Today, let’s talk about an evolution in the way that startups are being funded, and what it means for the companies working to replace the current internet with blockchain technologies.

For a long while now, the basic deal in venture capital has been simple. Investors give founders money in exchange for equity in a company; they recoup that investment when the company is sold or goes public. (Or, if the company dies, not at all.)

A downside of this arrangement is that companies can take a very long time to arrive at these exits. Most VC funds assume it will take 7 to 10 years to know how well their bets are paying off, and in the meantime they face risk and uncertainty.

The arrival of blockchains over the past decade created a new option for impatient VCs. Companies in the Web 2.0 era produced only goods and services, whose value was always denominated in dollars or other national currencies. But companies in the web3 era offer a third product — tokens — and the value of those tokens is far less tethered to reality. More often, the value is correlated to the collective belief that the project’s backers have in it, and both those beliefs and the tokens’ value can be manipulated as part of the startup’s growth.

One way an impatient VC could manipulate a project is by insisting that a startup offer tokens as part of their project, and require that a certain amount of tokens be set aside for the VC. That way, once the tokens become available for trading on public crypto exchanges, VCs can cash out part of their investment years ahead of schedule.

Or, if the project fails before it can sell or go public, the VC can earn a profit on an investment that would have otherwise been a loss.

A few months ago, a VC friend told me that they are hearing about startups being pressured to offer tokens, for just this reason.

VCs still want traditional equity in companies, of course. But increasingly, they want something else, too.

One of the most famous web3 projects is the Bored Ape Yacht Club (BAYC), a collection of whimsical NFTs created by a company called Yuga Labs. The company has been consolidating some of the most valuable collections in the NFT world; earlier this month, it announced that it had acquired the intellectual property behind CryptoPunks and Meebits.

Yuga takes a cut every time a Bored Ape is re-sold, and reportedly earned an impressive $127 million in profits this way last year. (Bored Apes’ lifetime sales exceed $1.5 billion.) This week, Yuga Labs announced that it had raised a fresh $450 million in capital, valuing the company at $4 billion.

The plan is to go beyond pricey NFT sales and begin selling virtual land in a massively multiplayer online roleplaying game called The Otherside, according to The Verge and a deck obtained by The Block.

There is also now a token associated with BAYC, called ApeCoin. Eventually, its creators say, you’ll be able to use it to buy virtual land, play games, and purchase services.

But ApeCoin DAO is not Yuga Labs, its PR firm took pains to explain to me in a press release Thursday. (This information was highlighted for me in a section of the release that was outlined in a box and headlined “Important facts.”) Rather:

Yuga Labs gifted ApeCoin DAO a one-of-one NFT featuring a blue version of the Bored Ape Yacht Club logo. This NFT conveys along with it all rights and privileges of the logo’s intellectual property to the ApeCoin DAO. The ApeCoin DAO will decide how the IP is used.

So far, ApeCoin DAO has decided to use the IP to reward all of Yuga Labs’ earliest backers. On Thursday, the DAO gifted 1 billion ApeCoin tokens to Yuga Labs, Yuga Labs’ founders, and the VCs who backed the project. Bored Apes owners got tokens as well. The coins hit a high of $40 per coin on trading markets before settling down to $12.20. At that price, VCs’ tokens are worth around $1.7 billion — far more than they have invested in the project to date. And that’s in addition to their equity stake.

But the rewards of ApeCoin are not just financial for investors; their tokens grant them governing privileges over the DAO as well. It’s not totally clear what the DAO will vote on — the practical utility of DAOs are often overstated, as I learned when I wrote about Ethereum Name Service’s version — but to the extent that it has power, VCs will be one of its most powerful constituents.

The DAO’s website lists four vague benefits of owning tokens, but mostly it appears to be a mechanism for keeping “the community” as far away from the governance of Yuga Labs itself as possible. “Crucially,” Kyle Chayka writes in Dirt, “there is nothing in here about any transfer of profits or share in company value.”

Is all of this kosher? It certainly has folks I know scratching their heads. ApeCoin began life as a Yuga Labs project; it’s part of the pitch deck that leaked this month. One crypto investor who spoke to Bloomberg called the fig leaf of a DAO a SPAC without the legal protections a SPAC offers investors; writing in Dirt, Chayka called it “as close to a fake stock as you can get without being blatantly illegal.”

My guess is that it falls into the category of “legal for now,” a time-tested way for Silicon Valley startups to make money. But perhaps the Securities and Exchange Commission will have other ideas.

In the meantime, it’s a great time to be an investor in Yuga Labs. The company has a thriving business in NFT sales, growing cultural cachet, and billions in value created out of thin air by a new token.

ApeCoin DAO allows Yuga Labs to talk up the virtues of decentralization — community governance, interoperability, democratizing access to those very expensive Bored Apes — while also enjoying the benefits of centralization (keeping the community at arm’s length; collecting all the profits).

Maaria Bajwa, a principal at Sound Ventures who serves on the ApeCoin DAO board, insisted that the DAO would be empowered to do meaningful work.

“Governance happens at the DAO level,” she told me over email. “The Ape Foundation acts solely on behalf of ApeCoin DAO community proposals, and is responsible for the day-to-day administration, bookkeeping, project management, and other tasks that ensure the ApeCoin DAO community’s ideas have the support they need to become a reality.”

A core idea of web3 is that it is more open and inclusive than what came before. Before, you had to be an accredited investor to participate in a new project like Yuga Labs; today, you can simply buy some ApeCoin and begin to “participate” in the “ecosystem.” Over time, perhaps you’ll own enough ApeCoin to be able to shift the direction of the project: voting on delegates, or future projects, or whatever.

But this is a lot of power to grant to the public, and so perhaps it’s understandable that web3 startups are being stingy with it. DAOs are created, but distanced from the core intellectual property. Token holders are granted votes, but on fringe issues. Nearly half of any tokens (38 percent, in the case of ApeCoin) are given for free to an inner circle. Decentralization becomes a marketing pitch — a forever promise of rewards to come, if you only buy and hold those tokens — but it’s all still centralized where it counts.

Maybe I’m being too cynical here. Bored Apes seems like a fun brand, and if any NFT project tokens are going to have lasting value, it may well be Yuga Labs’. Over the past month or so, I’ve seen Bored Apes painted on jackets in fashion boutiques in Miami, and graffitied on walls in Brooklyn. It seems possible that people will enjoy the major-label Bored Apes virtual band, or make real money off the forthcoming Bored Apes play-to-earn game.

But something still feels off to me. Self-dealing founders and investors; a hype machine in overdrive; and a growing disconnect between the web3 we were promised and the one that’s being traded on the crypto exchanges. This sleight of hand might keep working for a while. But eventually the truth catches up with you. And when it does, I wouldn’t be surprised to see that decentralization is its first casualty.