If you are a seasoned, well-connected business owner, all you need is one good idea to find an investment. However, if you are new to the game, you may want to learn more about equity tokens.
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Until recently, new businesses had a way to raise funds – selling an inconveniently large chunk of it to an interested venture capitalist or angel investor in the hope that they didn't get in the way of the creative process. Otherwise, they'll have to build from scratch, and that's not always the most effective strategy for many business models.
Suddenly there is a second option – cryptocurrency. That was not always legally feasible. As of 2018, coins known as “equity tokens” will enable more traditional companies to tokenize equity in their company and sell these “shares” in an ETO (Equity Token Offering). Last year, Liechtenstein and Switzerland passed new laws to cater to this emerging industry, and with the right approach, equity tokens are now accessible to the average entrepreneur.
This is all new and unknown, which can be a cause for hesitation. But the underlying technology creates a powerful, versatile platform with a solid legal framework that is accessible to a wide variety of entrepreneurs. It has nothing to do with coins or competing monetary systems. In this context, it's simply a new way of structuring a business and raising funds. Equity tokens have many advantages, but there are also many reasons someone might choose the more traditional route.
Related: 5 Things to Consider Before Investing in Cryptocurrency
Here I explain the advantages and disadvantages of each. Cryptocurrency offers the opportunity to fund resources through crowdfunding, but this isn't always ideal for companies with sensitive intellectual property. It appeals to a wider audience, but often it's the individual investor who wants all or nothing and is willing to pay for it. Finally, the blockchain offers simplified and inexpensive legal solutions, but many companies need a more nuanced approach.
Cryptocurrency offerings are a form of crowdfunding that is not a new concept. IPOs follow a similar model. Merchandise such as books and t-shirts are also a form of crowdfunding. GoFundMe and Kickstarter were the next evolution, but their capabilities are very limited. It's a great way to access a much larger pool of capital and a wider potential audience. For example, Intercoin is essentially the kickstarter for crypto companies, providing a platform to raise funds for new projects. Intercoin comes with a variety of other tools for new projects, including an integrated community, infrastructure, and automated tasks.
This method has disadvantages. The company is displayed for all to see before it can gain a foothold in the market. Any company with a heavily proprietary model wants to stay within the scope of private investment protection. Private meetings and NDAs exist for a reason. It is also possible that nobody cares. Crowdfunding distributes the rewards thinly. Some potential VCs prefer the high risk and high reward of a private raise, and often provide other resources such as connections and staff that crowdfunding cannot provide.
But there is a new wave of sentiment around crowdfunding and decentralization that could be a selling point for new investors. Liti Capital unveils a new way to decentralize litigation funding by crowdfunding litigation purchases. The LITI token gives its holder a voice in the decision-making process.
"Investing in litigation funding was only accessible to the rich," said David Kay, CIO of Liti Capital. "But the blockchain gave us the opportunity to access a much larger pool of investors."
Related: Cryptocurrency And Taxes: What You Need To Know
Tokens provide users with the opportunity to interact more intimately with the companies they have invested in and provide more incentive for retail investors to decide on a project and help projects raise the funds they need. Tokens also offer new ways to raise funds for existing businesses. OneOf is an NFT platform that enables artists to raise funds through NFT sales. By positioning themselves within the green blockchain sphere, projects have come one step closer to using the tools that the Tezos blockchain has to offer. Blockchain projects benefit from high interoperability and lean partnerships.
The legal fees incurred when founding a corporation are often a major hurdle for start-ups. Not only are the fees charged, but also the legal system. Structuring a business without legal assistance can be very complicated and lead to higher fees. Companies like Neufund can create documents automatically and allow new projects to configure the details in a guided process. These simplified templates allow potential business owners to avoid a tremendous amount of stress and legal fees. This significantly lowers the entry barrier for a large number of start-ups who have the vision of making their company successful.
More complex units may need a bespoke solution that doesn't fit into the cookie cutters offered by blockchain platforms. Simplicity is a lifesaver for companies with very simple legal structures and a burden for companies that require multiple levels of complexity. Some companies also require multiple levels of judicial protection under multiple entities. This requirement can also apply to crypto companies that may need out-of-the-box solutions that modular platforms cannot provide. With all the regulations and pressures on cryptocurrency, new projects often hire the best lawyers for an airtight legal framework.
If a project meets the guidelines and restrictions of ETOs for cryptocurrencies, crowdfunding capital-raising could be very effective and lucrative – savings -. This option also benefits from the popularity of the cryptocurrency and the sentiment of decentralization. Even so, there are still good reasons to do things the old way. Many companies have to raise a lot of private money before showing their creation to the world. It is possible and understandable that this new market does not offer a perfect solution for everyone. You should do the best for your developing brand.