Blockchain technology is ushering in a new wave of innovation in the world of startup investing, with tokenized shares offering a fresh approach to how startups and investors interact.
Traditionally, startup investing has been a long, cumbersome process often involving expensive lawyers, tedious paperwork, and lengthy negotiations. With tokenization and our legal framework, these issues are a thing of the past.
By leveraging blockchain technology, startup investors can quickly and easily purchase and transfer shares of a company with minimal hassle, eliminating many of the roadblocks that have historically stood in the way of successful startup investing. As the shift towards tokenized shares continues to garner momentum, startups, and investors alike stand to benefit from the improved efficiency, cost savings, and heightened security that blockchain technology can provide.
Overview of the New Way to Exit
- The traditional path to exit for startups, involving regulatory hurdles, expensive legal fees, and much paperwork, has limitations and delays for investors.
- Tokenized shares offer a fresh approach, providing digital representations of ownership stakes on the blockchain.
- They streamline fundraising, offer transparency and have the potential to alleviate complex shareholder administration.
- Tokenized shares enable increased liquidity, quick, automated, low-fee transactions and are a neat way to diversify shareholders’ portfolios.
- Switzerland has a supportive regulatory framework for asset tokens, granting them legal recognition
The Classic Path to Exit - A Road Riddled with Yesterday's Problems
The “classic exit” has been the gold standard of startup investing for decades, but as technology advances and new approaches to funding become available, its limitations are becoming increasingly clear. The classic path to an exit for a startup typically begins with a round of seed funding, followed by multiple rounds of venture capital financing, and culminating in an initial public offering (IPO) or acquisition. Along the path to an exit, investors and startups typically navigate a long and complicated road filled with regulatory hurdles and expensive legal fees. Only after the lengthy process of due diligence and contract negotiations is completed can a startup actually realize an exit, often with no guarantee of success.
During the early stages of a startup, investors frequently have difficulty evaluating the potential for success and are hesitant to invest heavily in an uncertain venture. Once a startup does manage to garner interest from investors, the process of negotiating and executing agreements is often complex and time-consuming. As a startup continues to grow after its initial funding rounds, subsequent investments become increasingly difficult to coordinate, leaving investors and founders with few options to capitalize on the company’s potential until it is sold or goes public.
Throughout the entire life cycle, investor relations often suffer due to the cumbersomeness of traditional fundraising methods, leaving investors feeling left out in the cold. With strong investor relations being key to a startup’s success, the outdated methods of raising capital have proven to be a major impediment to the growth and success of startups in recent years. As the obstacles littering the classic path to exit become increasingly apparent, the emergence of smart contracts and automated market makers (AMM) offer a promising alternative for startups and investors alike.
Tokenized Shares - A Fresh Path to Exit
Tokenized shares, or asset tokens as they are known in Switzerland, offer a unique approach to startup investing, revolutionizing the way startups and investors interact.
At its core, a tokenized share is a digital representation of an ownership stake in a company, managed on the blockchain and secured using cryptographic keys. Given that a startup uses the right tools (e.g., The Brokerbot) tokenized shares enable a secure, efficient, and cost-effective way for startups to raise capital from investors.
By streamlining the fundraising process, tokenized shares together with the brokerbot eliminate many of the roadblocks associated with traditional methods. First of all the startup investment landscape is easily opened up by using tokenized shares and selling them on your own website. This enables you to raise capital faster and with less friction, while keeping a good oversight over your investor community. Secondly, the unique pricing mechanism of the Brokerbot enables reliable pricing and thus helps new investors to get a feel for the price without negotiating it.
However, the benefits of tokenized shares go beyond just fundraising. By providing a secure and transparent standard to easily buy, sell and track shares, asset tokens are on track to revolutionize investor relations. Investors are able to track their holdings in real-time, allowing for more accurate and timely decision-making. In addition to that, all tokens can be accounted for on a distributed ledger, eliminating the need for complex administration and paperwork that often delay an exit.
Perhaps the most notable benefit of tokenized shares is the increased liquidity they unlock for investors relative to traditional private equity investments. With conventional paper shares, investors are often locked in for extended periods of time before being able to liquidate their holdings—if a buyer even exists and knows how to get her hands on the shares. Tokenized shares on the other hand allow for quick, easy transactions with low fees and near-instant settlement times. Like that investors can exit their positions and rebalance an illiquid portfolio easier than ever before. This is possible through the building blocks on top of the open Ethereum network, where anybody can use the interoperable standards to build trading venues, option markets or custody services.
Switzerland - A Supportive Regulatory Framework
After some first skepticism, the emergence of tokenized shares has been met with enthusiasm by investors, startups, and regulators across the globe who recognize their potential to revolutionize the capital raising process.
Switzerland, in particular, has been at the forefront of this innovation with a supportive regulatory framework for tokenized securities. In 2020, Swiss lawmakers passed legislation to support the issuance of tokenized shares (asset tokens) by giving them the same legal recognition as paper shares. The Digital Ledger Technology (DLT) legislation, as it’s known, provides a comprehensive legal framework for these shares. At the same time it is written in a technologically neutral way, so it doesn’t only apply to a specific blockchain but rather the concept of ledger based securities in general.
Like that the DLT-Act marked a major milestone for tokenized share offerings, solidifying the legal recognition of asset tokens and paving the way for an influx of blockchain-based startup investments.
With a supportive regulatory framework and the right technological solution in place, tokenized shares are now poised to revolutionize the capital-raising process through opening up startup investing to a much wider group of investors without the hassle of crowdfunding but with more clarity and control.
Last but not least, with their ability to streamline the fundraising process and to enable greater liquidity for private equity, tokenized shares are set to usher in a new era of opportunities for startups and investors alike.
To learn more about the game-changing benefits of tokenized shares and a Brokerbot for your startup request a free demo today.