Here’s what you need to know about SAFTs — the cryptocurrency fundraising craze that’s shaking up venture capital

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Just as blockchain technology is shaking up the startup space, it's also revamping the way venture capital firms invest in emerging companies.

Over the last year and a half, startups have raised nearly $4 billion through initial coin offerings, or ICOs, which are a kind of unregulated fundraising technique involving the creation of new digtial tokens, or units of value.

Venture capitalists have been wanting a piece of the action. Enter the Simple Agreements for Future Tokens, otherwise known as a SAFT.

In a SAFT deal, VCs invest a certain amount of money in a startup in exchange for its promise to one day give them a set amount of the tokens it sells in an ICO. The agreements are premised on the notion that once the company's service is up and running and consumers are using the tokens to pay for things on it, those tokens will become valuable.

A SAFT is like a mashup of buying a gift card for a store that hasn't yet opened and purchasing shares in a private company.

As more and more blockchain startups look to raise funding, VCs are experimenting with SAFTs as a way to get involved early on. Among the pioneers is Matt Huang at Sequoia Capital.

Here's what you need to know about this emerging funding technique:

SAFTs are only possible because blockchain technology lets companies create their own cryptocurrencies and tokens.

Blockchains, which are widely distributed digital ledgers, are the technology behind bitcoin, ether, and other cryptocurrencies. The technology is really good for publicly documenting rules and changes, which is why some large enterprise technology companies including IBM and Oracle are designing blockchain products for shipping and contracts.

Blockchains also make it easy to create unique digital tokens, or units of value. Companies can sell those tokens to investors to raise money or allow customers to use them on their sites and services as a medium of exchange.

If Facebook had been built on top of a blockchain, for example, it could have issued tokens that could be exchanged for upgraded profile features or used to buy advertising.

In a SAFT, investors buy the rights to tokens that will be issued in the future, rather than equity in a company.

In traditional venture capital investing, investors give a startup money in exchange for an ownership stake in the company. But with SAFTs, venture capitalists receive the rights to future tokens instead.

Typically, in the agreement, the VCs get the rights to a certain portion of the tokens a company issues in an ICO.

SAFTs are related to ICOs, the superpopular new fundraising technique.

SAFTs are venture capital's way of adapting to the boom in ICOs.

ICOs are similar to initial public offerings, or IPOs, in that they are a way for companies to raise money from the public. In an IPO, a company sells stock, or ownership stakes, to the public; in an ICO, a company sells its tokens. After an ICO, the public can buy, sell, or hold the tokens in much the same way they can stock.

Ultimately, investors and VCs hope that the tokens gain enough value that they'll be able to cash out their tokens for a profit.

The first ICO was held in 2013, but the technique has boomed in recent months. Startups have raised nearly $4 billion since mid-2016, and most of that has been raised since May.

There's growing concern about how well companies that are choosing to use ICOs for fundraising are being vetted and how well the public is being informed about the process. Controversy has swirled recently around Centra and Tezos, both of which raised money through an ICO this year.

See the rest of the story at Business Insider