This year we saw a major spike in funding using crypto tokens with over $3 Billion raised in 2017 alone . I think that token sales can potentially disrupt the traditional venture capital model, but they have a long way to go. We're in the "honeymoon phase" of token sales, and there are challenges that need to be sorted out. 1. Democratization of venture capital
Token sales potentially open up early access to investment opportunities to not just sophisticated investors but everyone. On the surface such democratization of venture capital might look like a good idea; why should only a select few get preferred access to investment opportunities? However, the regulations around securities exist for a reason. The securities regulations are there to protect the general public from misrepresentation and outright scams. There is a need to strike the right balance between democratizing venture capital while complying with all applicable law. 2. Milestone based funding
The venture capital model of rounds of financing (Seed, Series A, and so on) is there because startups are riskier early on and de-risk as they meet milestones and show growth. Token sales, however, currently do a single financing at the launch of the project and we haven't seen milestone-based models yet. In my view, this results in (a) a lot of capital raised by pre-product projects, and (b) a lack of checks and balances on the projects after the sale. 3. Governance structure
Startups typically have a Board that can include representation from founders, executives, investors, or independent parties. There are well-defined mechanisms for conflict resolution in this governance structure. Currently, in some cases, funds raised through token sales are going directly into the hands of founders or into non-profit entities which are sometimes offshore. The governance structure of non-profit entities sponsoring technical protocols is unclear and can potentially lead to problems and infighting. Blockstack Token Sale
With the Blockstack token sale our goal is to have a legal framework and governance structure that can:
- Be inclusive while complying with all applicable law. We designed a "voucher system" for this which is described below.
- Work under the constraints of a "single funding event" at genesis block but structure the operating capital more like rounds of venture funding.
- Design a governance structure that is not overly complicated but can have explicit checks & balances and can optimize for the public good.
: In the Blockstack token sale we introduced a "voucher" system for users. People who are not Accredited Investors, i.e., don't have a net worth of $1M+ or made $200K/year for the last two years, can also participate in the token sale and get the same price as the Accredited Investors. These users will get a free voucher for a potential future payment instead of paying in the upcoming sale. Non-accredited users can only redeem the vouchers when tokens are clearly not securities. See disclaimers .