VDP-7 Equity/Startup Deals Proposal

[longevion]

Simple summary

We are in advanced talks with a few projects in the startup stage which the Longevity WG team is excited about. These were either unwilling or unfit for VitaDAO to acquire a stake via the IPNFT route, and funding via traditional equity, SAFEs, or convertible notes is required.

Abstract

This proposal is to decide if VitaDAO will do equity deals (i.e. fund startup projects) along with IPNFT deals (i.e. acquire a project’s IP).

Motivation

1. We want to advance the development of longevity therapeutics via providing funding in exchange for owning a piece of the upside, not on a donation basis
2. Money is most useful at the earliest stages or the most ignored areas that could be promising
3. Supporting early stage projects by acquiring IP via the Molecule IPNFT framework would have a high impact in the field and can result in the generation of extremely valuable assets over the long term, which might take many years to be realized
4. We don’t have the limitations VC funds have, like only being able to invest after a startup is formed, or 10-year funds that require “quick” exits
5. We have raised a modest amount of funds (compared to VC funds or how much it takes to bring a therapeutic to market) by issuing 10% of our token supply
6. After we deploy the current funds, we must either raise more funds by selling tokens from the treasury or have returns from previous investments to roll into new investments
7. If we only fund early-stage projects, we probably won’t see returns that would be enough to roll into new funding
8. Raising more funds is the most likely next step, otherwise there’s not much for the DAO to do, and the team will move on to other things, and probably won’t come back when the IP acquired is finally generating returns many years in the future
9. If the token price is reasonable, and the community votes yes, we could raise another reasonable amount of funds
10. We have a limited token supply, so in order to keep raising more funds, we’d need to issue fewer and fewer tokens for the same or higher amount of money (ie the token price would go up, in accordance with the team’s execution success and growing asset pool)
11. While our funds keep depleting as we deploy capital, the token price might not really reflect the value of the asset pool, since early stage IP is hard to evaluate. Even the stock market (which is much more experienced and liquid than the crypto market) isn’t good at evaluating it, as can be seen by the huge volatility in individual biotechs
12. To issue tokens on more and more favorable terms, we must either:

a) Show a good internal rate of return (IRR), even if it’s “paper gains” - i.e. the projects we’ve invested in either:

    i. go on to raise money at high valuations, but are still illiquid, or
    ii. have such high potential that we wouldn’t want to exit, or
    iii. it would be detrimental to them or our reputation as a source of funding that exits too quickly

b) Become a go-to place to govern the best longevity IP, not just the pre-startup IP that nobody heard about, so that people who are convinced longevity will be one of the biggest industries, but don’t have the time/connections/knowledge to get involved in the best projects can simply hold VITA. That means having exposure to brand names, with a quick boost in confidence of future growth. This is the most powerful value proposition. The more we own diversified, top assets, the more VitaDAO will be the go-to place for people who want to be involved in the success of the industry

13. We can raise a lot more funds to have a lot more impact, go earlier stage, think longer term
14. From our conversations with startups, we have learned that some are at a minimum reluctant to sell parts of their IP and would definitely prefer doing it the “usual” way with equity, SAFEs, and convertible notes. If we would come with larger check sizes that might change.
15. Most of the value of an early stage startup is in the potential of the team. Getting exposure to the company equity gives upside in whatever that team will do in the future at that startup, even if it pivots away from pursuing a particular piece of IP.
16. From my 1on1s with the team on the vision for VitaDAO, the lowest percentage of funding to go to equity financing was 20%, and the highest was 90%, and I think it should be informed empirically, based on how many pre-startup projects we find and how many startups are willing to sell a piece of their IP.
17. How “established” and how many of the projects/startups/IP to be revenue-generating is a topic for another proposal, with variance within the team from 0% to 70%.
18. Willingness to participate in traditional equity deals alongside traditional VCs will enable us to foster closer relationships to VCs and other organisations that may eventually be purchasers of IP-NFTs and allow us to draw on that network for our early stage projects that need a lot of help, including connections with VCs, incubators, operators, etc.

Specification

The amount proposed for VitaDAO to invest in this new LLC for equity deals is $1.5M (~15-20% of the available liquid funds).

