The basic idea behind Neufund is to represent securities in an entity (e.g. shares in a startup) by tokens on the Ethereum network. Today there is no active secondary market for venture capital / startup equity. Such secondary market exists, however, for Blockchain projects, and has a great positive impact on the innovation financing ecosystem, both for founders and for the investors. It is, however, limited to Blockchain-based startups, and to investors who already own significant amount of cryptocurrencies.
Neufund aims to extend this to non-Blockchain startups and non-crypto investors, through representing equity/shares as Blockchain tokens — even for non-Blockchain projects. To make this work practically, we have established a legal-technical structure that attaches self-enforcing smart contract to such tokens, and also provides for a legal position that is enforceable off-chain, in regular legal proceedings.
As a first use case, to demonstrate the tokenisation process and its features, and to test technical and legal implications in real life, we have set up our own Neufund’s employee incentive program (EIP) on the EthereumBlockchain. This program is currently implemented for Neufund employees, but is open sourced to any other startup to use, regardless of its place of incorporation and the market where it operates.
ESOPs are typically equipped with various incentive mechanisms, in particular vesting schemes. Under those, employees earn the options over time, the longer they stay with the company the more options they get. ESOPs also provide for various leaver cases which incentivise employees negatively to remain with the company and do not leave.
In the European startup industry, options usually may only be exercised in a liquidity event which is a trade sale (exit) or an IPO (initial public offering). In the US, ESOPs usually grant ESOP beneficiaries also the right to exercise the (vested) options when leaving. However, also in the US options only generate liquidity for their owners in case of an exit or an IPO.
Current market conditions in the startup industry do not provide for a standard algorithm determining the number of options to be granted to an employee. Some startups apply strict policies based on hierarchy and seniority, some simply bargain on a case by case basis.
Current ESOPs give employees an illiquid asset. Only in an exit employees can convert their options to shares, and earn some money. In particular, for early stage employees this is a long ride — it takes about 5–10 years to build and sell a startup. Considering the regular size of equity piece represented by ESOP, combined with the waiting time until materialisation, the intended incentive becomes quite weak. Making ESOP liquid substantially changes this! Tokenised ESOP allows for a liquid asset position, thanks to which employees can make money before the exit, simply through trading of vested options on exchanges like Kraken or Poloniex, or through converting the options in an ICO.
Another often criticised feature of ESOP is the lack of transparency. Often employees have not enough information to evaluate the offer they receive. This lack of transparency exists on two levels. Within a particular plan, it is hard to say how much stock an employee holds — cap tables are convoluted and not always available for inspection so it is impossible to translate given amount of options into percentage of equity owned. There is also lack of transparency on the level of the whole industry — employees have no way to compare different deals — there is no market that would tell what is a fair offer in a given situation. This asymmetry of information and intransparency results in significant reduction of intended incentivation and retention. Tokenised ESOP on Blockchain provides full transparency for beneficiaries under ESOP, and a visible algorithm for distributing ESOP to employees.
Smart contracts that are used to issue tokens are self-enforcing contracts — they enforce the performance of the ESOP agreement between the employer and employee, and make contractual clause unnecessary. It means that they not only set the ESOP terms but also execute them.
Neufund’s tokenised ESOP runs on Ethereum Blockchain technology. Beneficiaries get tokens representing options in shares in the company based on a transparent algorithm that rewards risk-takers as early employees, and additionally the loyalty. A self-enforcing smart contract grants full transparency over the status of the actual vesting scheme of the individual rightholder. Once Neufund has ICOed, beneficiaries may convert vested ESOP tokens into ICO tokens, and immediately benefit from Neufund’s going to market. Based on the beneficiary’s own risk profile s/he can enjoy immediate liquidity events or wait if higher token price is expected.
Neufund’s ESOP is not only enforceable through smart contract on chain. The smart contract refers to printed ESOP Terms & Conditions Document, which itself refers back to smart contract. Signing up for options or shares via a smart contract is then equal to signing a paper agreement. Hence, beneficiaries can be assured that any rights held under the program are legally binding also off chain. This is combined with smart contracts assigning options to new employees, which does all calculations and bookkeeping, executes conversion from option tokens into ICO’ed tokens, and distributes the proceeds. All of this will happen in an automated, decentralized way, without requiring company’s direct involvement. It also is fully transparent and fair.
Join us in the effort of increasing transparency and liquidity of the startups equity! Here are all the resources you’ll need to implement tokenisation in your company.
Here are the smart contracts source code, ESOP Terms & Conditions Document and ESOP User Interface on Github for anyone to check the code, extend it or adopt for its own company. The sample deployment of our smart contracts are accessible and ESOP User Interface can be launched and browsing through contract settings, legal documents and employees’ list is enabled. Please note that Neufund is doing a final code review of smart contracts and currently deploys on Ropsten. Neufund’s ESOP UI is a work in progress and further iterations will be released in coming weeks. The UI should be usable on any modern mobile and desktop browser but Chrome is supported primarily.
To use Neufund’s ESOP implementation please read this quick guide how to do it:
1. You will need a developer or sysadmin that is familiar with node.js and has basic blockchain and Ethereum knowledge.
2. Deploy smart contracts to Ropsten network. Please do not use main network for your first deployment!
3. Upload your customized ESOP Terms & Conditions Document to IPFS and write down its hash.
4. Deploy and configure ESOP User Interface as described in README. This is a simple web application without any backend components.
5. You are done! Now set up your ESOP Terms. First read an introduction, launch the UI and follow instruction (have your company’s management wallet ready!).