Optimal Financing with Tokens

We develop a model in which a start-up firm issues tokens to finance a digital platform, which creates agency conflicts between platform developers and outsiders. We show that token financing is preferred to equity financing unless the platform expects strong cash flows, has large financing needs, or faces severe agency conflicts. Tokens are characterized by their utility features, facilitating transactions, and security features, granting cash flow rights. While security features trigger endogenous network effects and spur platform adoption, they also dilute developers’ equity stake and incentives so that the optimal level of security features decreases with agency conflicts and financing needs.