Implementation

This proposal is for IF VitaDAO should invest in startups, and the HOW is discussed separately. The current proposal is here: VitaDAO-backed Investment Fund Implementation - Google Docs

** This is time-sensitive. Some startups are closing their funding round this month. **

• Agree
• Agree with revisions (please comment)
• Disagree

[Ben]

@longevion sorry to be a stickler but please could this Ph2 proposal be formatted per VDP-1:

Phase 2: Specification

Proposals that receive more than 10 votes are moved to Phase 2. This phase requires proposals to be posted in the VitaDAO Proposals category on Discourse using the VitaDAO Governance Proposal template (VGP) . Beside proper naming, the VGP template requires all proposals to include fields including but not limited to a Simple Summary, Abstract, Motivation, Specification, and Implementation.

In addition to these fields, Phase 2 proposals must include a single-choice poll on the proposal outcome giving the options “Agree”, “Agree with revisions” (requiring a comment), and “Disagree”. Participation should be restricted to trust level 1 and above and will be increased to trust level 2 at some point (see Discourse Trust Levels ). The poll should result in a pie chart with results visible, as per this template:

[poll type=regular results=always public=true chartType=pie groups=trust_level_1]
* Agree
* Agree with revisions (please comment)
* Disagree
[/poll]

The proposal author is responsible to incorporate comments from “Agree with revisions” votes. If their comment is fully resolved, commenting authors are supposed to change their vote from "Agree with revisions” to “Agree”.

[longevion]

Yes, thank you @Ben!

[Ben]

Forgive me I have a lot of questions…

@longevion

a performance fee of 8% charged at every liquidity moment for a SPV portfolio investment.

1. I interpret this as the 8% split between the 7 managers + VitaDAO? Is that correct?

2. It is also unclear to me what the 8% fee is for, for example if there are non-fund managers part of VitaDAO assisting with due-dil or deal flow, how are they treated differently to fund managers?

@longevion

1. The proposed General Counsel is Jesse Hudson.

1. Do we have a proposal for the GC’s comp?

@longevion

The proposed fund managers are @longevion @timrpeterson @vincentweisser @audieleon @NiklasTR @tylergolato

1. What is the mechanism by which the DAO has control over the actions of the fund managers? How does the DAO ensure that the fund managers are acting in the best interest of the DAO? (understand the nominated managers are trusted parties but could that change in the future?)

2. What is the mechanism for adding or removing fund managers? Is this on-chain gov?

3. Can any description of venture/angel deal making experience/track record be shared from the nominated fund managers?

Based on this deck VitaDAO Separate Fund Formation - Google Slides

1. It reads like this is a spin out fund from VitaDAO with little connection to the DAO but some % return on the treasury’s investment.

2. What is the subscription fee for the DAO’s treasury to hold membership units in the fund?

3. What is the distribution of membership units across LPs(?) and fund managers?

4. Will this LLC only be raising one fund? and there will be new LLCs for future funds?

5. What percentage will VitaDAO treasury be getting from the liquidity events?

[Jesse]

I interpret this as the 8% split between the 7 managers + VitaDAO? Is that correct?

This is not correct. The 8% fee is split between the managers only. The DAO, as the only LP, gets all but the 8% (so 92%)

It is also unclear to me what the 8% fee is for, for example if there are non-fund managers part of VitaDAO assisting with due-dil or deal flow, how are they treated differently to fund managers?

The 8% fee is to compensate the fund managers.

Do we have a proposal for the GC’s comp?

We do not. IMO the GC role should be uncompensated until the fund managers decide otherwise.

What is the mechanism by which the DAO has control over the actions of the fund managers? How does the DAO ensure that the fund managers are acting in the best interest of the DAO? (understand the nominated managers are trusted parties but could that change in the future?)

The DAO does not control the fund managers. The fund is independently managed. The mangers have fiduciary responsibilities to fund’s investor: VitaDAO, so their interests are aligned.

What is the mechanism for adding or removing fund managers? Is this on-chain gov?

Independent governance by the fund manager.

Can any description of venture/angel deal making experience/track record be shared from the nominated fund managers?

It reads like this is a spin out fund from VitaDAO with little connection to the DAO but some % return on the treasury’s investment.

This is correct. The DAO is investing into the fund.

What is the subscription fee for the DAO’s treasury to hold membership units in the fund?

The DAO will vote on how much to invest in the fund (subscription amount).

What is the distribution of membership units across LPs(?) and fund managers?

92% to the sole LP, VitaDAO, and 8% to the fund managers.

Will this LLC only be raising one fund? and there will be new LLCs for future funds?

This proposal is only for one fund and VitaDAO’s investment into it. There could be future funds if the managers decide to raise additional funds.

