This year we saw a major spike in funding using crypto tokens with over $3 Billion raised in 2017 alone [1]. 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:

1. Be inclusive while complying with all applicable law. We designed a "voucher system" for this which is described below.
2. Work under the constraints of a "single funding event" at genesis block but structure the operating capital more like rounds of venture funding.
3. Design a governance structure that is not overly complicated but can have explicit checks & balances and can optimize for the public good.

Voucher System: 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 [2].

Milestones of the Token Sale: I think that one of the bigger risks of token sales is that projects get all the funding upfront while the tokens and the network might never go live. In such a case, the tokens will never be functional or tradeable. In the Blockstack token sale, potential investors in our token Funds and SAFTS can get up to 80% of their original money back if the network doesn't go live by a certain date. If the network successfully goes live, in my view, the next biggest risk is the platform never getting any real usage. For investors in our token funds, there is a second milestone that allows potential investors to get up to 40% of their money back if the network doesn't hit a specific growth milestone by a certain date.

Public Benefit Corp and Advisory Board: Earlier in 2017, we converted our for-profit company to a Delaware Public Benefit Corp with the mission to enable an open, decentralized internet. Blockstack PBC is committed to keeping the core Blockstack software open-source, and supporting the decentralization of the Blockstack network. Also, we have an Advisory Board for the Delaware Fund for the Token Sale. The Advisory Board consists of potential Limited Partners (investors in the token sale) along with independent members chosen by Blockstack. The Advisory Board for the Fund makes final decisions on milestones and adds a layer of checks and balances for the Blockstack protocol developers.

It's still really early days for crypto tokens, and I think that we'll likely see a lot of innovation not just on the technology side but also on legal frameworks and governance structures for token sales. We've put a lot of thought, time, and effort into the governance structure of the Blockstack tokens and would love to get your feedback on our model.

This post is not an offering for tokens. You can find all offering material for the Blockstack Token Sale from the Blockstack Token LLC website: https://blockstack.com