CashLink wants to digitalize Venture Capital by putting it on Blockchain
In our legal framework … you can sell your startup shares basically at any time at very low transaction costs, because it is now digital.
Michael Duttlinger, CEO and Co-Founder CashLink
CashLink is a tokenization platform based in Frankfurt. The startup helps other startups to issue securities in the form of security tokes. Their idea comes from their own experience in raising venture capital, they still remember the pain of raising venture capital in an all paper-based environment. They also lower the transaction cost for each VC round, based on their platform.
So they decided to take on that minor challenge of digitizing the German venture capital scene. CashLink is currently offering its service for startups in Germany and investors from the European Union, but they are working on extending their service to startups all over the European Union.
In the near future we will see more hybrid (financed) startups, wo have tokenized and non-tokenized shares.
Michael Duttlinger, CEO and Co-Founder CashLink
Joe interviewed Michael at the Fintech Hub of Deutsche Börse https://www.venture-network.com/dbvn-de/fintech-hub (here is the view (or parts of it) https://www.instagram.com/p/Bno9mWQBRp0/, which is located in the borough of Bornheim https://en.wikipedia.org/wiki/Bornheim_(Frankfurt_am_Main) in Frankfurt.
With us you can onboard investors very easily, on the go.
Michael Duttlinger, CEO and Co-Founder CashLink
During the interview Michael and Joe talk about:
- GmbH (German Version of an LTD) https://www.investopedia.com/terms/g/gmbh.asp, which is currently the standard legal form for startups in Germany.
- Stock Options: https://www.investopedia.com/terms/s/stockoption.asp
- Phantom Shares / Virtual Stock Options:
- Primary Market: https://www.investopedia.com/terms/p/primarymarket.asp
- Joe talks about the German Commercial Registry: https://en.wikipedia.org/wiki/German_Trade_Register
The interview was conducted in February 2019 (that’s where the snow references come from).
Originally this interview was intended as a video interview, but the autofocus did not work.
© Startuprad.io – All right reserved / Picture courtesy of CASHLINK
00:06 Announcer: Welcome to startuprad.io. Your podcast and YouTube blog covering the German startup scene. With news, interviews and live events.
00:20 Joe: Hello and welcome everybody. This is Joe from startuprad.io, your startup podcasts and YouTube blog from Germany. Today I’m here in snowy Frankfurt in the Fintech Hub in Bornheim. The Fintech Hub is created by Deutsche Borse. And I do talk to a startup here with Michael. Hey Michael, welcome.
00:40 Michael: Hey Joe, welcome to our Fintech Hub.
00:43 Joe: Oh, I love it here. It’s very nice here in the burrow of Bornheim. Even though I had to walk through the snow. Fortunately, it’s not as cold as right now in Chicago. Big high five to the guys in Chicago. Hopefully, nobody gets harmed there. We are talking about your startup.
01:02 Michael: Yes, CashLink.
01:04 Joe: CashLink. Can you tell our viewers a little bit about CashLink?
01:08 Michael: Yeah, so we are CashLink. We are digitalizing venture capital. So what we’re doing is we’re helping startups to issue securities in the form of security tokens. So that your startup share gets more flexible and gets finally digital. Because, as you all know, we have startups, we are like we’re doing, we’re digitalizing the world, let’s say. And all the investors are funding us and then they fund the digitalization of the whole world. But if you look at the process, how investors invest, it’s still like from an old world, it’s more like, it’s very undigital. It’s very often paper-based and we’re going to change that. By digitalizing startup shares in general, what you can say is we’re a token station platform, fully compliant in Germany to issue and manage your security tokens.
02:05 Joe: That’s actually not an idea you come up with a, you wake up one morning or have an idea under the shower or while spilling your coffee. How did you get there?
02:17 Michael: Yeah, so like when we found CashLink like two or three years ago and we used to like the core of a company, it was a payment company. So we launched several payment products and we also raised our seed funding round. And while raising our seed funding round. We found out that this whole process, the whole fundraising process is very complex. It takes a lot of time. Like it’s always like one founder always like only doing fundraising. And we really felt the pain that it’s all paper-based and that has very high transaction costs. Because you have to pay the lawyers in Germany especially, you have to go to see a notary service in person and which is also a very cost effective. And then we said, okay why do we have to rise in rounds? Rather than rising on the goal because if we can lower transaction costs, we can do it digitally, then we can rise on the goal which is just more effective and we can more focus on our core product.
