As I've seen more and more companies exploring ICOs, I sigh. I think tokens are great technological innovation, but executives are using them as a money grab rather than maximizing the utility of a token. I see many existing companies that have launched tokens recently such as Kik (KIN) and Telegram (TON) where the incentives aren't aligned. When you buy equity in a company, executives and board holders are legally required to execute a fiduciary duty. Fiduciary duty requires three elements (under Delaware Law):
- Duty of Care: the responsibility one person or business has to be reasonably careful (or to use “reasonable care”) when dealing with others.
- Duty of Loyalty: to act in good faith and a manner, it reasonably believes to be in the best interests of the corporation and its stockholders and to avoid engaging in acts of self-dealing.
- Duty of Good Faith: requires control persons to exercise care and prudence in making business decisions
If you purchase a token, these governance laws aren't in effect. It's entirely legal for Kik to stop working on Kin, but to take the token investor's money. This situation is problematic because regulations don't protect investors and companies can take advantage of poorly educated investors.
How do you solve this problem? It's tough to answer because a company could launch an ICO and pivot if they aren't succeeding. Think about a company like Slack; they pivoted from a video game to a messaging application. If a token was issued for the video game, the value would currently be 0, but the equity portion would be worth billions.
PROPS, issued their ICO via a Public Benefits Corporation. I am skeptical that this model works primarily because token holders cannot bring legal action. Even if token holders, believe PROPS is violating their mission, there is no way to resolve this.
The only token model that is logical at the moment is using a model that doesn't involve any equity holders. This would require a non-profit model or a purely open-source model. The reason why this model works the best is that it ensures maximum effort is put into increasing the token's value. If you don't have an equity component, you can't have diverging incentives.
If you are a company looking to launch a token, you need to ask yourself if a token makes sense and if you can ensure the equity component of your company aligns with the token element.
You want to read more about token economy models. Check out the articles below.
- The Value Trap Dilemma
- The ICO Governance Deficit
- Aligning Teams with Token Holders
- New Models for Utility Tokens
Thanks to Jake Micham, Andrew Steinwold, and Phil Glazer for reading drafts of this.