Startup life is full of ups and downs. You desperately seek funding to develop and scale your ideas while retaining enough control to be able to implement your vision. Many believe that bootstrapping and letting your company grow organically is better than selling out to the wrong VCs and angel investors. According to Shikhar Ghosh, a Harvard Business School lecturer, at least 75% of VC backed companies fail; And in another VC analysis by Tech Crunch, up to 95% of startups were either completely unprofitable or barely breaking even.
That’s why many advisors now suggest alternative forms of investments and funding like crowdfunding, ICOs, and the latest startup trend, STOs, or Security Token Offerings.
ICOs (Initial Coin Offerings) rose to popularity in 2017, raising over 6 billion dollars in 2017 and 7 billion in 2018. However, the bad reputation related to potential exit scams and the overall lack of regulation made them a poor alternative for tech startups that didn’t want to alienate serious investors and customers. That’s where STOs came in. They retain much of the benefits of an ICO crowdfunding and offer compliance with local security regulations. Here are the five crucial advantages of STOs for young startups seeking funding.
STOs are sometimes described as a middle ground between ICOs (Initial Coin Offerings) and IPOs (Initial Public Offerings). The IPO is a process of issuing and selling company shares to public investors on the stock market to raise equity. It’s a lengthy and costly procedure that requires extensive auditing and significant preparation meant to protect public investors from potential fraud and financial losses. Not every company is ready to undergo an IPO, as we’ve recently experienced with the WeWork scandal. STO offers some benefits of an IPO, like the ability to sell your company shares to the public at a lower cost. You also avoid a lot of the time-consuming paperwork thanks to the majorly automated process of equity tokenization. Digital shares can be quickly and legally issued on the blockchain using pre-vetted and pre-programmed smart contracts.
STO offers you a wider range of options than an IPO. Instead of issuing your company shares on the stock market and dealing with a board of directors and investor votes, you can get creative and securitize only a part of your company or the company’s assets and other equities using the SPV (Special Purpose Vehicle). You then effectively borrow from your investors to pay them back in dividends rather than sharing ownership of the mother company directly. It all depends on your deal with the investors. If you opt to securitize the entire company itself, you may specify the type of investor voting rights and the laws of the shared ownership. Either way, you are less likely to face big and influential shareholders like VCs and angel investors who might put unnecessary pressure on the vital development and implementation decisions.
3.Encoded Rules and Regulations
STO or Security token offering is the issuance of digital security tokens that represent company equity or other equity in the project, with rules and benefits encoded inside the structure of the token. Such digital assets are issued on the blockchain and pre-programmable via smart contracts. In effect, they represent a contract between startup founders and startup investors, with rules agreed upon at the purchase and programmed into the code of the token. These may include details on the payable dividends, voting rights, and local regulation about who can buy and sell the assets.
4. Compliance and Transparency
Unlike ICO and IPO, Security Tokens offer you an option of inherent compliance, with executable rules about who can buy and sell the assets encoded in the tokens. The code can also specify investors voting rights and other agreed-upon terms.
Token issuance on the open public blockchain offers additional transparency that helps with compliance and auditing. You can monitor and track the equity ownership in real-time. It doesn’t mean that sensitive financial data will be exposed to the public per se. The cryptocurrency owners are not directly identifiable through their wallet addresses, and the transactional data is usually encrypted. However, you can easily give auditors direct access to the list of your investors and their transactions, with tokens easily tracked and verified online for internal and external audits.
5.Accessibility and Liquidity
Whereas the stock market offers company shares to specific broker accounts and accredited investors at a significant price plus the brokerage and transaction fees, STO offers smaller, fractional shares, and lower prices available to global retail investors. Asset fractionization, together with 24/7 online access to crypto assets marketplaces and exchanges, dramatically increases assets’ liquidity. It means you can more easily sell your shares and gather the necessary funding for the next stages of your development because you gain access to the global network of retail investors rather than seeking out scarce local VCs.
Security Token Offering is growing in popularity among young startups and becoming an interesting alternative to traditional IPO and crowdfunding. STO offers a quicker, cheaper, and more flexible way to raise necessary funds for project development while retaining more control over the vital company decisions. At the same time, STOs are safer, inherently compliant, and more accessible to the wider public and retail investors. Digitizing company equity on the blockchain offers startups and startup investors continuous liquidity and access to global markets through 24/7 crypto-assets platforms and crypto exchanges.