while establishing the smart contract functions. Ethos is one thing; law is another. Trust me, if you have lost access due to whatever reason to tokens reflected in equity and you are entitled to a dividend payout, you want to make damn sure you will receive said dividend and not some hacker who could somehow obtained access to your wallet.
Maybe early-stage startups will figure out a way to do so in the future, but everything after seed and SMEs should make use of the new prospectus regulations in the EEA and blockchain technology. That's my wish and I believe it's the right thing for the future. How, when, in which shape, in which stage... those are answers I don’t know yet, but I hope we will be at the forefront of this development.
So, what's your take? Are you already tokenizing your equity? I always want to meet entrepreneurs who are keen on exploring alternative ways of funding.
You can always text me @