A version of this piece was originally posted on Mirror on March 21, 2023.

Crypto founders face a challenge: Many want to give token ownership to their users from the beginning, but as soon as they do, fear of regulatory action forces them to decentralize and distance themselves from their product.

As our general partner Jesse Walden recently pointed out, user ownership and decentralization are not the same thing; we should be able to have the former without requiring the latter. This post explores an approach that would allow crypto startups to achieve user ownership while maintaining centralized control where necessary.

We can do this by using rebates.

A rebate is an old concept: You pay money now and receive some portion back later. Let’s turn rebates into tokens. These tokenized rebates are a potential pathway to giving users “ownership” at a company’s earliest stage.

I’d like to qualify first that everything in this post hinges on tokenized rebates not being considered securities. I am not a securities or legal expert; this is just a thought experiment. However, I believe there is a starting point for an argument if we assume the following:

1. Users can never receive a rebate greater than the revenue they contributed to the company. The token cannot give the user an expectation of future profit.
2. The rebate is redeemable for a fixed dollar amount. It cannot fluctuate with the value of the protocol or be indexed to it in any way. For example, one token may equal a $1 rebate.
3. The rebate tokens confer no governance rights over the company, though users may be granted revocable rights to give product feedback, make discretionary spending decisions, or other narrow-scope choices.
4. Rebate tokens would not be redeemable at the users’ discretion but at the company’s discretion when and if it has the means.
5. Companies that wish to be more conservative can make rebate tokens non-transferable.

Many web3 companies are already choosing to give away too much value to customers. Rebates would enable them to grant a sense of “ownership” without giving away too much upfront.

Not only that, but rebates would also allow teams to keep their options open.

If a successful company wants to stay centralized, it can bear the burden of a Reg. A or targeted public offering. At the point of the offering, users would have the option (but not the obligation) to exchange their $1 rebate tokens for the equivalent of $1 of common stock in the company at the stated offering price. If a company decides decentralization is the best path, it can replace a Reg. A or IPO with a more traditional token launch. Either way, if users choose not to convert, the company is still liable to settle at some point (perhaps concurrent with the offering). Rebate token holders go from creditors of the protocol to owners; after the offering, the company can continue to give users ownership by directly giving equity or tokens.

Imagine the following:

At launch, XYZ announces users must pay protocol fees in ETH or USDC. Users will receive rebate tokens based on the USD value of the fees paid, with rebate tokens each equal to a $1 claim on the company, redeemable when determined by governance. 

The XYZ team decides initially to rebate 100% of protocol revenue via tokens. They intend to reduce rebates to 90% after three months, 80% after six months, and so on. This has the intended result of favoring earlier users over later ones.  

Fast-forward a few years. XYZ is successful, and users have accumulated rebate tokens. The company has matured to the point where it can bear the burden of a public offering. The company prepares the necessary offering under Reg. A, limiting it to the company’s customers. Rebate-token holders are then given the option (but not the obligation) to settle their $1 token claims for $1 of the company’s equity at the offering price. Now users truly are owners.

A potential downside of rebate tokens is that users may lack psychological ownership if they do not have any governance rights. To mitigate this risk and build engagement, rebate tokens can serve as a product feedback mechanism or confer limited governance control over the company’s charitable giving.

Today’s many tokens are hard-to-value, highly speculative assets with insufficient disclosures. By contrast, rebate tokens protect retail investors because they are purposely non-speculative and provide a limited owner’s benefit when redeemed for real equity in the future. Rebate tokens keep founders in leadership roles without heightened regulatory risk — while unlocking user ownership’s flywheel. Moreover, they are easily replicable in the traditional world, which could help onboard more companies into crypto.

I would love to hear thoughts and criticism from those more knowledgeable than me: [email protected]. 

+++

Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.