  Why would a blockchain-based startup and its venture capital investors choose
to finance by issuing tokens instead of equity? What would be their rates of
return for each asset? This paper focuses on the liquidity difference between
the two fundraising methods. I build a three-period model of an entrepreneur,
two types of investors, and users. Some investors have unforeseen liquidity
needs in the middle period that can only be met with tokens. The entrepreneur
obtains higher payoff by issuing tokens instead of equity, and the payoff
difference increases with investors risk-aversion and need for liquidity in the
middle period, as well as the depth of the token market.
