Money-ring entrepreneurs can get rich without making money. Who's paying for foam

The founder laughed, the investors panicked。

Prepared by Jeff John Roberts, Forbes

Photo by Saoirse, Foresight News

The business community is always preaching the story that the founders have been working hard for many years, working tirelessly, and eventually joining the ranks of millions ofaires when their own businesses are listed or acquired. Such wealth stories are also common in the area of encrypted currency, although the path to large gains here is often much shorter。

A typical example is Bam Azizi, who created the encryption payment company Mesh in 2020, which this year completed a round of B-round finance and raised US$ 82 million (a few months later, additional financing totalling US$ 130 million). The usual logic is that almost all of the A or B financing is spent on business expansion of start-ups. In this case, however, at least $20 million of the financing fell directly into Azizi personal pockets。

This proceeds from the second-hand transfer of shares, i.e. the purchase by investors of shares of companies held by founders or other early participants. Such transactions mean that when the start-up company announces the financing information, the firm is often actually receiving less money than is claimed in the title; and, more importantly, the founders need not wait several years to realize their shares, but rather to achieve freedom of wealth overnight。

This is not necessarily a bad thing. In response to a request for comment on Azizi’s “unexpectedly rich”, Mesh’s spokesperson referred to the company’s recent bright spots – including collaboration with PayPal, the introduction of artificial smart wallets, etc. – to prove that the company was operating well. Nevertheless, the early cashization by the founders of second-hand stock transfers, which is now common in encrypted currency markets, has led some of the founders to accumulate enormous wealth without having actually proven their worth (and probably never. This raises questions as to whether such a set would distort incentives for entrepreneurship. Is the culture of "quick enrichment" prevalent in encrypted currency reasonable

A $7.3 million complex in Los Angeles

Mesh founder Azizi is not the only founder of the "earth-dry harvest" in the current volatile and encrypted currency market. The cattle market began last year, during which the price of bitcoin rose sharply from $45,000 to $125,000, with high industry heat。

By mid-2024, the encrypted social platform Farcaster had completed a remarkable round of A-round financing, worth $150 million, with the windfall company Paradigm leading it. Notably, of this $150 million, at least $15 million was spent on the acquisition of second-hand shares held by the founder Dan Romero. Romero, an early employee of the encrypted money giant Coinbase, held an equity interest long before the company came on the market, and he was never deliberately indifferent to his wealth. In an interview with the Architectural Digest, he revealed that he was investing heavily in the renovation of properties on Venice Beach - This complex, consisting of four buildings, is worth $7.3 million and the Digest compares it to a “small Italian village”。

However, the renovation of the property has proceeded smoothly, while the development of Farcaster has been unsatisfactory. Despite initial momentum, it has been reported that the start-up company had fewer than 5,000 active users last year and is now far behind competitors like Zora. Romero repeatedly refused to respond to requests for evaluation of Farcaster ' s performance and its own sale of second-hand shares。

Although Farcaster raised $135 million ($150 million less $15 million in the founding cash pool), its predicament is not an example. In the area of encrypted currency and throughout the industry, investors know that the probability of a start-up company failing is much higher than the probability of growing into an industry giant。

Omer Goldberg is the founder of another encrypted currency that is profiting from second-hand stock transfers. According to a trader, earlier this year, Chaos Labs, a block chain security company, completed the $55 million A round of financing, of which $15 million was a direct personal gain for Goldberg. Chaos Labs, supported by PayPal Ventures, is now an important voice in the area of block chain security, but neither Goldberg nor Chaos Labs responded to the request for comment。

According to windman and one of the founders of the encrypted currency interviewed in Fortune, Azizi, Romero and Goldberg are just the tip of the iceberg of the beneficiaries of the recent second-hand transfer of shares. For reasons of maintaining professional connections, these sources request anonymity。

Investors point out that, driven by the heat of the encrypted currency market, second-hand stock transfers (also occurring in other hot start-ups such as artificial intelligence) are on the rise. Private investors such as Paradigm, Andressen Horowitz and Haun Ventures are competing to participate in the relevant transactions。

Against this background, windward companies that agree to convert part of their founder's non-liquidity shares can obtain the right to vote in a given round of financing or ensure that they have a “place” in the transaction. The usual mode of operation of such transactions is that one or more venture companies acquire the founders ' shares in the financing process and hold them for a long period of time, with the expectation that they will be sold for higher valuations in the future. In some cases, the early employees of the start-up company also had the opportunity to sell shares; in others, the information that the founder had compiled was completely confidential to the employee。

For investors, there is a considerable risk of second-hand equity transfers: They receive ordinary shares, with rights attached to them far less than the preferred shares common in the financing cycle. At the same time, the encryption industry has a history of “too many promises and insufficient implementation” and second-hand stock transfers have given rise to a controversy: how much should be paid by early founders? Will such transactions affect the future of start-ups from the outset

The founder of the encrypted currency is "unique."

