Treasury management is, by far, the most challenging thing for decentralized governance.
Not only because of the diversities of views and backgrounds, but also in the fact that some of the loudest users tend to have the least experience and the least amount of votes.
I have a (characteristically) long view point here so let me TL;DR:
TL;DR: Sushi should likely do a strategic raise, but with signifgant adjustments to the terms, and a detailed plan of fund purpose and allocation.
Overall, people drastically underestimate what is involved in running a business, raising funding and the role that good investors play. They also underestimate the tremendous opportunity that Sushi has in front of them, and the resources required to capture that.
I think there are a few misunderstandings and fallacies worth breaking down, as well as somethings worth repositioning.
#1 - Sushiswap is a huge success and doesn’t need this amount of funding
Right now, Sushi is actually in one of the largest fights of all time. To decide if it is going to be a dominant leader in one of the largest new sectors, that we expect to absorb a signifgant portion of traditional finance.
To many people thinking of Sushiswap as a $1B entity is something they view as having won the race. But, it’s very likely that the finish line for this raise is somewhere between the $20B - $100B+ range, as there is a rare outsized opportunity to capture tremendous value.
Most startups in this space make the critical mistake of not moving fast enough and sitting on large treasuries for rainy days. Which allows competitors to innovate, grow, and in the end steal their thunder.
In the simplest terms, DAOs make the mistake of not spending enough of their treasury to strike while the iron’s hot.
Not only is there room to better capture the market, but there is still a lot to improve.
Sushi currently has a number of products, many of which don’t have the love and attention they need to succeed. For example, Kashi, an innovative first of its kind product which has underwhelming use and could have an entire team dedicated to it.
#2 - DAOs make the mistake of raising money without purpose:
On the other hand too many DAOs and startups make the mistake of raising funds when they have no real need for them.
In traditional startups you should only raise funds that:
A) Will last you about 18-24 months of runway as that’s how long it takes to raise another round.
(In DAOs because its harder to go out and raise additional rounds, I can see there being a reason to raise a higher amount all at once)
B) Only if you have a compelling reason to spend those funds that unlocks the next stage of growth and isn’t a current plateau.
Funds ideally shouldn’t be raised unless they are going to be spent on things that unlock growth or solve strategic challenges faced by the startup, and any excess shouldn’t sit idle.
#3 - People think VCs are evil and just add money:
The reality here is, that capital isn’t scarce.
It’s easy to raise money.
It’s hard to raise money from the people who care and matter and will go to bat for you.
I recently came a VC, so I have an obvious bias.
But, when Chef Nomi left Sushiswap in the dust, I took a two week vacation from everything else in my life to act as support staff in Discord, create the first Sushi help docs, manage translators, help start a governance process and act as one of the first multisigs for Sushi; and I refused to take any $SUSHI as rewards or even hold any $SUSHI during my entire tenure as a multisig which was a huge opportunity cost, but I wanted to remove any risk of bias.
Most VCs wouldn’t get their hands dirty like that for no rewards? No.
Now am I a great VC?
No, probably not. While I’m an experienced operator and advisor for startups in fintech I’m still new to the VC world and so I probably don’t have the contacts, strategic overview and networks that other VCs do.
But, that’s a great litmus test.
If someone like me is willing to dive in, get involved, get their hands dirty and help solve real problems and fight to keep Sushi alive, then its reasonable to expect at least that kind of behavior and mentality from other VCs.
There are many VCs out there who bring vast networks, but also expertise in growing and scaling companies. Which is a really hard problem.
The thing people forget about Venture Capital, is that in most countries, its actually a subset of consulting/private equity and not just financial allocation.
The expectation is that VCs take money, invest it into startups in their area of expertise and help mentor them and foster their growth.
In turn, the startups get a leg up, and the VC builds experience in helping specific types of companies solve hard problems.
If you’ve ever been at the senior levels of a startup you know first hand the tremendous complexity involved. Now imagine one that is at the cutting edge of industry with technical, economic, political and legal challenges and scarce talent.
That’s why startups take money from VCs and not just generic capital.
#4 - Most people under estimate the cost of a startup at scale:
I also remember the first budget proposal I put forward in Sushi governance advocating to get a budget for 0xMaki to get paid.
People thought I was crazy with the kind of numbers I proposed. They balked at the idea of giving Maki $1M even though it was vested over a 3 year period.
We heard retorts that “a good price for developers was $85k” and that this would be a reasonable salary.
The reality is that outside of startup land, most people are unfamiliar with the actual costs that go into a startup, especially talent compensation.
Sushi is worth $1B - $3B depending on if you look at circulating or FDV.
Looking at publicly traded startups in that sector I think people would be shocked by the type of compensation costs that go into TAC.
- Paid an avg of $500k - $1M in stock and options to non-employee directors
- TAC for CEO was $58M ($226k base, $784k bonus, $18M ICU, $24M SA, $2M comp)
- TAC for CFO was $13M
- TAC for CRO $5M
- Paid an average of $250k per board member.
