Crypto Making Its Way Into VC Equity Financing Documents
Initial Coin Offerings (ICOs) had a breakout year in 2017. With over $5B raised across nearly 800 deals, ICOs provided more funding to blockchain startups than equity financings in 2017. This has undoubtedly caught the attention of the startup and VC community.
Beyond the impact that ICOs might have on startup fundraising generally, crypto concepts have started to make their way into traditional VC equity financing documents, even for startups currently operating outside of the blockchain and crypto space. The most basic way this is happening is through the inclusion of crypto-specific provisions in investor protective provisions or veto rights. The ability of a startup to create, issue, sell, distribute or sponsor crypto tokens is now being included as part of the standard list of company actions requiring investor approval. These veto rights might also extend to the creation of a token network, prohibiting the startup from developing a computer network either incorporating crypto tokens or permitting the generation of crypto tokens by network participants, without investor approval.
Other types of crypto-specific provisions that have begun to appear in some equity financing documents include: (i) a right of first offer allowing investors to purchase their pro rata portion of any crypto tokens that the startup proposes to issue (potentially subject to a lockup agreement whereby investors are restricted from selling their allotment of tokens for a certain period of time); (ii) representations and warranties stating that the startup has not taken any action to create or issue any crypto tokens; and (iii) covenants requiring that any network protocol developed by the startup will only be exploited directly through the startup itself or a wholly owned subsidiary.
We expect these types of provisions will become more prevalent in VC equity financing term sheets and deal documents as ICOs and the general crypto market continues to grow. You might even see them in your next equity financing round.
Scannavino Lamb LLP is a boutique law firm based in New York City offering legal and business advice to forward-thinking entrepreneurs, startup companies, and startup investors. Founded by former Big Law lawyers, the firm serves its clients by blending world-class service with entrepreneurial perspective. Check us out at www.scannavinolamb.com.
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