If you are interested in setting up your own ICO, one of the considerations you need to take will be the caps that you apply to the initial coin offering. Most of the time, ICOs operate with a soft cap and hard cap in place, but there are times when ICOs have only one of these caps or neither, but this could be considered a warning sign by potential investors.
To start the process of setting caps for your ICO, lets examine what each of them are:
When preparing to launch an ICO, the company will need to evaluate the costs of launching their basic product. This will include things like development costs, operational and marketing costs. This is then calculated to determine the soft cap that the ICO will have at launch.
Putting it another way, the soft cap is the minimum amount of contributions that an ICO needs to generate to be considered successful. Many ICOs normally add a small extra percentage onto their launch cost, to ensure that they have a bit of cushioning once they start the build process of their product.
There are multiple ways to define a hard cap. The first usage of the word was to describe the maximum number of tokens or coins that would ever enter circulation (e.g. Bitcoin has a hard cap of 21,000,000). However, as ICOs have grown in popularity, the meaning of hard cap has also evolved. The meaning of hard cap now is the maximum amount of funds that would be raised, or tokens sold during the ICO process, and if an ICO hits their hard cap, the sale of tokens is halted immediately, as there are no more available for sale during the ICO.
To justify the hard cap that companies apply to ICOs, they generally build a roll out process that included multiple milestones, starting with the bare minimum for reaching the soft cap, and growing to include everything possible when reaching the hard cap.
This explains the 2 types of caps that ICOs put in place, but if we examine the process of funding for an ICO we can see that there is another stage of funding that affects both the soft and hard cap of an ICO.
The seed funding stage of an ICO starts before most of the other work for an ICO is even started. This stage of funding works the same way seed funding works outside of ICOs. The company looking to do the ICO creates a pitch deck. This is then sent to or presented to potential early stage investors, who are then asked to bankroll the project until the ICO phase.
If the pitch is successful, and a potential investor is found, the company launching the ICO agrees to terms (generally a specific number of tokens that are guaranteed to the investor), and the exit strategy for the investor. Once all of this is agreed and contracted, the seed funds are given, and the company can prepare for their ICO.
Things to Consider When Setting Caps for your ICO
When setting the caps for your ICO, a lot of thought and mathematics should be put into the final numbers that you present on your ICO. Specific things that you should consider:
Don’t go too low
Setting the soft cap for your ICO too low may mean struggling to come up with funds if something goes wrong. Rather set the soft cap for the ICO a little higher, to ensure you have the capital available for a rainy day.
Don’t go too high
This seems a little counter intuitive, as making as much money as possible is the goal of most businesses. This being said, you need to be sure that the level you set your hard cap at provides investors with a tangible goal, and timeline that you ICO can and will stick to.
If you can employ more resources and deliver your promises faster by having a higher hard cap, then it is something you should do. However, setting a high hard cap, where the money is just going to be sat in an account (or paid to advisors) and presents no real change to the project deliverables, or project timeline, means that more savvy investors will shy away from your project, as more money in this case does not mean a better project
Think of your seed funding
If your seed investors have given you a big chunk of cash to get your project off the ground, take this into account when setting your caps. You really shouldn’t use your seed funding for post ICO activities, so the more you have at that stage, the more you can use to promote and drive traffic to your ICO.
Once you have calculated your soft and hard caps for your ICO, you need to create and present a viable plan for what will happen in the case where you hit each of these caps. Additionally, you should maybe consider creating a step plan, where you set different goals for certain goals that you create between the soft cap and the hard cap.
Having goals set up between the two caps ensures that you are encouraging investors to put more into your ICO, as there are clear viable goals that are created for many different funding scenarios.
It used to be very rare for ICOs to hit their hard caps, but more recently, ICOs are getting more traction, and are more likely to hit their hard caps, so ensuring that you have a plan for all of the funds that are contributed to your project shows potential investors that you are serious about the project you are working on and gives them more confidence to invest in you.