We’re delighted to share with you the first official proposal of the Sad Cat Capital. Meow!
Sad Cat Capital
This proposal gives the DAO a venue to de-risk early-stage token and NFT investments at the time they become liquid. By mandate the DAO would be able to do so quickly and flexibly, giving it more opportunities to benefit from short-term market conditions. It will also reduce the amount of governance overhead for something that is, in our opinion, a clear win for the DAO.
The DAO is doing a lot of SAFT and NFT investments. Usually, these occur in the early stages of a project. Where tokens or NFTs are sold at a fixed price to early supporters, usually with a vesting schedule. At this stage, there is normally no liquidity for the given NFT or token.
Then, there usually is a second stage, where the token or NFTs starts trading, but the early supporters are still subject to a vesting schedule, hence their tokens stay illiquid. When these investments finally become liquid, when both the lock has expired and the token or NFT trades at the open market - they often trade at high multiples of the purchase price. This means the DAO effectively sits on a profit. There is currently no clear path or protocol in place where the DAO de-risks one of the investments or takes profit on one of the investments.
Of course, the DAO invests with the intention of holding the assets for a long time and in many instances the intention to turn the assets into productive assets on the partner gaming platforms/worlds. At the same time, it is also the DAOs mandate to return profits from investments to the DAO in addition to the P2E revenue it generates.
In this balance between investment profits, long-term support to partner projects and P2E revenue generation, we think it is very sensible for the DAO to have a de-risk and profit-taking mandate. With there being so many different investments, we fear the DAO will sit for too long on too many investments.
A solution would be to give the DAO a mandate that gives it the ability to de-risk any token or NFT investment within certain parameters. It would be an ability that does not have to be exercised if the investment committee deems it a bad time to sell. This will avoid selling 20% of a 10x, when the committee believes it will be a 20x next month due to certain market assessments - or when the committee thinks we should keep or even increase exposure to a certain project.
The parameters we would propose are the following:
- De-risk any investment as standard procedure when it hits a 10x multiple from the purchase price or more and the investment is liquid
- Standard de-risk by selling up to 100% of the initial dollar value of the investment at current prices back into the market
- A standard procedure where to take profit on another 100%, effectively taking back 200% of the initial dollar value that was invested
- Take profit on a maximum of 20% of the total token or NFT position. Meaning, the profit taking part could exceed 200%. This is up to the discretion of the investment committee, acting in accordance with the DAOs mandate and best interest.
- At this point, the DAO would have doubled their investment. The investment is now completely risk-free and the DAO has double the amount of capital it can put into new projects.
- For larger sells (or buys) of tokens or NFTs the DAO should issue a proposal and go through a form of discussion and/or voting process.
- De-risking the treasury of the DAO
- Diversifying (and with it further de-risking) the treasury of the DAO by freeing up more capital for new investments
- Giving the DAO flexibility to quickly benefit from market opportunities when certain investments spike up briefly
- Having a clear-cut procedure that the DAO can rely on and can point towards, which should greatly reduce the amount of discussion and time spent on explaining and defending potential de-risking decisions parties external and internal to the DAO.
Isn’t this just dumping tokens from partners?
The DAO is in no way auto “dumping” or selling out of a partner project. Even at a 10x, this would only equate to 20% max of the position. At 100x, it would only be 2% at the standard procedure of 200% de-risking of the dollar value, and up to 20% at the maximum of the take profit mandate. The majority of the position can be held until a new DAO decision is made on what to do with the remaining tokens. Ideally, only when the long-term prospects of a partner game have shifted drastically. In the ideal scenario, a partner project is fundamentally so strong that the DAO would never be inclined to sell more and might even increase exposure.
How will this impact the relations with partners?
We believe that this is better for the long-term relationship with partners. They have complete transparency and clarity on the policy. Versus a scenario where the DAO participants would suddenly and unexpectedly have to make this decision. This is a policy where most of the tokens are held for the long-term. Because most of the games the DAO backs are for the long term. Tokens and NFTs should be held as long as the project keeps delivering, any project cooperating with the DAO should have an incentive to keep delivering to be attractive to the DAO. Just like the DAO has to keep delivering to stay attractive to the partner project. This is indirectly an extra incentive, free market dynamics at its finest.
To the contrary, the investment committee could overrule an “auto-sell” at a 10x and issue a proposal to buy more of any given token or NFT. As has been the case with Axie Infinity until now, the DAO has not been reducing, but increasing exposure in the past months. Because Axie offered a venue to make money on productive NFTs. In this instance, a good ecosystem to the DAO gets rewarded.
We do believe it is critical the DAO keeps looking for long-term, high-quality investments and partnerships, as it does currently. Not for quick flips. At the same time, something that starts as a long-term investment, might at some point not make sense anymore.
Wouldn’t this trigger people to benefit by setting alerts or bots at the DAO addresses?
In theory there could be scenarios where the DAO gets frontrun. However, since there is a discretionary element in timing, size and yes/no. There is no way for bots to accurately predict and frontrun any sale. This is why the discretionary element is so important.
Added, after discussion:
Include discretionary option for the committee to sell token and NFT investments OTC within the same parameters.
We hope this proposal pleases the DAO participants, the partners and the team. We’d like to invite everyone to share their opinion. Let’s hear your thoughts!
Signed with left paw,
Sir Tom Purralot
Sad Cat Capital
Copyright and related rights waived via Creative Commons CCO