Don't do an ICO unless you actually DEFINITELY need one for your project at all.
Don't assume your token does or will continue to have an economic justification that is sensical. We still don't know what token economics look like at all, so being thoughtful in their design is a must, and if the conclusion is that a token is not long term economically justifiable, then do not have a token.
Don't do an uncapped sale. Just don't, not in this environment, it's unacceptable. It doesn't matter if you're concerned about deadweight loss, or economic efficiency, or whatever. Consider the environment before printing an ICO. And the environment right now says "campfire rules" -- leave the space a little better than you found out of respect for everyone else and out of recognition of the externalities your actions produce.
Don't raise more than you need. Figure out what you need to get your product launched, add 30%, set that as a cap, and figure out the most equitable distribuition scheme you can think of. If the number you come up with is > $50mm, divide it by 7 and follow the next bullet point.
Do raise money in tranches. This is what Melonport, Dfinity, and Mysterium have done recently, to name just a few. Raise money in line with what your short and intermediate term needs are.
Do not pay yourself cash upfront with ICO proceeds before you have a product that matters. If that is your first act, what does it say about you? How does that properly align your incentives with those of the people you raised money from?
Do have any tokens or cash from the ICO that goes to founders, principals, and employees vest over a long period of time. A long period of time should be 3 years or more.
Do heed soft guidance from regulators. When the SEC says all ICO promoters have a duty to "protect investors," take that duty seriously and be cautious and conservative.
Do put your ICO investors' interests before your own. This is your ethical responsibility, whether you like it or not. If you don't like, don't have an ICO.
Don't negatively market against other projects. Your first focus should be on why your product is great, not why your product solves the flaws of some other product in a space with no mainstream adoption or proven use cases to date. There is so much white space here, focus on being great and working together. Tezos and Blockstack have done this recently. Augur/Gnosis trade shots on the regular. Defining yourself as a negative is a literally empty existence.
Don't be an asshole to investors or to anyone. For instance don't call investors liars and innumerates, especially if you may have told some half truths and made countless math mistakes and spelling errors in your soliciation materials.
Don't give Billionaires preferential access. Especially if they are allowed to make a fundamentally differnt investment and get them better terms than anyone else. It defeats the purpose, even if it makes you richer in the short term.
As an aside, it's amazing watching how differently people deal with the ICO process. One person in particular has set the standard in my mind on how to comport oneself during an ICO process. Luke Mulks has represented BAT well in every setting. Luke endured countless trolls, rude questions, difficult pointed questions, scams, problems, and more, all with everlasting grace, respect, and thoroughness. He impresses.
Btw this is not a static thing and I look forward to other people's contributions.
Additional Links:
Nice list, but I have a few questions for you:
Suppose you have a product fully developed and want to distribute 90% of your tokens, does the no-cap still apply? Is it still an ICO?
Suppose you do it in rounds, does selling 1% for $10M and keeping 99% for the developers sound fair? Especially if the developers only need $10M?
What about selling 1% with no cap to set the price like EOS and repeating the process until you get what you "need"? Who determines "need" and "scope" anyway?
What about the value of a wide distribution and community buy in it generates?
What about allegations of centralized control caused by selling a small percent?
Don't the developers make much more profit by selling in the future (after they have delivered the product) and isn't the idea of "developers getting rich" the very thing articles like this are complaining about?
How do developers prevent copy-cats from stealing code if they don't have market effect of vested interest of token holders?
If only a small amount is outstanding wont this also inflate market prices and cause people to lose money when future rounds dump on the market?
These are tokens not securities, no one, not even the developer, can be expected nor demanded to do anything on behalf of tokens. If you want securities then you want to play under the existing regulations which will only allow the rich and connected to invest.
A few is 3! You have broken the "law of few" by 6. ;) It's all inchoate so no list can cover every scenario.
Yes. This is based on today's environment and the externalites to the space of an uncapped sale.
Sort of. Depending on the mechanism, it's "fair," but perhaps not advisable. The sheer dollars at risk are a material issue more than the valuation imo.
The team should determine need and scope. If they can't, they are probably not a good team. Refer to "raise money in tranches," a superior alternative to "raise all the money we can and now."
Distribution is important but can be solved by other means. No crowdsale will be perfect.
I am unclear on what this means. But at least partipcants ex ante know the valuation they get in the Gnosis scenario.
No, They only get rich in the future if they do well. It's conditional, not guaranteed, and it's aligned with the outcomes of their investors. This is why payouts in the future, vesting, not taking a big payday in the beginning, are important -- they align incentives appropriately. In the real world, I don't get paid my lifetime potential earnings up front in a lump sum. If I did, I would probably apply myself at work differently.
This is an issue for all FOSS and all projects in this space for the most part. One can argue that the more $ raised, the greater incentive for a copycat before there are non-monetary barriers. This is distribution issue and a delivering a working product/ecosystem, not a money issue imo.
Potentially no, potentially yes. This is why character matters in leadership. You need people who will do what's right for all stakeholders and balance the project's financing needs with investor outcomes. If AAPL needs to raise $5bn and it makes sense, that new supply of AAPL stock won't negatively affect the extant stock's value. Same goes goes Melonport or Dfinity's next rounds.
