Currently thousands of founders are undertaking ICOs with the aim to raise many millions of USD. With this money founders are free to do what they want, because unlike in a startup investment, in an ICO founders receive the money as a kind of donation without any obligation. So in many cases founders take all or large part of the money being raised for themselves. In other cases they will use the money to develop their company.
If founders do use the money for their company, odds are they will go bankrupt. In that case with a traditional startup investment, founders would not receive anything from what is left. This is because the investor will have had investor protection clauses that force founders to pay themselves only a low salary, and all the liquidation proceeds go to the investors first.
ICOs have no investor protection
However, in an ICO there is none of these investor protections. Thus an ICO founder can pay himself any salary he wants, but even better he can sell the company and keep all the sales proceeds. For example, a founder that raises 100 million can easily sell his company for 90 million and pocket all the money in cash himself.
So in any ICO there are at least 3 ways to benefit as a founder directly from the money raised:
- Pocket the money directly (scam)
- Pay yourself a really high salary
- Sell company with the invested money and pocket the sale proceed
However, assuming that the founders actually use all the money for the success of the ICO project, there are 5 different types of ICOs that we can distinguish according to the outcome from a founder’s perspective.
ICO that gives right to future service by the company
One type of ICO is a company which emits tokens that give the token holder rights to the future services of that company. A good example of this a software development company that is emitting tokens for future service. For example, a friend of mine normally sell his development service at 50 USD per hour. Now he wants to sell tokens that give the right of one hour of development service. As development prices go up the value of the token will rise and the person could sell it on the open market.
In this model, the ICO founder gets an obligation to provide a service for every token issued. This is thus not the best type of ICO from a founder’s perspective.
ICO that use money for expenses
Another type of ICO is an ICO that mainly uses the ICO money to cover expenses. If the money is used for expenses then once the money has been used up, and the company goes bankrupt the investors and founders are left with nothing.
ICO that creates a product
However, in many cases the expenses are incurred to build a product, most often a software. In those cases the software is an asset that has a value and could be sold. If sold all the money goes not to the investors of the ICO, but to the founders. So as long as the expenses are used to create a product that can be sold, the founders are well off.
ICO that invest in assets, owned by investors
Another type of ICO is where the ICO money is being used to invest in assets that are owned by the investors. For example, Crypto 20 is a fund that uses artificial intelligence to distribute money into crypto currencies. They collect money via the ICO and use only 2% of that money for their own expenses and put 98% of the money to crypto investments that are being owned by the investors of the ICO.
Such kind of ICOs pose the least risk to investors, because their assets do not go the founders of the ICO but to investors, and if the ICO goes bankrupt they are still own the investment.
But while from an ICO investor point of view this is the least risky, for the ICO founder this is the least interesting, as in fact only a small fraction of the ICO money goes to him.
ICO that invest in assets, owned by founders
Another kind of ICO is where the ICO money is mainly being used to buy an asset but this asset is not owned by the investors, who put the money but by the founders of the ICO!
Example of this is a luxury house sharing ICO, kind of like AirBNB for luxury houses. The ICO proposes to build a marketplace for luxury houses, where members can rent to each other their houses. The ICO proposes to use the ICO investment to buy houses to be used for the community.
So let’s imagine they buy 2 really nice properties for 5 million USD each and have 98 other properties participate in their community. The investors can now use their 10 million in coins to rent any of the properties. But the ownership of the houses belongs to the ICO founders, not to the investors. And if the company does not work out the founders get to keep the properties. This kind of ICO is from the founder perspective the most interesting!