Security Token Offerings can be a very efficient method to finance a startup. Considering my experience that I gathered through various STOs, I want to share both the positive sides, but also depict, when a STO does not make sense.
Everything described in this post is my personal Opinion. No financial advice, no legal advice.
With a Security Token Offering, a startup can raise funds to finance the operation of the company and grow. Why shall a startup consider a STO if there are so many traditional and long-established forms of fundraising available on the market?
The startup can tokenize the shares of the company. This would mean that a digital representation of those shares is created. This representation exists on a Blockchain and every unit of it is called a token. Compared to classical fundraising, this allows the startup to move the company shares fully digitally. In most cases without any intervention of a bank.
Hence, creating and selling a token that represents your company shares is pretty similar to going public (IPO) on a stock exchange. However, with security tokens, this can be achieved much faster, cheaper and with less effort. While the IPO on stock exchanges is preserved for very few and grown-up companies, a security token can be issued by startups in earlier phases – even right after collecting the first seed capital.
An STO can be seen as the light version of an IPO on stock exchanges that enables much more startups to go public early on and collect investments from investors worldwide.
The main reason for that is the fact that many intermediaries are removed from the issuance process and the focus on tokenized and digitized shares enable huge efficiency gains. With fewer costs arising for executing such funding rounds, it is also possible to conduct smaller funding rounds.
However, there are more ways of leveraging an STO to finance a startup. In addition to giving out tokenized equity, startups can also tokenize stock options for their employees, collect mezzanine capital or make use other forms of debt capital.