What percentage will VitaDAO treasury be getting from the liquidity events?

92%.

[Ben]

Thank you Jesse

@Jesse

This is correct. The DAO is investing into the fund.

How will we enforce a firewall between the venture fund and the DAO. Presumably as I read it, we don’t want the fund managers using any DAO resources to support their deal making beyond the investment in the fund?

For example if there is an expert researcher who is in the DAO but not in the fund, would the fund want the support of that researcher in performing due dil? If they do how will the fund remunerate the researcher? Presumably that would be an independent contract between the fund and the researcher separate from the DAO?

[Jesse]

The wall should separate control of investment decisions, preventing the DAO from controlling the fund, which should be independently managed, but the wall should not prevent the fund from relying on members of the DAO for dealflow and DD, similarly to how other funds rely on third parties for the same, and the DAO should compensate those parties accordingly.

The onus of enforcement of the wall is on the fund managers, as in any fund. It is up to the managers to make sure that the fund’s LPs are treated with respect but not deference.

[audieleon]

I did try. Even in “god mode” on discourse, once the poll is 5 minutes old, it’s fixed and un-editable. We’ll tighten up how we do this, thanks for noticing the detail.

[longevion]

To simplify things, this proposal is only for if VitaDAO should invest in startups, and the how is discussed separately. The current proposal is here: VitaDAO-backed Investment Fund Specification & Implementation - Google Docs

[PaulHaas]

I think this is a really interesting proposal - thank you Laurence, Jesse, and all who put in the efforts to work this out. It’s amazing that we’re seeing this amount of quality equity dealflow and it’s simply how the world works today. Simultaneously, Vita didn’t set out to launch a VC fund, but rather build a new democratic R&D DAO financing and curating early-stage research. Equity investments in biotech companies would be materially different than what was described to Genesis participants.

Something I find really compelling here is:

1. VC network Ability of the fund to co-invest with leading longevity VCs, indirectly growing VitaDAO’s network, exposure, and expertise. Having VitaDAO’s independent vehicle on the cap table with Sequoia or Apollo would send a strong signal. From what I gather the deals in question are in that range.
2. IP NFT sales: VitaDAO would be indirectly building relationships with scientific teams in those companies & potentially develop pipelines for its IP. For example, the fund could co-invest in a mRNA biotech. VitaDAO could now deepen its R&D focus in mRNA and attempt to fund related early-stage academic research via IP NFTs. If any are successful, the biotech may have an interest in acquiring these for their portfolio. This is entirely speculative and I haven’t considered the conflicts of interest here.

While I think the arguments are compelling, I’d like to point out downsides too:

• Non-compatibility with Web3 and our current architecture - this setup requires legal engineering and makes the organisation more vulnerable to regulatory compliance. Security tokens never took off for a reason and its unclear to me how ROI could easily flow back into our on-chain multisig - with IPNFTs the entire value flow is simpler, but the concept is obv. more novel and untested. That said, the legal engineering and separation you’ve outlined seem solid and I believe the overall concept could make VitaDAO more antifragile and networked.
• Token Holders cannot vote on equity deals - the proposed structure means that the DAO can only decide how much funds to allocate to the independently managed fund. It cannot decide what to fund, or how funds are used. This removes our democratic angle somewhat. The relationship with the fund is based on trust, and while Stewards are ofc. trusted I think it could be problematic and impractical for Stewards to be fund managers in parallel.
• Playing to our strengths / product market fit - early bio VCs typically deploy $+100m into 20-30 deals. For the fund to participate successfully in equity deals, it would need substantially more funding. Otherwise, statistics are against us. Next, in terms of value add to those companies, VitaDAO currently cannot ensure follow on rounds or take a biotech to IPO. What is our core value proposition to startups? If we do not anticipate to do 20-30 deals via the fund then our reasoning should be primarily strategic (for example on the points above).

Taking all the above into account I think the best thing would be to simplify this VDP for governance and on-chain vote.

For me, the question is less about the how (it is evident a lot of thought went into this) and more about the basic question of whether VITA holders want this material change - yes or no - as well as the amount of funding this would require from the $8m treasury to get started.

[Ben]

Thank you, I think the deferral of the mechanism simplifies this proposal

[longevion]

Thanks @PaulHaas, well put! I agree VitaDAO didn’t set out to be a VC fund and it won’t be. As you put it, yes, considering the novel and untested IPNFT path, and the way this world works, before we completely disrupt it, there is value in getting on the startup bandwagon for now, where there are great opportunities right now.

