While most investors in the crypto and blockchain sphere are aware of the ICOs and token sales, there is still some mystery behind mixed contracts. Mixed contracts are an important investment strategy that will allow venture capital firms to engage with the nascent industry. With the injection of venture capital (VC) funds blockchain startups can get the backing they need to develop their projects.
The standard ICO would normally issue utility tokens to investors, however this would exclude most venture capital firms due to the nature of the token. Regulation on many firms limited them to only acquire equity. However utility tokens are viewed as a product as opposed to equity, because utility tokens are considered digital assets. This placed blockchain startups outside the scope of venture capital firms normal investment models.
Nick Evdokimov, a blockchain expert, paired with a group of funds that where exploring ICOs and created the concept of mixed contracts. A mixed contract became an investment strategy that initiated the VC and ICO investments simultaneously.
Evdokimov posted a video course detailing the workings of mixed contracts.
In the video he explains that initially a VC fund will being negotiations with a budding startup until the startup is able to ascertain a value for their business. Then the investor determines the level of shares they wish to purchase, getting the corresponding amount of equity out of the startup. The startup then gives the corresponding value in tokens to the fund as a gift.
“Here the transaction is structured for the fund as a purchase of ‘equity’, that is, the purchase of shares, and the tokens go for the same amount, basically insuring this transaction.”
After the transaction is finalized, the splits the equity from the tokens, diverting the shares to a management company and the tokens to a different management company.
This mixed contract allows large investors to play a part in the blockchain ecosystem. This in turn allows blockchain startups to receive the large investments need to complete a project without having the crowd source from multiple smaller investors.
A link to the video can be found here.