In an entrepreneur-led formation of an On-Chain Organization (OCO), one or more operators build a business concept. This may be an idea or a full-operational company1. Similar to an equity offering or token offering, they’ll open a round of IDT offerings at a predetermined rate. For example, the OCO may offer one token per USD contribution or one million tokens per ETH contribution. At face value, each dollar raised may be viewed as more dilutive since it will generate IDTs, then the money in the treasury may be used to mint corresponding TPTs.
Investors may choose to capitalize a new OCO, where the investors create the treasury and initially own 100% of the tokens as IDTs. The investors may then incentivize entrepreneurs and operators by providing them TPTs– a great guaranteed source of income with equity-like upside2. The investors have tremendous flexibility given that they control token issuance, may easily change management, and the cumulative risk of the investors is equal to the sum of issued TPTs (or expenses paid directly from the treasury). In this case, investors perpetually dilute themselves by issuing additional tokens to operators. Since investors and operators have the same type of upside on the OCO’s tokens, incentives are well aligned.
The treasury may add assets through three mechanisms:
Generation of revenues / proceeds of operations
Open market operations (sale of normal tokens on secondary markets)
Investor Debt Tokens (IDT) issued in a tranched token sale3
At any point, an OCO may vote to issue additional investor debt tokens4. The new tranche of debt tokens (IDTs) may be issued at the same or different redemption rates. The new debt tranche may be voted to be senior, equal, or junior to the initial debt tranche. These assets are protected from the investor’s standpoint because IDTs receive redemption priority in the waterfall of liquidation following the redemption of TPTs.
Operators and investors should remember that token sales of any sort are merely tools to be used to incentivize parties to grow the liquidation value of the treasury (LVT) per token. If the treasury continues to grow proportional to the token count, the long-run outcomes for token holders do not improve.
In the most extreme scenarios, the OCO formation may happen around fully operational traditional companies that wish to become OCOs.
In the most extreme scenarios, the newly formed OCO may offer to buy out the entirety of an existing company using TPTs, effectively acquiring the company and turning it into an OCO.
This may be either initial funding or incremental tranched community sales can be thought of similarly as PIPEs in public equity markets
A ⅔ majority will suffice in most situations