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Mitigating the Downsides of Founder Tokens in Crypto Projects

Posted by Jayson R. Elliott | Jul 25, 2020

The rise of cryptocurrency and blockchain projects has brought about unique mechanisms of ownership and reward, notably the allocation of “founder tokens” to project initiators. While these tokens can serve as a significant incentive for founders, they also bring certain challenges. In this article, we'll discuss strategies to mitigate the potential downsides associated with founder tokens.

The Challenges of Founder Tokens

Founder tokens, although beneficial, pose certain risks and challenges:

Market Manipulation Risks: Founders owning a large share of tokens can cause market volatility if they decide to sell their stake abruptly.

Perception of Greed: A high allocation of tokens to founders can lead to a negative perception among the community if it appears disproportionate to the founders' contributions.

Regulatory Risks: Depending on jurisdiction, tokens can be regarded as securities by regulatory bodies like the SEC, attracting additional compliance and legal risks.

So, how can these challenges be mitigated?

Mitigation Strategies

1. Clear Communication and Transparency:

Clear and transparent communication with the project's community is key. Explain the rationale behind the token allocation strategy, ensuring the community understands the value the founders bring and the risks they've taken. This can help mitigate the perception of greed or unfair allocation.

2. Use Vesting Schedules:

To mitigate the risk of market manipulation, implement vesting schedules for founder tokens. A vesting schedule gradually releases tokens to the founders over time, preventing the sudden sale of a large number of tokens. This can also reassure the community of the founders' long-term commitment.

3. Token Lockups:

Similar to vesting, token lockups prevent founders from selling their tokens for a predetermined period. This can maintain price stability and boost investor and community confidence.

4. Legal Consultation:

Consulting with a legal advisor experienced in the crypto space can be beneficial, especially regarding potential regulatory risks. Such professionals can guide the project towards compliance with securities laws, help craft terms of service and user agreements, and navigate the legal implications of token sales.

5. Consider Alternative Reward Structures:

Rather than allocating a large number of tokens at the outset, consider tying token rewards to milestones or KPIs. This can demonstrate that the founders are incentivized by project performance and success, rather than personal gain.

6. Include a Clawback Provision:

In certain cases, including a clawback provision can be effective. This allows the project to reclaim a portion of the tokens if the founders leave before a certain period or fail to meet specific performance criteria.

In conclusion, founder tokens are a powerful tool in the crypto world but must be handled with care and foresight. Implementing thoughtful strategies can help manage potential downsides and ensure the project's success in the long term. As always, seeking professional advice in legal, financial, and crypto-specific matters is recommended.

About the Author

Jayson R. Elliott

Jayson R. Elliott Attorney at Law | Managing Director of Bay Legal Profile: Jayson R. Elliott, as the Managing Director of Bay Legal, combines his extensive legal expertise with a deep understanding of business and technology. With a Juris Doctorate from Santa Clara University and dual Master'...

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