We’ll be able to boost VitaDAO’s resources so we can have a bigger impact and really help close the translational valley of death. Long term, we might not need to get into equity at all, since the IP funded by us will become a startup that others will invest in or that we may take all the way to market.

The $8M funds available is not enough, but we can leverage a part of it to play the game we need to so we can realize on the game we want to in a big way. It’s not like we’re selling ads, haha. We’re still talking about putting money towards breakthrough longevity therapeutics, and positioning the DAO as “the” place where anyone convinced the longevity industry will be successful can participate, with exposure to all stages.

Regarding early bio VCs, the ones deploying on the order of $100m are only the ones you know of, there are so many small VCs that add a ton of value, with only a few million, $100k checks, and if we’re talking angels and accelerators, even much lower (as low as $10k, 25k, even in big $10m rounds). Our friends at Methuselah Fund started with little money and nourished a few great companies. I think they’ve helped the field a lot.

Researchers aren’t the most entrepreneurial bunch, and small investors are arguably more important than in other fields (like tech). VitaDAO is next level in terms of the value it can add, with the kind of engaged community we bring, and the potential to empower people in a decentralized way to work on many projects in parallel. We have a scalability that traditional VCs/angels don’t, with little overhead and no centralized points of failure/bottlenecks.

I propose VitaDAO invest in this new LLC for equity deals $2M (25% of the available funds) and 5M VITA. In total, about 10% of the “market cap” of VITA. By holding 80% of it’s assets in VITA, the fund is super aligned with the success of the DAO, on top of it’s fiduciary responsibility to it’s only LP, to whom it is giving 92% of the profits, after returning the initial capital invested.

[amended the proposal]

[vincent]

@longevion

Researchers aren’t the most entrepreneurial bunch, and small investors are arguably more important than in other fields (like tech). VitaDAO is next level in terms of the value it can add, with the kind of engaged community we bring, and the potential to empower people in a decentralized way to work on many projects in parallel. We have a scalability that traditional VCs/angels don’t, with little overhead and no centralized points of failure/bottlenecks.

agree, and would be very excited if Vita would also have a vehicle to pursue equity deals

[kabelsalat]

I would like to see the fund open not only to VitaDAO but also to VitaDAO token holders. I’m sure there are more people here who would like to directly participate in longevity equity/startup deals.

Since the plan is to capitalize the fund with money from the original token holders, it would be great to give interested Vitalians the opportunity to co-invest in this fund. This could also improve the capitalization of the fund.

• Would this be possible from a legal perspective?
• Does anyone have any other thoughts on this topic?

[vincent]

Agree, great idea!! Just needs to figured out if possible from legal side

[Jesse]

It is possible to open the fund to 3rd party investors…and part of the intention of the fund! The key factors of that are: (i) the 3rd party investors qualify through KYC/AML and applicable securities laws; and (ii) the fund follows applicable securities laws in fundraising from the 3rd parties.

[tylergolato]

I would agree with the proposal, in general, but do not think it makes sense for the fund to hold 5M VITA, at least at this early stage. I would also prefer to reduce the amount of USDC we consider investing, at least initially. This is a very substantial part of our current treasury. I would prefer to reduce this to $1-1.5m to start. Once we have proven we can execute deals, we can pass an additional proposal to top it up.

[tylergolato]

5M VITA would make the fund the majority owner of VITA, and it would be able to push through any proposal that it wanted. I think the fund needs to prove itself before before holding anywhere near that amount of VITA.

[longevion]

Decreased the budget to 1.5M USDC and 0 VITA. There will be a separate proposal for adding VITA.

[Ariella]

@kabelsalat

I would like to see the fund open not only to VitaDAO but also to VitaDAO token holders. I’m sure there are more people here who would like to directly participate in longevity equity/startup deals.

Some years ago I pitched a startup for crowdfunding research and clinical trials using social networking — similar to go-fund-me but focused on research, and funders would get advanced access to project updates, etc. Another analogy is those programs where you “sponsor” a child and get updates on their progress (e.g. photos, letters).

The practical limitations, especially legal, killed it at the time. But I still believe the theory was solid — people love sponsoring a specific entity where they can observe the fruits of their investment rather than throwing money into the void of large charities and just hoping it did some good and didn’t get eaten by their overhead costs.

Anyway, all of this is just to say I love the idea of individual token-holders being able to invest in individual projects. I’m sure it’ll be a logistical and legal nightmare, but I still love it. ^^;