Optimal financing with tokens

Sebastian Gryglewicz; Mayer Mayer; Erwan Morellec

doi:10.1016/j.jfineco.2021.05.004

Optimal financing with tokens

Sebastian Gryglewicz
, Mayer Mayer
, Erwan Morellec

Business Economics

Swiss Federal Institute of Technology Lausanne

Research output: Contribution to journal › Article › Academic › peer-review

56 Citations (Scopus)

Abstract

We develop a model in which a start-up firm issues tokens to finance a digital platform, which creates agency conflicts between platform developers and outsiders. We show that token financing is preferred to equity financing unless the platform expects strong cash flows, has large financing needs, or faces severe agency conflicts. Tokens are characterized by their utility features, facilitating transactions, and security features, granting cash flow rights. While security features trigger endogenous network effects and spur platform adoption, they also dilute developers’ equity stake and incentives so that the optimal level of security features decreases with agency conflicts and financing needs.

Original language	English
Pages (from-to)	1038-1067
Number of pages	30
Journal	Journal of Financial Economics
Volume	142
Issue number	3
DOIs	https://doi.org/10.1016/j.jfineco.2021.05.004
Publication status	Published - Dec 2021

Bibliographical note

Funding Information:
We thank the editor (Ron Kaniel), an anonymous referee, Paolo Colusso, Lin William Cong, Rȭdiger Fahlenbrach, Mike Fishman, Marc Frattaroli, Paolo Fulghieri, Thomas Geelen, Evgeny Lyandres, Fahad Saleh (EFA discussant), and participants at the EFA 2020 annual meetings for helpful comments and discussions. Part of this research has been done while Simon Mayer was visiting the Kellogg School of Management at Northwestern University. Erwan Morellec acknowledges financial support from the Swiss Finance Institute .

Funding Information:
We thank the editor (Ron Kaniel), an anonymous referee, Paolo Colusso, Lin William Cong, R?diger Fahlenbrach, Mike Fishman, Marc Frattaroli, Paolo Fulghieri, Thomas Geelen, Evgeny Lyandres, Fahad Saleh (EFA discussant), and participants at the EFA 2020 annual meetings for helpful comments and discussions. Part of this research has been done while Simon Mayer was visiting the Kellogg School of Management at Northwestern University. Erwan Morellec acknowledges financial support from the Swiss Finance Institute.

Publisher Copyright:
© 2021

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10.1016/j.jfineco.2021.05.004

Cite this

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abstract = "We develop a model in which a start-up firm issues tokens to finance a digital platform, which creates agency conflicts between platform developers and outsiders. We show that token financing is preferred to equity financing unless the platform expects strong cash flows, has large financing needs, or faces severe agency conflicts. Tokens are characterized by their utility features, facilitating transactions, and security features, granting cash flow rights. While security features trigger endogenous network effects and spur platform adoption, they also dilute developers{\textquoteright} equity stake and incentives so that the optimal level of security features decreases with agency conflicts and financing needs.",

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Optimal financing with tokens

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