Empirical measures of marketability and liquidity discounts for veterans
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I was as surprised and bewildered by these events as much as the rest of the community, dismayed that another bitcoin company had imploded amidst allegations of fraud and leaving many investors, creditors and employees with serious losses. My goal in writing this is to offer honesty and transparency, which has always been my primary principle in business dealings, and to provide the community with some answers, however limited those may be because of my limited involvement.
I am frequently asked to assist startups in the bitcoin space and I do so on a weekly basis, behind the scenes and most often without compensation, because I believe in bitcoin and I want to see the whole space thrive.
I will do my best to prevent that from happening again, while continuing to work in this industry in support of the many amazing startups and dedicated professionals. This would allow me to offer advice to the developers, as well as advice on security strategy to the executives and the board, but on a limited time basis.
I also asked that my role would be communicated only as an advisor, not as a director and not as an endorsement towards investors. Danny agreed to these terms and a few days later we agreed to start on a trial basis for three months, during which time I would get to know the team, they would get to know me and we would see whether the relationship was productive.
At this time in November, I was not that well known in the bitcoin space, though I had a small but growing reputation. Honestly I was glad to have some paid work after two years of working in bitcoin without any income. I agreed to proceed on a verbal agreement, given this minor role, without a formal contract.
In the first month of the relationship I had four or five calls with the developers to discuss their security architecture and strategy. My work was focused on security advice for the software developers, protecting against external threats. I also recommended an architecture for the bitcoin-facing nodes and discussed various options for that implementation bitcoind vs bitcoinj vs.
These were all technical discussions that did not involve the CEO, though some did involve George Papageorgiou. This work was in alignment with my expectations of the role. In January I participated in two team calls, where they discussed their plans for the launch of the new branch office and where Danny told the team about making a big splash with the Cyprus media and gearing up for a big launch. My impression from these calls was of a company with strong morale, excitement and commitment by the employees and an ambitious plan for bitcoin in Cyprus.
As an outside technical advisor, I saw no indications of internal problems, financial or otherwise. I think I only had one or two email exchanges and skype exchanges to advise on some technical choices. After my outreach I got another burst of activity from the team. In late February and again on the 10th of March, I reached out by Skype to Danny, asking him to make sure the team engaged with me more closely, so I could add value.
I reminded him that unless they reached out, I would not know if they needed technical help and I urged him to use the technical advice hours he was paying for. In his last communication on Skype, Danny told me he would convene a team meeting and get some dates from everyone on March 11th for such a meeting.
I did not hear back the next day. On March 13th, I received a call from George and Danny about some problems with the Cypriot advertising regulators. The regulators had done some Wikipedia research, seen the April blockchain fork and decided that the statement of absolute security was contradicted by those events.
I suggested that I was not an independent expert, since I consulted for them, but that they should reach out to the Bitcoin Foundation and see if they might be able to help. That is the last communication I saw from Danny. I never heard back. I reached out to Danny again and received no response. At this time I was travelling to a conference and trying to catch up with a week of emails. I advised the team to go public as soon as possible. Rumors were building and the first articles were appearing in the bitcoin press.
Trading at Havelock had already ceased for a few days and the press was already trying to figure out what was going on, though no one inside the company or outside seemed to have any answers.
My last invoice was issued on March 15th. Unlike previous invoices that had been paid within a day or two and well in advance of their due date, this invoice was still unpaid a week and a half later. In retrospect this was unusual and should have alerted me that something was wrong. However, since the invoice was not past due and given the activity surrounding the launch of the storefront in Cyprus, I simply assumed they were busy and would pay it by the due date of March 30th.
I had no insight into finances, no oversight, no involvement in marketing or investor meetings, no contact with customers, investors or regulators.
Unlike investors who took risks, knowing they were risking their investment for a reward, employees do not take a position in a company as a risk venture, they do it to pay their bills and support their families. Those employees have been hurt by this, finding themselves suddenly unemployed, with unpaid paychecks and missed bills. While the executives of the firm may suffer damage to their reputations, I think it is important to recognize that it is easy to see the signs in hindsight but much harder to see them or act upon them in real life when lacking certainty and operating under a busy work schedule.
I hope we can all show restraint and compassion, even if there is legitimate need for answers and explanations. As my reputation has grown, I have tried to practice full transparency and have made efforts to control the use of my name and remove any appearance of endorsement, so as not to lend my reputation to anyone who might exploit it for fraud or other self-serving purposes. I have developed a detailed Retainer Agreement that clearly defines the scope of my role, which is very limited for technical advising, and prohibits the use of my name outside of the scope of my role.
These limitations are intended to protect the public. My contract further explicitly states that I have no fiduciary or oversight responsibilities while acting as a technical advisor, to ensure that the company understands the scope of my role. I now advise all of the executives and board members in any company where I am offering advice, paid or unpaid, to carefully construct controls over treasury funds to ensure separation-of-duties and to prevent embezzlement or fraud by any executive.
I put it rather bluntly: Do not trust anyone, use internal security controls, like any large corporation should. I will continue to advocate for security controls rather than trust in individuals. While I believe I acted in good faith and while my role was minor and included no fiduciary or oversight duties, I did not do enough to prevent my reputation from being exploited.
Consumers and investors in the bitcoin space should use the same scrutiny as they do in other start-up spaces. At minimum, they should do due diligence before investing their money or handing it over to any company for safekeeping. Consumers and investors should not rely on any endorsement or, even less so, rely on any contractual arrangement with a known person in the industry as a substitute for research and due diligence.
No individual can vouch for an entire company. Instead cryptographic proof, public ledger transparency and cryptographic controls are better than any audit or individual oversight. Consumers and investors should insist on these controls and companies should embrace them as best practices.
I also hope this statement, while personally humbling, serves as a lesson for others and offers some answers that the community deserves.