Investor Debt Tokens (IDTs) allow investors to enjoy the benefits of holding an On-Chain Organization’s token while also receiving priority positioning in the liquidation waterfall in the event an OCO votes to dissolve. This is analogous to traditional liquidation preferences. If the OCO votes to liquidate, IDT holders simply receive their contributions back before the remaining treasury is divided among token holders. IDTs lose their status as “investor debt” if they are sold or transferred to incentivize long-term holding1. Once an initial investor sells the token, it acts like every other traded token. The IDT seller forfeits the token’s claims to the treasury’s assets and the purchaser also has no claim to the treasury’s assets.2
Unlike Treasury Protected Tokens, which will see frequent sales, redemptions, and issuance, Investor Debt Tokens’ debt-like trait only matters in the event of an On-Chain Organization’s liquidation. It is likely that investors will simply sit on their tokens after an investment. Since trading their tokens removes their protected status, they are more valuable unsold. If an IDT holder chooses to sell their tokens, they do not get their initial asset contribution back; they only receive the value that secondary markets are willing to pay for the regular tokens. The original contributed assets stay in the OCO. From the purchaser’s perspective, they are simply purchasing a regular token with no added benefits.
IDT holders may exit their investment at any time by simply selling their tokens on secondary markets. If they choose to exit, they walk away from their claim to the assets they contributed to the treasury. By selling their tokens on secondary markets, IDT holders actually strengthen the treasury by decreasing the liquidation liabilities, meaning that the amount of assets distributed to token holders in the event of liquidation increases. The sale of debt tokens actually increases the equity value of the organization.
Key Benefits of Investor Debt Tokens:
Provides funding for operations
Creates long-term incentives for investors while maintaining flexibility
Creates on-chain liquidation preference
Investors “exiting” the company actually strengthens the treasury
Of course this is easily modified, but we think this is a superior incentive structure