The startup life is full of ups and downs. You are desperate for funding to develop and evolve your ideas while maintaining enough control to be able to implement your vision. Many believe that it is better to start and let your business grow organically than to sell to bad VCs and angel investors. According to Shikhar Ghosh, professor at Harvard Business School, at least 75% of companies supported by VC fail; And in another Tech Crunch VC analysis , up to 95% of startups were either totally unprofitable or barely profitable.
This is why many advisers are now suggesting alternative forms of investing and financing like crowdfunding, ICOs and the latest startup trend, STOs or security token offerings.
ICOs (Initial Coin Offerings) grew in popularity in 2017, raising over $ 6 billion in 2017 and $ 7 billion in 2018. However, the bad reputation of potential exit scams and the general lack of regulation made them a big hit. bad alternative for tech startups who didn’t want to alienate serious investors and clients. This is where the STOs came in. They retain many of the benefits of crowdfunding ICOs and offer compliance with local safety regulations. Here are the five crucial benefits of STOs for young startups looking for funding.
1. Lower cost
OCTs are sometimes described as a happy medium between ICOs (Initial Coin Offerings) and IPOs (Initial Public Offerings). IPO is a process of issuing and selling shares of the company to public investors in the stock exchange to raise equity. This is a long and expensive procedure that requires a thorough audit and significant preparation intended to protect public investors against potential fraud and financial loss. Not all companies are ready for an IPO, as we recently experienced with the WeWork scandal. The STO offers some advantages of an IPO, such as the ability to sell your company’s shares to the public at a lower cost. You also avoid much of the tedious paperwork with the largely automated process of tokenization of stocks. Digital stocks can be issued quickly and legally on the blockchain using pre-checked and pre-programmed smart contracts.
2. More control
STO offers you a wider range of options than an IPO. Instead of issuing shares of your company on the stock exchange and dealing with a board of directors and investor votes, you can get creative and secure only part of your business or the assets and other shares of the company. company using the SPV (Special Purpose Vehicle). You then effectively borrow from your investors to pay them back in dividends rather than sharing ownership directly with the parent company. It all depends on your agreement with the investors. If you choose to securitize the whole company itself, you can specify the type of investor voting rights and shared ownership laws. Either way, you are less likely to face large and influential shareholders like VCs and angel investors who might put unnecessary pressure on vital development and implementation decisions.
3. Coded rules and regulations
The STO or security token offering is the issuance of digital security tokens that represent the company’s equity or other equity in the project, with rules and benefits encoded in the token structure. These digital assets are issued on the blockchain and pre-programmable through smart contracts. Indeed, they represent a contract between managers of startups and investors of startups, with rules agreed upon during the purchase and programmed in the token code. These can include details of dividends payable, voting rights, and local regulations on who can buy and sell assets.
4. Compliance and transparency
Unlike ICOs and IPOs, security tokens give you an inherent compliance option, with enforceable rules on who can buy and sell the assets encoded in the tokens. The code may also specify investor voting rights and other agreed conditions.
Issuing tokens on the open public blockchain provides additional transparency that aids in compliance and auditing. You can monitor and track attendance in real time. This does not mean that sensitive financial data will be exposed to the public per se. Cryptocurrency owners are not directly identifiable through their wallet addresses, and transactional data is typically encrypted. However, you can easily give auditors direct access to your investor list and their transactions, with tokens that are easily tracked and verified online for internal and external audits.
5. Accessibility and liquidity
While the stock market offers shares of companies to specific broker accounts and accredited investors at a significant price plus brokerage and transaction fees, STO offers smaller, fractional shares and lower prices available to investors. global retail investors. Asset splitting, coupled with 24/7 online access to crypto asset markets and exchanges, dramatically increases asset liquidity. This means that you can more easily sell your stocks and raise the necessary funds for the next stages of your development, as you access the global network of retail investors rather than looking for rare local VCs.
The security token offering is growing in popularity among young startups and becoming an attractive alternative to traditional IPOs and crowdfunding. STO offers a faster, cheaper and more flexible way to raise the funds needed for project development while keeping more control over vital business decisions. At the same time, STOs are more secure, inherently compliant, and more accessible to the general public and retail investors. The digitization of corporate equity on the blockchain provides startups and early stage investors with continuous liquidity and access to global markets through 24/7 crypto-asset platforms and crypto exchanges.