SEC has been clear as it doesn't matter how you want to lawyer it, ICO and token promoters have responsibilities to those to whom they sell tokens. I am not interested in securities law or lawyering Howey test, that will be done for us in the future. There is a clear expectation that if you have a project and you raise money, you are expected to do right by your investors (or donators or token holders). It's not a strictly legal standard (yet), but it's a very prudent ethical standard. Again, each project gets to choose for themselves. This is a standard the community holds projects to as determined by me.
I would like to see an ICO that distributes tokens through an uncapped process of staking, but only taking a small % of capital.
For instance, if you want to buy into a popular new protocol, you stake an amount of ETH for two weeks that represents the max you are willing to invest.
When the staking period is done and the number of ETH has been counted, a maximum of X ETH would be collected from all staked accounts.
If $100 million ETH is staked, and the project needs $5 million, they will take 5% from each stake and return 95% of the ETH staked to investors, along with the tokens.
Thoughts?
Too complicated for my simple list, but directionally good. The end point for ICO structures seem like it will be something like we see in regular capital markets (subscribe and allocate ratably with some tweaking) or one of Nick Johnson's auction contract dreams.
Yes please, you speak from my mind! Carve this into the stone.
ICOs seem to be "the new black". Well are you surprised? Who wouldn't wanna get paid before the work has been done?
I don't mean to be hating these projects, many are solid and really interesting.. but do you really need $100M? I don't think so. As one redditor nicely put this:
I'm still launching and crying at the same time..
Great list of ICO do's and don't, and although I doubt those starting such a project will listen, I'll be using this as a "acid test" in my investing review. I also agree with you, Luke is a model online citizen.
I agree with all of these. Issuing tokens for the sake of tokens without much thought is unnecessary and reckless.
This is insightful. You should do a post solely about the do's and don'ts of investing in ICO's, mainly because most people will be investing in them rather than creating them
Good Posts . I hope they Will act like this.
Very good writing and interesting, very fondly if only to comment without reading without care.
Disclaimer: I am just a bot trying to be helpful.
Man ICO's are really the craze right now, I wonder how many startup will still be here in 2 years from now.
EOS seems to do their ICO in a new an unproved model.
What's your thoughts on they ICO model?
I think the EOS ICO model is overcomplicated, over long and greedy.
It's a weird model I guess, and yeah it seems a bit to much.
I can't figure out why they decided to have the ICO running for so long.
I bet that the price will fluctuate wildly during the windows making some investors paying significantly more than others
Dan likes to 1) play games for which he designed the rules 2) tinker with economics/schemes and 3) raise money for his ideas and 4) because they can. This market has no discipline and this will herald in even more malinvestment in bad ideas and structures, until it all pulls back, most of these projects fail, and we'll see what's left and worthwhile. Humans are reliably human and cycles are reliably cycles.
I will ask this question just to get an understanding:
How much software/hardware development have you been directly involved in?
None because I am not in software development.
I have financed billions of dollars of regular companies worth of various sizes. But I am not sure its relevance here given the issues at hand are organizational, structural, incentivish, legal, finance, etc. -- all areas of expertise for me.
yeah...coming back with "i financed....." because you know nothing about software development has been the biggest issues with the entire software industry. executives sitting on billions of dollars making uninformed decisions purely based on a bottom line, and knowing nothing about software development. again, i ask you to reassess your own imposition of expertise in one area due to the expertise in another, and realize that this is a logical fallacy. rocket scientists know only about rocket science. if you do not know anything about "software design", simply "funding" software design does not make you an expert enough to know the proper software design life cycle, or at which point funding is necessary. just because a bunch of people kissed your ass and never told you otherwise does not mean you have been incorrect in the past. I think too many people have done you a disservice by not telling you when and where you are out of your skill set to be making decisions because they want your money.
Cheers for the convo though!
I sincerely appreciate it!
You ever hear of "No Man's Sky"????
THAT is a prime example of what you are doing.
Top down decisions that are completely disconnected with what is happening on the ground.
Before you respond, please think about this.
No offense, this is literally my entire point about Tezos above -- the Tezos team has narrow expertise and will be building an empire whose scope is almost entirely OUTSIDE of software development. It was a foundational point to my entire piece.
My job is to be versatile and analytical and understand what happens over time in given situations and to do so when money is at stake. I'm held accountable to my decisions and judgments and I have been doing it long enough to know the quality of my past decisions and analyses. It's not squishy, feel good, or insulated from results.
I'm going to tell you right now that your reply shows that you are outside of your own skillset. And reread that quoted section. Is that your best?
Good luck.
Good post. Interesting to see I'm not the only one that is thinking about this. I found that running a business depends on having enough money to run the business but definitely not to much. We give this icos to much money so they are less intended to do an amazing job, they don't have to work to become a profitable business because in their eyes they are already. Do you know this interesting site? https://www.coincheckup.com I'm really enthusiastic about this site, they let you analyze every single coin out there.
Nice post :)