03:27 Joe: I’m not sure if everybody out there gets the irony. The investors and the startups who want to digitize the world have to go through a paper-based process long, entirely some paper-based process just to get the digitalization started. This is right now the case here in Germany in, but also I assume in many other countries as well. But let’s stick with Germany for now because you’re confined in this legal framework.
03:56 Michael: Yes. So we were kicking off in Germany. So our legal framework is now open for German companies and for investors from the European Union. And soon we’re going to start our expansion. Meaning that I like in other areas with restrictions, we’re kind of open our legal framework. And then more investor from all of the worlds can use our very simple and digital investment process.
04:24 Joe: You are talking about a simple investment process. When we talked before this interview, you talked about GMB H, which is a German form of D Ltd. Most startups here in Germany are funded or go into serious business in this legal form. Can you tell us a little bit about how you are changing that and how you’re actually working?
04:52 Michael: Our legal framework is based on the GmbH, that’s a framework. And if you’re an investor and you want to have a digital share, our legal framework represents a part of the exit proceeds of the startups. So if you use our tokenized shares, if you buy the tokenized shares from with our legal framework, from a startup that you basically get the ride to participate in the exit proceeds. And this is basically what you want as an investor.
05:27: So if the startup gets sold, years later, you want your money back, let’s say. And what is also very important then because the staff shares are now more liquid or more flexible, you can basically sell it at any time. At very low transaction costs because it’s now digital. And this makes it way more attractive for investors to use this kind of investment process rather than the old one. Nevertheless, we still believe that especially over the years, we will see a lot of hybrid models. So we don’t see like one company does one of them tokenized and then other company or not tokenized. We’ll see a lot of companies in between, meaning that you don’t tokenize the whole company. You might only tokenize like 20% of the company. So in your cap table, you will on the one side have like the traditional investors that were part of the cap table who go to still the traditional the old way. And then you will have other investors who get tokenized digital shares. We also see like some investors say, okay, I want to be in like some money I’m in with his company shall be represented in the old cap table. And the other half will be represented in Tokens, which I can sell it at any time.
06:41 Joe: The way you’re describing those tokens right now, disclaimer, I’m not a lawyer, this is not law blog. You’re describing now sounds pretty much like phantom shares from other startup constructions. Is that true?
06:56 Michael: That’s totally true. So our legal framework is based on the virtual stock options or Phantom shares. So because we figured out when we did our like stock options plans, we, of course, use our stock options and if you get, okay, this is a very, very good legal framework also for investors if you tokenize it.
07:19 Joe: We may get, we may do step back. Most of the people who watched this are professional investors themselves. For everybody else, there’s a short explanation because an option is a right to buy a share in the future. For example, I now have a CashLink share, which is worth 100 euros. I don’t have that much money. So I’m buying for let’s say five years and option to be able to buy CashLink shares in one year. And then they go through the roof and are now worth 250. And so the difference would be 150 euros minus your option price. And so there’s also some time value. The option should be worth something between 150 and 145 euros, somewhere in this area. Maybe if there’s more demand, it could even go higher. So that’s basically the idea. That’s the idea of traded options. And what are you describing are basically options that are not tradable. Basically, the employees get them and then they have to sit with them. That that used to be the phantom shares.
08:29 Michael: That’s how it used to be.
08:31 Joe: Yes, exactly. And you make them tradable right now on a token base.
08:36 Michael: So we make them easily transferrable we say. Like for tradable tokens, we now see a lot of security token exchange coming up. Especially like a lot of like traditional exchanges are now like moving into this space. So what we are doing is more like in the primary market we were like tokenizing. So we’re bringing in startups. We are digitalizing the shares to startups. So if we bring them on the blockchain. And if someone wants to, later on, they can have their shares to be traded on a security token exchange. But at first, it already solves the problem of in a way more easier investment process because you now have a digital form of your startup share.
09:22 Joe: Are you then like the central registry of those digital shares? You put them in blockchain and then they are tradable between everybody who’s participating in CashLink?
09:34 Michael: If the vendor tokens are easily transferable, you can basically transfer them basically to anyone. You have a lot of like regulatory restrictions. So do you have like, you know, your customer rules, you have anti-money laundering rules. And of course like for some of our framework is only for professional investors in crowdfunding, it’s really following our professional out there. So who is now used to invest in startups? And so you can try to, in between other professional investors. Not like normal persons are normal retail person says.
