If you’re an experienced, well-connected entrepreneur, all you need is a good idea to find an investment. However, if you’re new to the game, you may want to learn about equity tokens.
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Until recently, new companies had one option to raise funds — sell an uncomfortably large chunk of it to an interested venture capitalist or angel investor and hope they don’t get in the way of the creative process. Otherwise, they need to build from the ground up, and that’s not always the most effective strategy for many business models.
Suddenly, there’s a second option — cryptocurrency. Legally, it wasn’t always feasible. Starting in 2018, coins known as “equity tokens” have allowed more traditional businesses to tokenize equity in their company and sell these “shares” in an ETO (Equity Token Offering). In the past year, Liechtenstein and Switzerland have passed new laws to accommodate this emerging industry. With the right approach, equity tokens are now accessible to the average entrepreneur.
This is all new and unknown, which may 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 range of entrepreneurs. It has nothing to do with coins or competing monetary systems. In this context, it’s simply a new way to structure a business and raise funds. There are many benefits to equity tokens, but there are also many reasons why someone might choose the more traditional route.
Here, I’ll explain the pros and cons of each. Cryptocurrency offers the ability to crowdfund resources, but this isn’t always ideal for companies with sensitive intellectual property. It appeals to a wider audience, but it is often the individual investor who wants all or nothing and is willing to pay for it. Finally, the blockchain provides simplified and cost-effective legal solutions, but many companies require a more nuanced approach.
Cryptocurrency offerings are a form of crowdfunding, which isn’t a new concept. IPOs follow a similar model. Even merchandise, like books and t-shirts, is a form of crowdfunding. GoFundMe and Kickstarter were the next evolution, but they are very limited in capability. 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 a built-in community, infrastructure and automated tasks.
There are drawbacks to this method. The company is put on display for everyone to see before it has a chance to get a foothold in the market. Any company with a high proprietary model would want to stay within the protection of private investments. Private meetings and NDAs are there for a reason. It’s also possible that no one takes an interest. Crowdfunding spreads the rewards thin. Some potential VCs prefer the high risk and high reward of a private raise and will often contribute other resources, like connections and personnel, that crowdfunding can’t offer.
But there is a new wave of sentiment around crowdfunding and decentralization that may be a selling point for new investors. Liti Capital presents a new way to decentralize litigation finance by crowdfunding litigation asset purchases. The LITI token gives its holders a vote in the decision-making process.
“Investing in litigation finance was only accessible to the rich,” said David Kay, CIO of Liti Capital. “But the blockchain gave us a way to access a much larger pool of investors.”
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