Owning Tokens Versus Equity

A lot of VC’s and LP’s have been asking whether or not it’s better to own tokens or equity — or if they should be launching “Token funding strategies.”

It’s generally better to own equity over tokens. With equity comes:

(1) Governance (2) Better alignment with the founder (not complete alignment as share classes are different), (3) Downside protection that comes from preferred equity, (4) Protective Provisions/Minority Rights etc.

Basically, equity just has a lot more protection for its holders, and more stable governance and voting mechanisms for changes in the rules than a token might have.

But tokens do have utility. One of the frustrating things about equity is a lack of control around liquidity and the ability to sell it. In some cases, companies stay private for so long that a company can be launched, scale, create value, and then get disrupted again before there is any realization. Other times equity can become subordinate to so many follow on rounds, that it becomes easy to get crammed because you’re essentially levering junior classes of equity.

So perhaps the best solution is to own both the equity and the tokens. The equity being the generally stronger bet for all the reasons outlined above, but the tokens can serve as a hedge against the business staying private too long, and holding something that can be sold at the peak of the hype cycle of company value creation could be attractive as a way to supplement VC returns, but probably not as a way to replace them.

[5'9", ~170 lbs, male, New York, NY]. I blog about investing. And usually about things I’ve learned the hard way. Opinions are my own, not CoVenture’s

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