Tokens Are Equity

Mikal Khoso
3 min readNov 27, 2017

2017 has been a good year for all things Blockchain. It’s a talking point in every major stakeholder in society — from governments to businesses and everyone in-between. While there are diverse applications for Blockchain, the application most people are familiar with are cryptocurrencies. In the past year numerous currencies have debuted through what has come to be known as an “initial coin offerings.” With growing public interest and massive flows of capital, cryptocurrencies — or tokens as they are also known — have seen their market caps soar.

There are many things to like about tokens. In an “initial coin offerings” a company sells a portion of its tokens to the public to raise money to finance its operations and grow its business. Time and again I’ve heard people within the tech and venture community talk about how “disruptive” initial coin offerings are because they are non-dilutive to founder equity. I agree with this view, and I agree that it is unique as a financing model.

But I think it is wrong to describe tokens as not being equity. While they are non-dilutive to founder equity in the company, they still allow token investors to purchase a share in the company’s future success.

In a sense tokens are equity financing in the same way that venture investment is, except that you are buying equity in the protocol and not in the company. Because the number of most tokens is capped (for various reasons) each token you have is a percentage share in the equity of the protocol. While that might be a tiny share (1000 tokens out of 1 billion), it’s a share nonetheless. My partner Mike Annunziata has described tokens as allowing retail investors to buy a share in the gains from a company’s future network effects.

As Union Square Ventures has pointed out, the value of the protocol will always grow faster than the value of the applications built on top of it, creating “fat protocols.” Thus, for the first time retail investors can purchase “equity” at the earliest stages for emerging tech companies working in Blockchain and profit from VC-like returns.

Cryptocurrencies bring the best of crowdfunding and equity financing together. Enabling the retail investor to invest at the very earliest stages in tech companies and new ecosystems of exchange.


Aren’t ICOs Dilutive?

There is a sense where ICOs are dilutive, by definition. When a company sells say 20% of its tokens on the day of the ICO, it is left with only 80% of the tokens it once had. By extension the shareholders of the company are only left with 80% of the tokens they once had.

But that sale of tokens seeds the protocol with early-adopters and gives the protocol some momentum. That in turn will drive demand for the company’s service built on top of the protocol and raise its valuation (in theory). Founders should look at tokens as an asset on the company’s balance sheet that they can deploy to build their business, as opposed to a type of equity that they should be trying to preserve at all costs. Founders can have the best of both worlds. They can keep their equity in the company high (and even completely undiluted) while at the same time holding some portion of tokens and benefit off of their rise in value to fund further development.



Mikal Khoso

Former VC turned Operator interested in the fastest growing businesses in emerging markets. Sign up for my newsletter here