FOR THOSE WHO HAVE LONG OBSERVED THE ENCRYPTED MONEY INDUSTRY, THE FOUNDERS MAY HAVE KNOWN THE SCENE OF THE GREAT WEALTH IN THE CATTLE MARKET. IN 2016, THE ICO HOT TIDE SWEPT THROUGH THE INDUSTRY AND MANY PROJECTS RAISED TENS OF MILLIONS OR EVEN HUNDREDS OF MILLIONS OF DOLLARS THROUGH THE SALE OF DIGITAL TOKENS TO WINDWARD COMPANIES AND THE PUBLIC。

These projects are usually committed to "revolutionary new uses of opening blocks" or "overcoming the Etherwood as a global computer" -- and they claim that as the project attracts more users, the value of tokens increases as well. Now, most of these projects are "lost." Some of the founders continue to appear in meetings and conferences in the encrypted currency industry, but others have long gone missing。

An investor recalled that the investors at the time had tried to restrain the founders through "governance tokens". Theoretically, holders of governance coins are entitled to vote on the direction of the project, but in practice this constraint is almost meaningless。

"They are nominally called "governance coins" and in fact do not function as governance at all. The blogger says:。

By the next round of encrypted currency cattle markets in 2021, the start-up model of financing began to converge with the traditional Silicon Valley model, where windfall companies acquired equity (although token sales in the form of equity certificates are still a common component of windfall transactions). In some cases, the founders, as they are now, received large sums of money in advance through second-hand equity transfers。

The payment company MoonPay is a typical example: of $555 million in financing, the senior management team cashed $150 million. Two years later, the deal triggered a dramatic wave of media investigations showing that, on the eve of the collapse of the encrypted money market in early 2022, the CEO of MoonPay had purchased a large house in Miami for nearly $40 million。

The same is true for the NFT platform OpenSea. This pre-eminent start-up company raised over $425 million in multiple rounds of financing, a large part of which went into the pocket of the founding management team through second-hand stock transfers. By 2023, however, NFT heat had plummeted, almost unsuspecting, and OpenSea announced this month that it would move towards a new strategy。

"You're making a personal worship."

GIVEN THE TURBULENT HISTORY OF THE ENCRYPTED MONEY INDUSTRY, ONE WONDERS WHY WINDWARD COMPANIES DO NOT ASK THEIR FOUNDERS TO ACCEPT MORE TRADITIONAL INCENTIVES. AS ONE OF THE INVESTORS HAS SAID, UNDER THE TRADITIONAL MECHANISM, THE FOUNDERS HAVE ACCESS TO SUFFICIENT FUNDS TO ADDRESS LIFE PRESSURES, SUCH AS MORTGAGES, ON EITHER B OR C ROUNDS OF FINANCING, BUT IN ORDER TO GET A “HEAVY RETURN”, THEY HAVE TO WAIT FOR THE COMPANY TO BE SUCCESSFULLY LISTED OR ACQUIRED。

The partner of Cooley LLP, Derek Colla, who was involved in the design of multiple transactions in the encrypted currency industry, stated that the code in the encrypted currency sector was “unique”. He pointed out that, compared to other start-ups, encryption money companies "light asset operations" - This means that funds that could have been used to purchase hardware such as chips can now be allocated directly to the founders。

Colla adds that the encrypted money industry is highly dependent on "net-red marketing" and that there are not a few who are willing to "sharp money" for their founders. "In essence, you're making a personal worship. He commented。

The CEO of Rainmaker Securities, who focused on second-hand stock transfers, Glen Anderson argued that the founders were able to make huge gains ahead of time for a simple reason — “they have this condition”. "Many areas, whether artificial intelligence or encrypted currency, are in the middle of a filing cycle," Anderson says, "In this market environment, if the story is well told, the price will be high. I don't know

Anderson also stated that the sale of shares by the founders did not mean that they lost confidence in the company ' s future. But an inescapable question is: if the companies that the founders are trying to build are likely to “do nothing”, are they morally entitled to eight digits of wealth

For their part, counsel Colla believes that such a set will not diminish the entrepreneurial enthusiasm of the founders. He cited the fact that the founder of MoonPay, who had been attacked by the media for buying a luxury house, was still evaporating; and that Farcaster was not in trouble because its founder, Romero, was “not working hard” — Colla, saying that Romero was “painting more than anyone”。

But Colla also admits that the best entrepreneurs usually choose to hold shares on a long-term basis -- they believe that by the time the company is listed, the value of shares will be much higher than it is now. "The true top founders will not choose to sell shares in the second-hand market. He says:。