Letter #31: The Controversial, Lucrative World of Crypto Premines

Dear Readers,

Retail and institutional investors alike are familiar with the realities associated with startups and startup culture. New startups are born everyday and older startups fail almost as rapidly. Startup founders often have little in the way of money or investment security to offer to early employees and investors when the company is brand new. They need to come up with appealing ways to entice people to take a chance on their business, even though the risk of failure is off the charts. When unlimited PTO policies, casual dress codes, free food, and more don’t bring outsiders in the door, or when traditional companies cherry pick those offerings for their own employees, startups have an option that isn’t available to anyone else: startup equity.

Offering ownership in a startup to early employees and investors can be extremely rewarding, at least for companies that avoid failure and make it big. Take Dustin Moskovitz, one of the first people involved with Facebook after Mark Zuckerberg created the company. Dustin still owns around 2% of Facebook even though he left his position in 2008. As of this writing, Facebook’s market cap is just north of $1 trillion U.S. dollars, meaning that Dustin’s stake in the company is worth around $20 billion USD. At that price, was he adequately compensated for his efforts and risks at the startup? I think so.

Observers often find many similarities between the cryptocurrency industry and startups. Both are often on the cutting edge of technology. Both require a significant amount of effort to stave off failure and bankruptcy. And both involve a significant amount of risk for founders, developers, and early investors. Perhaps it is unsurprising then that many nascent cryptocurrency companies have resorted to a method of rewarding those early participants that seems almost identical to granting startup equity: coin premining.