Finding the Balance: Fair Terms for Raising and Building Crypto Projects

Lately, I've had a thought bouncing around in my head, and it's about time I let it out. What is the fairest way to raise and build a project in the world of Web3 and cryptocurrencies? i.e., “Fair Raise”. Brace yourself because this is a controversial topic. Let's dive in!

1. Issues and Why It Matters

  • In the fast-paced world of crypto, it's essential to establish good terms for both sides to raise money. These "fair terms" are often up for debate, and there are a few key points to consider:

    • a) Greedy Terms: This approach involves raising a lot of money and unlocking tokens aggressively. While I have personally benefited from such terms, it may not be the fairest way to incentivize a project's long-term success.

    • b) Fair Launch: On the other end of the spectrum, there's the fair launch, where the team behind the project receives no tokens. But without financial incentives, will they remain committed to the project's success?

    • c) Communication Breakdown: It's frustrating when a project's team is unresponsive and later informs us that they've failed and used up all the funds. This situation leaves investors feeling hurt and betrayed.

  • The crypto ecosystem is flooded with infrastructure projects. To foster innovation, we should be encouraging more decentralized apps (dApps) and experimentation.

  • When anonymous friends (or "anon frens") attempt to raise funds for their projects, it's crucial to strike a balance that benefits both investors and project teams.

2. Key Principles for Fair Raise

Here are some principles to consider when striving for fair fundraising and project building:

(1) Community-first, Insider Later

  • Avoid early unlocks for insiders to ensure the long-term interests of the project.

    • Examples: The Graph and dYdX followed this principle during their first year.

  • Without proper incentives, project teams may lose the motivation to keep working.

(2) Milestone-based & Allow for Failure

  • Avoid "zombie projects" and soft-rugs by clearly defining whether a project should continue.

    • Funds raised should be placed in a multi-sig wallet and unlocked as needed based on milestones.

  • If a project fails to meet a milestone, let it fail.

    • Responsible teams will face less pressure to grind on without success.

    • Irresponsible teams will need to return the remaining funds.

(3) Embrace Speculation, Not Against It

  • The current trend focuses on utility first and delays token issuance as long as possible.

    • This approach can cause projects to miss time-sensitive opportunities and struggle to get started.

  • Issue tokens as early as possible to:

    • Generate attention via speculation.

    • Invite active participation and contributions, forming a strong community, especially when the valuation is low.

    • Provide incentives to bootstrap the project

  • Bitcoin is the best example for this principle

*These principles mostly applies to dApp teams since they require fewer resources and are easier to adopt than infrastructure projects.

3. Example Terms for a Fair Raise

Here's a hypothetical scenario that both my anonymous friend and I would consider fair and be willing to accept / invest in if the team is competent:

(1) Simple Math

  • $100,000/year cash + $100,000/year tokens for each position (1-year cliff, 3-year vesting; provides enough incentives for top talent)

  • 5 people (for dApp team)

  • $1 million to get started

    • At the start: $10 million valuation (10%+15% booked; 75% reserved for other purpose)

    • By the end of year 1: $20 million valuation, need to raise $1 million through OTC sales

Notes: Mainly for dApp teams; infrastructure projects may need 10x, gaming projects 5x, mass market projects 5x resources.

(2) Execution Details

Before the Raise

  • Whitelist can be used to grant token alloaction

  • Team need to desc Q1 target and supported needed explicitly if raise is successful

After the Raise

  • Multi-sig treasury: cash and tokens.

  • Governance choices

    • Monetary governance vs. non-monetary governance (e.g., product decisions)

      • At the beginning, core team should have more voting tokens in non-monetary governance decision such as product decisions

      • For monetary decisions such as stop project and refund, only non-team token will be accounted.

    • Proposal threshold: ~1% of total (i.e., 1/10 of initial token sold)

  • No liquidity to provide, the only way out is to grow and contribute together.

  • 85% buy-back price during the first month.

  • Quarterly planning milestones & unlock cash and token (if starts vesting).

  • Can issue NFTs instead during the seed round (e.g., BAYC, GAL) if planning a later IDO on a premier exchange.

  • Discount OTC via OHM bond model.

*Not aligned with big spotlight events like Binance IEOs.

(3) Scenarios

(4) Way Out

  • Determine a threshold for continuing if a significant amount of money is returned (e.g., >50%, discontinue and return all funds).

  • If the project fails to raise a second round of funding, consider it a failure.

4. Conclusion: The Path Forward: Encouraging Interesting Projects and Organic Growth

Striking a balance between investor protection and project team incentives is vital in the world of Web3 and cryptocurrencies. By following the principles and example terms discussed in this post, we can foster the development of more interesting projects that grow organically. This approach is preferable to focusing solely on massive raises for infrastructure projects and complaining about insider profits.

By ensuring fair terms for raising funds and building successful projects, we can encourage open discussions and ongoing collaboration, which are key to maintaining a vibrant and innovative crypto ecosystem.

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