- TAC for CEO was $5.5M ($565k base, $600k bonus, $4M SA, $300K incentive)
- TAC for former CEO was $27M (remaining stock awards over two years)
- TAC for CFO was $5.6M ($547k base, $620k bonus, $3.9M stock, $590k incentive)
- TAC for President $3.5M
- TAC for COO $2.7M
- TAC for CFO $2.9M
Then we get on to the hiring of non-senior talent, especially developers which in this industry is insane.
It’s not unheard of for the TAC of developers to reach $400k - $1M when you factor in vesting stock and token grants.
Consider on glassdoor some of the following:
- Back End Developer $235k/year base pay before TAC
- Product Manager - $251k/year base pay before TAC
- Senior Software Engineer $221k/year base pay before TAC
- Senior Director, Product management: $500k~ TAC
- Director, Product Marketing management: $345k~ TAC
- Senior Staff Software Engineer: $347k~ TAC
- Senior Product Manager: $300k~ TAC
- Senior Software Engineer: $211k~ TAC
- Senior Engineering Manager (Non-Solidity): $310k TAC
- Engineering Manager (Non-Solidity): $230k TAC
- Senior Software Engineer (Non-Solidity): $200k TAC
It’s entirely reasonable to expect that 2-4 senior level hires can cost a startup almost $1M/year in TAC.
Now most startups use stock compensation for a portion of that, but cash is still the vast majority of that proportion.
#5 - Users think that the discount is 30%
I think the ‘discount’ off of current price is framed wrong.
The 30% discount is off of buying the free floating 1/192M liquid asset today.
That’s not what investors would be buying.
Instead, they are locking up liquid cash, to buy a locked asset, that vests over time that is 1/228M
The dilution alone is 17.14% which is more than 56% of the discount.
Then we have to factor in the time value of money, to find out what the actual pay rate is:
(X * [1 + (20% / 1)] ^ (2 * 1)
Here the X is dollars, 20% is expected yield of a funds other opportunities (conservative), 1 compounding period, two year lock.
So on $250k, the conservative time value of that money is $350k.
The time value of the capital alone is a 33% price difference.
This is why some funds are arguing that the lock up discount should be closer to 50% because by the time you factor in 33% time value difference and 17% dilution exposure, then you are basically buying it at the current rate.
#6 - You probably can’t and shouldn’t sell any to the general community
While I believe in this ideologically, selling general users a locked up asset, which is issued by the DAO, for cash, in exchange for a future unlock of the asset, at a current discount is pretty much cookie-cutter for a securities offering no matter how you slice it.
Even if you were to put it into a contract like MISO or something to do the sale, this is existing property of the treasury being moved to facilitate this, while also being sold to VCs clearly as an investment.
There is no way that isn’t a security offering, and so it pretty much has to be to VCs for sake of an exempt offering.
It’s worth checking with more counsel on that, but, I have a tough time seeing that being viable.
I’m sure many of the community will fall back on the ‘decentralized’ and ‘its in a contract’ or ‘its a liquidity pool offering’ things, but, those really don’t hold up well and we know regulators are actively watching defi right now, you don’t want to involve yourselves in a time consuming and costly legal process even if you are in the right, because it would derail you.
So what would I propose?
A) Do the raise.
B) Maki should put forth a rough budget proposal. Not an itemized list but something that outlines:
- How will the funds be farmed to generate income when idle.
- What are the main challenges that Sushiswap is facing that these funds address?
- What roles are expected to be hired with these funds over the next X years?
- What products are these funds being allocated too? (i.e. how much of the hired or current team resources will focus on Kashi etc)
- If any is spent on user acquisition, outline the tests and unit economics of those incentives (LTV, churn, etc.) even with LP incentives, Graph queries should be able to tell us if they create user stickiniess and volume long term or are just wasted funds.
This will help frame with the community why its important.
C) Making should put forth an outline of value-adds they’d want from VCs:
- What are challenge points that Sushi wants support with?
- What kind of roles does Sushi want to hire for in the next X years?
- What is the current product roadmap and how can VCs help support you with partnerships that might enable that?
- Are there areas of governance, product, promotion or regulation where you would want a more hands on group of VCs?
D) Extend the timeline to a 2 year total lock-up. The cliff might be fine, but the lock-up is too short.
E) Talk to portfolio companies invested in by the various VCs, prioritize funds where those companies say they’ve added clear value.
F) If no one from that fund can give you a super compelling answer, then you should also prioritize funds that are closed-ended VC funds instead of liquid hedge funds, and funds with smaller portfolios who can spend more time involved. (Obviously exceptions to both of these exist, for example I’m pretty sure Mulitcoin is technically a hedgefund but also one of the most helpful in the space)
G) Require each of the VC firms to give incremental public updates on Sushi’s spot in the market and their contribution or involvement. [Possibly even explore the ability to add a dilutive pentalty to their investment if they fail to do so]
H) Cut down the total amount you are raising, to $20M~ and then raise the rest from the more helpful VCs in another funding round 6-12 months from now, when you will better know which VCs are helpful and continue to be at a better valuation.
TL;DR of proposal:
- 6 month cliff, 2-3 year vest
- $20M raise, rest raised later, once value add is clear.
- Clear budget plan for the allocation and requests of vcs.
- VCs must give updates of involvement.
- Prioritize funds that have actual capacity to help and/or experience doing so.