Equity Fundraising Solutions: Traditional VCs or Cryptocurrencies?

If you happen to’re an skilled, well-connected entrepreneur, all you want is a good suggestion to seek out an funding. Nevertheless, when you’re new to the sport, it’s possible you’ll wish to find out about fairness tokens.


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Opinions expressed by Entrepreneur contributors are their very own.


Till just lately, new corporations had one possibility to lift funds — promote an uncomfortably giant chunk of it to an enterprise capitalist or angel investor and hope they don’t get in the best way of the inventive course of. In any other case, they should construct from the bottom up, and that’s not at all times the simplest technique for a lot of enterprise fashions. 

Immediately, there’s a second possibility — cryptocurrency. Legally, it wasn’t at all times possible. Beginning in 2018, cash often called “fairness tokens” have allowed extra conventional companies to tokenize fairness of their firm and promote these “shares” in an ETO (Fairness Token Providing). Prior to now 12 months, Liechtenstein and Switzerland have handed new legal guidelines to accommodate this rising business. With the precise method, fairness tokens are actually accessible to the typical entrepreneur. 

That is all new and unknown, which can be a trigger for hesitation. However the underlying expertise creates a robust, versatile platform with a stable authorized framework that’s accessible to a variety of entrepreneurs. It has nothing to do with cash or competing financial methods. On this context, it’s merely a brand new solution to construction a enterprise and lift funds. There are a lot of advantages to fairness tokens, however there are additionally many explanation why somebody may select the extra conventional route. 

Associated: 5 Issues to Contemplate Earlier than Investing In Cryptocurrency

Right here, I’ll clarify the professionals and cons of every. Cryptocurrency provides the power to crowdfund assets, however this isn’t at all times ultimate for corporations with delicate mental property. It appeals to a wider viewers, however it’s usually the person investor who desires all or nothing and is prepared to pay for it. Lastly, the blockchain offers simplified and cost-effective authorized options, however many corporations require a extra nuanced method.

Cryptocurrency choices are a type of crowdfunding, which isn’t a brand new idea. IPOs comply with an identical mannequin. Even merchandise, like books and t-shirts, is a type of crowdfunding. GoFundMe and Kickstarter have been the following evolution, however they’re very restricted in functionality. It’s an effective way to entry a a lot bigger pool of capital and a wider potential viewers. For instance, Intercoin is basically the Kickstarter for crypto corporations, offering a platform to lift funds for brand new tasks. Intercoin comes with a wide range of different instruments for brand new tasks, together with a built-in group, infrastructure and automatic duties. 

There are drawbacks to this methodology. The corporate is placed on show for everybody to see earlier than it has an opportunity to get a foothold available in the market. Any firm with a excessive proprietary mannequin would wish to keep inside the safety of personal investments. Personal conferences and NDAs are there for a cause. It’s additionally attainable that nobody takes an curiosity. Crowdfunding spreads the rewards skinny. Some potential VCs choose the excessive threat and excessive reward of a personal increase and can usually contribute different assets, like connections and personnel, that crowdfunding can’t supply. 

However there’s a new wave of sentiment round crowdfunding and decentralization which may be a promoting level for brand new traders. Liti Capital presents a brand new solution to decentralize litigation finance by crowdfunding litigation asset purchases. The LITI token offers its holders a vote within the decision-making course of.

“Investing in litigation finance was solely accessible to the wealthy,” mentioned David Kay, CIO of Liti Capital. “However the blockchain gave us a solution to entry a a lot bigger pool of traders.” 

Associated: Cryptocurrency and Taxes: What You Must Know

Tokens give customers a solution to work together extra intimately with the businesses they’ve invested with, offering extra incentive for retail traders to decide on a venture and assist tasks increase the funds they want. Tokens additionally present novel methods of elevating funds for present corporations. OneOf is an NFT platform that permits artists to lift funds by NFT gross sales. By positioning themselves inside the inexperienced blockchain sphere, tasks are one step nearer to using the instruments that the Tezos blockchain has to supply. Blockchain tasks profit from excessive interoperability with one another and streamlined partnerships.

The authorized charges concerned in forming a company are sometimes a serious hurdle for brand new corporations.. Not solely are the charges a burden, however the authorized system is as nicely. Structuring a enterprise with out assist from a lawyer might be very difficult, resulting in extra charges. Firms like Neufund can create paperwork robotically and permit new tasks to configure the main points in a guided course of. These simplified templates permit potential enterprise house owners to dodge an incredible quantity of stress and authorized charges. This considerably lowers the barrier of entry for numerous entrepreneurs who’re self-starters and who’ve the imaginative and prescient to make their firm succeed. 

Extra advanced entities might have a custom-made resolution that doesn’t match into the cookie-cutter packing containers supplied by blockchain platforms. Simplicity is a lifesaver for corporations with very fundamental authorized buildings and a legal responsibility for corporations who want a number of layers of complexity. Some corporations additionally require a number of layers of jurisdictional protections underneath a number of entities. This requirement may also apply to crypto corporations who might have out-of-the-box options that modular platforms can’t supply. With all the laws and strain on cryptocurrency, new tasks usually rent one of the best legal professionals for an hermetic authorized framework.

If a venture suits inside the tips and limitations of cryptocurrency ETOs, crowdfunding the capital increase might be extremely efficient and profitable — saving money and time. This feature additionally advantages from the recognition of cryptocurrency and decentralization sentiments. That mentioned, there are nonetheless good causes to do issues the outdated method. Many corporations want to lift a big sum of money in personal earlier than exhibiting their creation to the world. It’s attainable and comprehensible that this new market doesn’t have an ideal resolution for everybody. You must do what’s finest in your growing model. 


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