A New Headache for VCs: Getting Squeezed Out by Token Sales
Venture capitalist David Pakman is facing a new problem lately. Many promising startups he sees as a partner at Venrock have expressed interest in raising money through cryptocurrency token sales. But if the firms do create cryptocurrencies, any investment he makes now might be undercut. “There is an argument that the equity becomes virtually worthless,” he said.
Mr. Pakman’s worry goes to the heart of an emerging debate among investors and startups about the relationship between a company’s shares and its cryptocurrency—and what rights, if any, shareholders should get up front. Concerned about potential threats to share value and regulatory risks, venture capitalists are asking for rights to receive or buy cryptocurrency in the event of an offering.
In some cases, several prominent investors and attorneys told The Information, venture capital firms are seeking to veto cryptocurrency offerings altogether. Some startup founders, meanwhile, are pushing back, wanting to preserve flexibility around decisions related to fundraising and their businesses.
The question of whether a cryptocurrency offering diminishes the value of shares has become more important as initial coin offerings, in which companies raise money by issuing their own currency, have become popular. Roughly $4 billion was raised by ICOs in 2017, according to EY (formerly known as Ernst & Young), compared with $6.8 billion raised through traditional angel and seed financing in 2017, according to PitchBook.
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