10:11 Joe: I see. And how are you guys funded by yourself?
10:15 Michael: So like I said before, we did a seed funding round two years ago. And we choose, it did our next funding round. With the Finland AG from Frankfurt Fintech.
10:33 Joe: Listed evergreen VC fund for everybody who doesn’t know them.
10:37 Michael: Exactly. And yeah we’re happy that all our existing investors from the very beginning participated again in our last financing round. And now we’re tokenizing ourselves. So we’re doing kind of security or we doing a security token offering. Meaning now other investors will now have to chance to buy digital shares of our company. And we were based here at the Fintech Hub Deutsche Borse since two and a half years.
11:08 Joe: And for everybody who thinks, ah, that sounds pretty interesting. Can we just take a little step through the process? So let’s say I’m an investor in CashLink, what would I need to do to digitize those shares? I’ve been with the notary. Once we made our deal, I gave you the money, you gave me the shares and now everything’s paper-based. How we change that?
11:36 Michael: As a company, it’s a pretty easy process. So you come to us and we digitized your company. So we tokenize a portion of your shares. So let’s say 20%. And then if new investors approach you, you don’t have to see in Germany, no rotary service. You don’t have any paper-based. You can just sell one of your digitalized shares to the investor. So right now at the beginning, what we are seeing is that a lot of the way you approach your investors, the way you sell your company to investors will stay the same. It’s just more about the technical process, which is now different at lower costs. And you have more flexible shares. So this is the difference right now. And that’s what this means for you. You can onboard new investors very easy. You can onboard them on the go and you don’t have to wait like for the next round. Or I have some other constructs.
12:38 Joe: who would be like in the official registry. Like in Germany for every company there’s a legal registry. And every company who has a certain form, certain revenues, passing some thresholds has to rate be registered there. And basically, there’s also like an official register of the shareholders and who is in there at this moment.
13:06 Michael: So if you look at the whole blockchain ecosystem, you see like, okay, of course, the dream is to completely put for many people the dream is to put the whole registry on the blockchain. And this also is that only for registered for companies that can also be registries for real estate and other assets. So right now in most of your sections. This is not possible. So that’s why we use other legal framers, other approaches. So in our case with our stock options. So in the registry are the real cap table equity owners. And then you have let’s say maybe a second, which will cap table, which represents economic, well you have the company. And so that can be done invest only in the cap table, at the equity cap table. And it’s also part of the economic cap table. And there are some other investors of digital shares where only part of the economic well your cap table.
14:04 Joe: I see. Now I understand it. And there was one more question popping up in my mind when you’ve been talking. It was, okay, I can sell my shares and I can buy shares. But I assume, for example, CashLink, of course, they’ll be the next SAPN something. How do you deal with the non-liquidity of those shares? How will be a price set that’s usually difficult for everything that’s not traded on a daily basis? For example, if you have a home, there’s not the exact home in the exact same place that has been traded before. So basically it’s always that’s the same problem we are talking about now.
14:49 Michael: Of course like the question of liquidity is like one of the main questions now in the security token space. If you go to all the conferences that like the main topic of any discussion. And so what we are seeing or what we believe in is if you look at the status quo, so we have high liquidity on the one side. If you look at the stock market and then you have almost zero liquidity in all the illiquid assets. And what the blockchain here, what do we can do with security tokens now is we can go all of this in between which is just not possible today. So we’re not talking about, okay, will every asset. We are talking about having high liquidity. We don’t know this, but we can surely say, okay, right now this is no zero liquidity.
15:37: Like new technology. We can lower the barriers to have more liquidity. And then we’ll see what happens. And for us it’s always like so many people that are working on it. We’re not in the secondary market, but we are now so many people that are working on this secondary market liquidity issue. Especially all the traditional exchanges that we’re going to be seeing a lot the next years. And then we’ll see what happens. In the first step, this is lowering that this illiquid asset can be potentially liquid.
16:08 Joe: As we said, it’s still for professional investors only. And they have to deal with non-liquidity, but they usually know that when they are professional investors. Best of luck.
16:19 Michael: Thank you very much.
16:21 Joe: It was a pleasure being here, even though I have to run through. Just know my equipment again, but totally worth it. Thank you very much.
16:29 Michael: Thank you very much.
16:35 Announcer: That’s all folks. Find more news, streams, interviews and live events. At www.startuprad.io. And remember sharing is caring.