More Non-Legal Advice for ICO-Funded Startups to Help Them Stay Out of Trouble

More Non-Legal Advice for ICO-Funded Startups to Help Them Stay Out of Trouble

Introduction

On January 25, 2019, I posted an article to this blog entitled, The Best Non-Legal Advice I Can Give to ICOs* to Avoid Getting Sued. It received positive reception and I’ve been wanting to do a follow up ever since. If you haven’t read the previous article, I encourage you to do so, but I also realize this is the Internet so the tl;dr version is as follows…

If this seems like common sense, please congratulate yourself, because it is common sense. But for some unknown reason, plenty of startups that raised funds via token sales in 2017 and 2018 kept screwing this up by ignoring (and in some cases outright abandoning) their communities.

However, almost as bad as ignoring your community is trying too hard to please them, which is the subject of this article. In particular, you should avoid catering to the demands of one segment of your community over the others, as that can also get a founding team in trouble.

Community Management: Before and After the Token Sale

Managing a community is hard work, both before and after the token sale. But in many ways, managing the community after the sale is more important and certainly more difficult.

Before the Token Sale

Leading up to the token sale, the main purpose of community management is to increase the number of contributions to the token sale. Typical posts by members of your Telegram community during this phase should appear similar to the following:

  • “Great project!” ๐Ÿ˜ƒ
  • “Your team is so awesome!” ๐Ÿ˜ƒ
  • “We’re gonna moon for sure!” ๐Ÿ˜ƒ
  • [insert positive-themed Telegram sticker here] ๐Ÿ˜ƒ

After the Token Sale

Note how positive and ego-boosting the pre-token sale community appears? That all comes to a screeching halt the moment the token sale is done. Once the dust finally settles, most posts are typically of the soul-crushing variety, as follows:

  • “We need more updates!” ๐Ÿ˜
  • “Is there an admin here?” ๐Ÿ˜
  • “I want a refund!” ๐Ÿ˜
  • [insert negative (and perhaps even violent) Telegram sticker here] ๐Ÿ˜ณ

Seeing these sorts of comments day in and day out is exactly what drove many projects to abandon their Telegram communities, believing they had become too toxic. I suspect that given the chance, however, most projects that decided to pull the plug would have left it in. And if they haven’t regretted doing it, they probably will. (Note: If this is something that you have seriously considered doing, then you definitely need to read The Best Non-Legal Advice I Can Give to ICOs* to Avoid Getting Sued).

Too Much of a Good Thing?

As already mentioned, abandoning your community is a VERY BAD IDEA. But that doesn’t mean you should cater to their every whim, either, and if you try too hard to please them it can also get you into trouble. This is especially true if you only focus your attention and favors on a subset of your community, which is typically the subset with the most tokens. I shall refer to this group as “whales.” Whales all tend to have the following things in common:

  1. They don’t care if your startup succeeds or fails because they don’t have any equity in it
  2. They only care about the price of your token and when they should sell it to get the maximum ROI
  3. They hold enough of your tokens to crash the market for it if they wanted to
  4. They are fully cognizant of the “power” they hold and will not hesitate to use manipulative or coercive tactics to pressure founders to do their bidding

Whales Can Get You in Trouble

Not all whales are bad. On the contrary, if it weren’t for whales, it is doubtful that most ICOs would have ever gotten funded. But whales really only care about one thing, and it doesn’t involve you or your project.

Whales will typically get founders into trouble by asking them to do things that violate the terms of the token sale agreement or violate the law. The specific laws and regulations involved vary considerably, but this is not supposed to be legal advice, so I will keep it general. Some examples of what whales might ask founders to do for them include:

  • Sharing exclusive insider information about:
    • Upcoming exchange listings;
    • When a lockup period is about to expire; or
    • Details of a planned masternode implementation.
  • Providing exclusive opportunities to whales, such as:
    • A discounted tranche of tokens; or
    • Access to an exclusive rate of return for masternodes.
  • Committing fraud by lying about the crypto reserves of a company because the whales did not want the real numbers to get out (for whatever reason).

In short, anything that involves disclosing or concealing material information that would tend to put a whale in a better position than other token holders is the sort of thing that can get founders into trouble.

The Two-Step Whale Neutralizer

Acknowledging that whales can get founders into trouble is one thing, but preventing them from even having the opportunity is another matter. Neutralizing a whale’s influence is a two stage process, as follows:

Stage 1: Realize That A Whale Only Has as Much Power as You Give Them

The first step in neutralizing a whale’s power is simply to realize that they only have as much power as you allow them to have. Can they crash the price of your token? Sure, but that’s a temporary condition. Other than that, there’s nothing they can do that anyone else couldn’t also do. They cannot have you arrested, put you in jail or force you to return all the money you raised in your ICO. But if they persuade you to violate the law or breach the terms of the token sale agreement to their benefit, all of those things can happen.

Stage 2: Limit the Opportunities for Whales to Gain Power

Once you realize that whales only have as much power as you allow them to have, the next step is to reduce or eliminate any opportunity for them to gain that power. Below are some useful suggestions that you may consider:

Always Keep the Whales at Arm’s Length

Do not give whales any special or exclusive access to confidential information that is not also available to every other token holder. Avoid one-on-one meetings and conversations whenever possible;


Always Read the Token Sale Agreement

The token sale agreement is what defines the relationship between you and your token holders (including the whales) so knowing what it allows and what it prohibits will make it much easier to deal with “special requests” by whales.


Keep Your Head Down and Fulfill the Promises You Made to the Entire Community

Just as the token sale agreement defines the rights and responsibilities of the token holders, so too does it define the rights and responsibilities of the project and its founders. Remember that part where it says you are supposed to be building a platform or a distributed application or something? That means you’re supposed to be building it. so get to work and stop worrying about the whales.


Don’t Do It Alone

Running a company is hard enough without having your largest token holders trying to make you feel guilty because your token isn’t performing as well as they would like. Sometimes whales can be very persuasive. When that happens, you need a reality check. Someone who can tell you whether you’re being asked to do something that may result in a very harsh set of consequences for you and the project. So find that person you can trust and add them to your team.

Conclusion

The best way to protect yourself is to have someone on your team whose task it is to help you make good choices, avoid making bad ones, and answer the tough questions when they come up. I regularly fill this role for my clients and it is one of the most rewarding parts of the job. If I can answer any questions about anything you’ve read here, please drop me a line below.