James Galvin

Mar 19, 2021

5 min read

Should your company tokenize?

Executives and business owners have only a few options when it comes to acquiring financing. Most companies either increase debt or sell equity in one form or another. However, there is another way, tokenization, that you should be aware of before you decide to tap traditional capital markets.

Tokenization is a new alternative to the traditional funding models made possible by blockchain technology. Technology has disrupted all sorts of industries and occupations. Do you remember taxis, travel agents, toll-booth operators? Now, blockchain technology is disrupting the financial industry and dis-intermediating banks and investors who previously pooled wealth and decided where to invest or lend. Tokens aren’t merely improving efficiency, but are progressing to cut them out of the process entirely.

[If you have additional questions, please visit the FAQ section]

How does tokenization help you streamline the process of financing?

Traditional financing options are where you draw capital from outside your company, Tokenization draws capital from the firm’s own customers. Tokenization helps you close the money loop between the firm and customers.

How it works

Tokenization creates a new hybrid asset-class, the token-holder, that combines attributes from shareholders and customers. The token-issuer creates their token and makes it redeemable for some aspect of the company’s product or service. Customers may purchase the token from you in order to receive a continuing stream of your product or service. This means token-buyers are pre-paying far in advance of the delivery of the product/service.

If you operate a theatre, the token may represent 4 free tickets per year per token-holder. If you operate a gym, the token may represent free admission to a gym location. If you operate a country club, the token may represent payment of all annual dues associated with the token-holder. Tokens are infinitely flexible depending on your business, because you decide what they are. Token purchasers can then choose whether your token offering is worth the expense.

If you tokenize, you are raising money directly from your own customer. You are pre-selling your product/service to your most dedicated customers and the token represents that claim. All the effort you put in to maintain customer relationships, creating a great experience and building brand-equity through the years now have additional market value that outside investors do not value or understand until the effects hit your balance sheet. However, these same attributes are what token-holders value most of all.

Token-holders can choose to pay your company directly for the token which they then lock up with you for a subscription to your product or service. They also have the choice of taking this token and selling it on an open token exchange. Lastly, they have the choice to buy this token on an exchange, and lock it up with you for a subscription to your product or service. If they own this token, they own the right to your product or service, but is only valid if they decide to lock up their token with you.

But should you tokenize? Here is a breakdown of benefits and drawbacks of tokenization.

Benefits:

Companies/Non-Profits that have a social benefit are rewarded- Consumers who like your product or service are the ones who want to participate in your growth. If you have a mission beyond profit-maximization, many consumers want to participate. Even though the absolute financial return on token investments may not compare favorably to other investment opportunities, token-holders want to participate in the development of socially responsible enterprise.

No loss of control- Unlike equity investors, when you sell tokens you are not relinquishing voting power of the company. Token holders are interested in your product not in managing your day-to-day affairs or governance.

No interest payouts- Unlike debt, you will not have outside creditors that you pay interest to. Your “creditors” under tokenization are your own customers who love your company and your product/service and you will be paying them out in the product or service they already enjoy.

Guaranteed Upfront Sales- Every token purchaser is now a guaranteed customer. The pandemic has taught us that the future is always uncertain and if you can make a large sale upfront it is much better than many smaller sales spaced over time. Successful tokenization packages your product or service into a desirable asset customers want.

Co-opting Your Customer- Token-holders become your superstar customers and your advocates in the marketplace. Token-holders welcome price increases because the value of their token increases. They will refer your business because more customers for you translates into more demand for the token they already purchased. Token-holders have the opportunity to become your new best advocates and they are paying for the privilege to do so.

Drawbacks:

May cost cash flow in future years- Since you are offering customers an option to buy upfront a stream of your product or service, this may cost cash-flow in future years because they are no longer paying periodically for your product or service. This is especially true if your unit costs are high. When building your token asset, considering the future costs of delivering on your token’s explicit offer is an essential aspect of tokenization.

Relative newness- Explaining what tokens are and what consumers would get from purchasing may be novel to some consumers. As tokenization becomes more common, the time spent educating your customers should dissipate over time.

Imprecise funding- Tokenization does not offer a guaranteed amount of capital that can be budgeted upon when you start. While you can make estimates, you can not predict the exact amount of proceeds you will receive when you create your token program.

onclusion: Tokenization is a powerful new tool available for those seeking financing. Blockchain has unlocked your customers’ wallets as a primary funding vehicle that has not existed before.

If you have further questions whether Tokenization may be right for you. Please click here to visit our website for more information.

About Tektonik:

Tektonik is a full-cycle business consulting firm assisting companies enact tokenization strategies based in Chicago. Tektonik helps SMBs, Non-profits, and Governments meet financial objectives through implementation of Tokenization.