I did want to share some quick thoughts on a question that’s come up a lot and is really important context for everything else: Is a 20-30% discount fair?
A couple ways we think about it:
1 - Based on ONE pricing model that’s often used to price illiquid assets (NOT our full approach to pricing), a “fair” discount JUST based on a narrow view of illiquidity impacting the value of an asset today is ~50-60% for SUSHI with a 6-month lockup followed by 18-month vesting period. This is NOT the discount we’re seeking and NOT a proposal - just context for why there’s often a discount involved in these types of transactions. Not saying 60% is the right discount at the end of the day. [Edits to this statement to clarify]
The model takes into account SUSHI’s historical volatility, crypto market volatility more broadly, and the proposed vesting schedule to back into an adjusted value for SUSHI under those liquidity terms.
Not able to share the exact model, but it’s similar to widely-used pricing models for options. I know that’s annoying / kinda shitty that we’re not sharing the model and less transparent than the community would prefer, but we’re also pretty confident that anyone taking a similar approach would reach a similar calculation and certainly believe no one should take it as pure gospel. At the end of the day, it’s just one tool we use to help us think about the fairness of a discount and if someone else’s model tells them something different, then more power to them. The market will decide which model was better.
So don’t take our word for it that 60% should be the discount - that’s not the point. The point here is this: our process isn’t just waking up one morning and saying “How greedy are we feeling today?” That’s a shitty human thing to do and an even shittier investment process. Our goal is to assess a risk-adjusted price based on math and it’s probably not perfect, but it’s one of the more sensible things we’ve come up with so far. Ultimately, we (and the investors who put their trust in us) own the consequences if we pay too much or too little because of that math. It’s also only one of many inputs. Valuation is an art and science. This is the science-y part.
2 - This raise immediately provides SUSHI’s treasury with up to $60m in proceeds. For now, let’s set aside the topic of whether $60m is the right number (which we should definitely discuss - maybe with more context from the Sushi team). So another way to look at the discount is: What would happen if the Sushiswap Treasury tried doing the same thing via the open market, i.e., market sell $60m in SUSHI?
As seen in the Sushiswap transactions above to swap SUSHI directly for ETH, a market sell would incur ~30% of slippage impact to the buyer and the overall market. For USDC, it would be ~43% slippage. The SUSHI in this market sell scenaro would be immediately liquid for the SUSHI buyer vs. the SUSHI sale proposed in this raise would be restricted for 2 years at a 20-30% discount.
3 - Funding rounds are auctions at their core - complex, multi-stage auctions with non-financial, hard-to-quantify assets that all factor into the perceived value of bidders (VC’s / vulture capitalists / face-stabbers / your preferred nomenclature) and their bids. So if this is an auction, then one important question re: whether the price is fair is “Is this a fair auction?”
There’s two reasons why an auction could be deemed unfair (more than 2 exist, but these are the key / most relevant ones):
if bids are artificially suppressed, e.g., blacklisting, exclusivity, holding the auction on a secret island hideout known only to supervillains.
if hidden externalities affect the bidding process, e.g., collusion, kickbacks, fake bids.
On 1), I don’t think there’s any credible signs of bid suppression. It’s fairly easy to tell from the length of the investor list that this raise was presented to a diverse set of funds, with various sizes, focus areas, team types. It’s worthwhile to think about whether it could’ve been more diverse, but clearly the team put in a lot of work and time to test the market rigorously and foster a healthy number of bidders. Eventually there’s a point where spending more of the team’s time and energy on fundraising isn’t worth it / likely doesn’t improve the auction’s efficiency enough to make a difference.
This thread is also a remarkable showing of what makes Sushi and its community unique. Publicizing this process as an open discussion thread is the farthest thing from bid suppression / a secret island hideout. So if there’s a better bid out there for a $60m block of SUSHI with a 2-year lockup + vesting schedule, whether you’re an individual or fund or collective, then this is a great place and time to bring that up for consideration.
On 2), there seems to be a concern that VC’s talk and know each other and therefore must be colluding to keep prices down or some mystery party is getting a finder’s fee for facilitating this raise. We can’t attest on behalf of others, but if there’s a cool kids’ table / cartel out there, we certainly haven’t been invited. The most reliable way to combat this type of hidden negative externality is through transparency and competition.
The transparency point is clear - by publicizing the full investor list, you create an opening for any possible cartel to be divided and captured. Anyone with a better bid inside or outside of the cartel can aim for the bottom of the tribe and put together a better alliance Survivor-style, until an efficient market price is reached.
The competition point is maybe less clear, but pretty easy to state: We compete like hell. For deals, for capital, for reputation - yeah, we definitely compete. Sometimes we find fellow investors that we work well / vibe with, sometimes we find investors who shut the door on our face because they want to eat our lunch. That’s cool and fair and does a great job at preventing collusion.
TL;DR - Based on the above, it seems like a 20-30% discount is a reasonably “fair” or math / market-based price for the liquidity terms of this specific deal, rather than a way to “sweeten the deal” for VC funds. Whether it’s the right deal ultimately is up to the community.