ICO Funded Startups: Token vs Equity Issuance Strategies

How are ICO Fueled Startups Structuring Themselves?
When it comes to structuring startups and raising funds through Initial Coin Offerings (ICOs), most projects employ both token and equity issuance methods. This article aims to explore the various approaches taken by ICOs, particularly focusing on the distribution of tokens and equity.

Token Issuance in ICOs

ICOs operate on a unique principle where instead of issuing shares of a company, startups issue tokens. These tokens serve as the native currency of the project, often pre-cryptocurrency, designed to facilitate the project's operations and incentivize early adopters. Here’s how token issuance typically works:

1. Distribution of Tokens

Initial Token Sale (ICO) Financing: During the ICO, a portion of the tokens are sold to early investors. The funds raised from this sale are used to finance the project's development and initial operations. Typically, the amount sold in the ICO is a percentage of the total token supply. Community Incentives: A significant percentage of tokens are set aside for community members to encourage them to spread the word about the project and publicly endorse it. These tokens are often referred to as 'mktgen' (marketing generation) tokens and can be earned through marketing efforts or user referrals. Project Reserve: Keeping a reserve of tokens under the project's control allows for strategic selling or listing on exchanges, which can provide additional funding when needed. This flexibility ensures that the project can adapt to market conditions.

2. Legal Considerations

While the structure of token issuance has brought in a wave of fundraising opportunities, it also poses significant legal challenges. Calling a cryptocurrency exchange an "exchange" is highly debatable, given the strict regulations around forex and stock exchanges. Crypto exchanges, despite operating similarly to fiat and stock exchanges, are considered more akin to peer-to-peer trading platforms in legal terms. Thus, the jurisdictions and regulations affecting these exchanges are still evolving.

Moreover, the term 'exchange' in the context of crypto often faces legal scrutiny, especially regarding classification issues. This is a critical point to understand for both startups and investors, as the legal landscape is still in the process of defining clear boundaries for these digital financial instruments.

Equity Issuance in ICOs

Not all startups stick purely to token issuance. Some projects also issue equity to their team members and early investors as an additional form of financing and incentivization. Here’s how equity issuance typically fits into the ICO framework:

1. Ownership and Control

In general, buying coins in an ICO does not automatically grant ownership in the company running the ICO. Similarly, issuing equity grants ownership rights. This aspect can be crucial for understanding the financial and governance structure of startups involved in ICOs.

2. No Immediate Ownership Stake

Some startups use ICOs to finance themselves without diluting ownership stakes. This strategy is particularly advantageous for startups that do not wish to immediately share their ownership with investors. Additionally, some electronic currencies have flourished without providing returns to purchasers of coins, making the ICO model quite flexible.

Founders and team members can benefit from equity issuance through options or direct ownership, enabling them to align their financial interests with the success of the project. However, it is crucial to ensure that the equity structure is well-documented and transparent to avoid legal and financial complications.

Despite the flexibility offered by both token and equity issuance, startups must navigate the complexities of regulations and ensure their fundraising methods comply with legal standards. In doing so, they can create a robust and sustainable framework for their projects, building a viable ecosystem for both investors and users.

Conclusion

The world of ICOs continues to evolve, driven by innovative structures like token and equity issuance. Understanding the nuances of these methods can help startups and investors make informed decisions and ensure long-term success. Legal clarity and regulatory compliance remain paramount, and as regulations continue to develop, so too will the strategies for structuring ICO offerings.