Many of the most innovative companies today are choosing to raise money through token sales. Cryptocurrencies seem to be flowing more freely than investments through traditional VC route. Additionally, we’re seeing participation on a worldwide scale. It’s exciting! Who doesn’t want to earn 25x on their money? Yes, it’s fun to throw a few Ethereum at a “too good to be true” deal, but the risks are extraordinary. It’s almost certain you’ll end up losing money.
Some deals are better than others, and it’s up to you to find the good ones. Due diligence shouldn’t be reserved just traditional investors. To support the long time viability of ICOs as a funding model, it’s critical that we start being selective into which project we back. A focus on diligence and quality will raise make it nearly impossible for a scam to be successful.
Below I’ve assembled a list of key questions to consider when evaluating a token sale. If the company’s whitepaper or website doesn’t provide enough detail, I encourage you to ask the founders directly. You’ll quickly be able to determine which companies are mature enough to deserve your hard earned money.
Is the business entity properly structured? – Is there a formed business entity? What jurisdiction does the entity reside? Is it managed by a board of directors or foundation? How is the business structured?
How experienced are the founders? – Have the founders built companies or tremendous value in the past, or is this the first time? What makes the founders unique for this opportunity?
How experienced is the engineering team? – Are there industry leading experts on the team? Is key development being outsourced?
Do you have a personal connection with any on the executive team? – Do you have any close connections on LinkedIn with any key management? Is the team completely outside of your professional network?
How does the company approach risk management? – Is the company simply reactive to business and information security risks? Have contingencies been planned in detail? Are all attack vectors documented and managed? Does the company have a culture that emphasizes security over convenience?
What are the internal fraud prevention controls? – Have segregation of duties been setup around key financial processes? How are funds moved and managed on a day by day basis? Does the company have a documented code of ethics?
How are key internal processes managed? – Is there an information security policy? What is the business continuity plan? Is there any incident response plan? How is customer support managed?
Have you audited your smart contracts? – Have smart contracts and other code been audited by a third party? What are the internal processes for code quality and static analysis?
How are information security vulnerabilities managed – Is there internal vulnerability scanning? Are external endpoints pentested by a third party? Have all medium and higher identified vulnerabilities been remediated?
How mature is the system architecture? – Are key components properly segregated to minimize risk? Can the system architecture be clearly described in a diagram? Has external exposure been minimized?
Is there a communication plan? — How are you notified if there are problems in the system or offering? What are the scenarios in which token buyers would not be contacted? What is the breach notification policy?
How transparent is the company? — How much information was provided up front? How did the company respond with regards to their weaknesses?
This is just a small sample of the questions you should be asking when evaluating an ICO. If you’re planning an ICO, giving this type of information up front will help buyers evaluate the risks involved with yours company. Building trust does not come easy.
As a token buyer, ICOs are a great way to participate in blockchain technology. Asking the right questions will help you minimize risk.