If Cryptocurrencies Became Useful: Raising Seed Money
Posted on September 15, 2017
It’s 2030, and you’re an entrepreneur raising the very first round of funding for your new venture. The pitch you gave today went really well, and now you’re discussing terms with a very interested investor. You both agreed on some numbers and timelines, and now it’s time to wrap up.
In the very early 2000s, this would have involved signing a meatspace paper contract and setting up your bank wire. Now, everyone simply uses ANGEL contracts on the blockchain. They were the logical next step after early organizations like S3 Ventures began standardizing fundraising processes and when the supporting technologies matured.
ANGEL contracts evolved from the convertible note, a kind of “I Owe You” that can be converted into ownership of a borrowing company some time in the future. Convertible notes helped companies raise money with just a team, an idea, and a prototype; it didn’t require agreement on a company’s market valuation before investment, which is problematic to ascertain so early.
Like a convertible note, the ANGEL contract takes several parameters, including discount rate, valuation cap, interest rate, and maturity date. However, instead of writing these into a spreadsheet or paper document, they’re inputted into the ANGEL mobile application.
You watch the investor populate values in the collaborative contract view on your mobile device. Once it’s completed, you both activate the lock icons on your displays, which must both be then unlocked for any further edits to the draft. Because both views are locked, the investor can now fire off the contract with a specifiable acceptance window, 48 hours by default. If both of your digital signatures are received within that period, then the contract begins. Otherwise, nothing happens.
At this point, you contact your friends and mentors for advice on your decision. For a reasonable fee, anyone can access an official and certified ANGEL contract specialist to review their understanding of the terms in any language. They are able to leverage anonymized market averages in their advice. Their credentials and contract volumes are immediately verifiable on the blockchain, but no one will know if they helped with any particular contract.
48 hours later, both of you have already signed the agreement with your digital private keys. A processing fee is collected from the investor’s account–about the price of a good coffee. The funds are escrowed into an interest-accruing account for release upon the contract’s specified
beginDateTime parameter. Follow-up messages asking for transfer timelines are a thing of the past.
To view the contract, you need the contract identifier and a participating private key to sign a viewing request. Depending on contract settings, these requests may be logged or not. This is rarely done except during litigation. These days, everyone has an account with a document store provider, which stores and organizes all their contracts and transactions in real time through integrations with thousands of protocols.
The backoffice work that used to cost each party half a working day now happens in five minutes. Hours spent with expensive lawyers are reduced to under an hour with a contract specialist–the usefulness of a standard and well-understood instrument really shines. The investor now has more time and mental capacity to focus on picking good investments, and the entrepreneur can spend extra effort on their pitch decks and product.
Here are some analyses on different aspects of this scenario, and how it relates to cryptocurrencies and processes today.
- Labor-saving. Less thinking with more automated standards. Trust the contract, not the billing department.
- New specializations and jobs, including contract specialist, contract network manager, blockchain performance engineer, digital contract organizer, digital contract portfolio manager.
- Global contracts for free, contingent on a global blockchain-based equity solution. The contract terms are in code, and logic transcends language barriers. Programmatic enforcement does not care about nationality or credit.
- Low lock-in and easy data transferability. A new offering can come along and immediately import all your data with proper authorization, as the data formats and encrypted blobs will be publicly available. It could simply be a matter of importing a root contract key to move a whole corpus to a new service.
Cryptocurrency Features Used
- Currency-integrated logic (currently known as smart contracts) allows for seamless integration between arbitration logic and transfers of value. At the time of writing, an implementation of this product would consist of a multi-party integration: banks from all parties for transfer, an escrow entity, and an arbitrator, and a product company. With enough advancements, all but the product company will be commoditized by blockchain automation. Without doubt, courts will still exist.
- Public blockchains ensure the global and available nature of this service. Contracts are fully auditable and directly driven by their code, not legislation. They also allow any authorized entity to immediately access versions of the contract for review without going through an intermediary.
- Zero-knowledge proofs would allow investors to stake claims on equity without revealing the details of their investments.
- Multi-sig is used to have more than a single participant in a transaction. For example, a firm’s Limited Partner can be required as a signatory on all contracts.
Why a Centralized Solution May Not Be Enough
The biggest point is that a public network hosts and executes these contracts instead of a centralized entity such as a digital contract company:
- Digital contract companies can be compromised or become bankrupt. With a public contract-executing blockchain as a base, this is far less of a concern.
- Digital contract companies must be trusted. Even if they make their contracts open-source, there would be no way of verifying that the contracts behave correctly short of having access to their private servers. Audits of these contract companies may happen once every few months by auditing companies. Audits of public blockchain applications can happen at anytime by anyone.
- Digital contract companies are not global. In the U.S., they’re even further bound to state laws. Having a registered corporate entity at all brings with it legal baggage. If it’s just code running on a global network of nodes, then the whole network must be toppled to stop it.
- If you make an error, then you’re still bound to it. Adding an extra 0 by accident will be a very expensive mistake unless there is a robust contract amendment system. This is even more true for vulnerabilities found in the core contract code. Courts may be able to settle this off the blockchain, but they will need to evolve to arbitrate fairly in this new ecosystem.
Barriers to Entry Today
- Cryptocurrencies are currently too volatile in price, and therefore cannot be confidently used to pay for salaries, rentals, or equipment unless fixed to a more stable currency.
- Regulation. It’s completely possible that courts rule that these contracts must to adhere to federal and municipal laws, or even that blockchain contracts are flat out illegal. However, is the location of signing for a global-blockchain contract even relevant? There’s a lot of precedent that needs to be determined here.