Welcome to Legal Nodes Playbook for Founders. When standing at the crossroads trying to choose the most suitable document for pre-seed Web3 fundraising, its important to consider any regulatory restrictions on token transactions that are imposed on the DevLab by a local regulator. Feb. 9PORT CARBON An intruder shot by a property owner in the borough early Tuesday suffered three gunshot wounds, including one to the spine. This could influence which token pro-rata right method you negotiate for. In summary, it is also worth noting that when a SAFT is used as a tool to attract investment for a Web3 startup, it should be used in conjunction with three additional tools: If any of these three criteria are missing, Web3 founders may wish to consider the SAFE + token warrant/token side letter option described above. For startups in the early stage of development, many investors will suggest or even expect the startup to structure their investment by signing a SAFE or other regular equity convertible instrument (Convertible Note, Advanced Subscription Agreement, etc.). This is not legal advice. DevLab, in turn, converts token options into tokens for founders, advisors, and team members, as well as token side letters into tokens for investors. After that, they manage the work, handling all communication with the service providers, quality-checking deliverables and ensuring that the fundraising and token launch are undertaken in a compliant way. Token Warrants Investors have one alternative that, as of May 2022, is growing in popularity amongst web3 venture funds the token warrant. A company might issue warrants with the option to purchase future tokens based on each investors equity ownership percentage multiplied by the total token allocation for investors. That price would, naturally, be lower than the standard price during the token generation event. This commit does not belong to any branch on this repository, and may belong to a fork outside of the repository. Because your token strategy and business models are subject to change, you want to have as much flexibility for your future token allocation and minimal token dilution. Using the right legal instrument is critical and by using a token warrant and a SAFE, founders can reduce the chances of falling into a regulatory pitfall. Rankings and News. Legal Nodes LTD is not an attorney or a law firm and does not provide legal advice. Any attorney-client relations are between clients and legal providers only. Otherwise, the United States is likely to face a brain drain at a time when it can ill afford it. Their incentive is to get as much of the tokens for the amount of capital invested. WebTHIS SIMPLE AGREEMENT FOR FUTURE TOKENS ( SAFT ) HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE ACT ), OR UNDER THE For your tokens, have some baseline or early assumption of future token allocations by looking at comparable benchmarks from sources like Cooopahtroopas and Lauren Stephanians tokenomics analysis, Messaris company profile pages, and other recent token launches (Goldfinch, Braintrust, dYdX). In this guide, well be focusing on fundraising for Web3 projects. Emerging Countries. To read more about the SAFT, how to use it, and to get a free SAFT template from Legal Nodes, visit this page. Instead, our Virtual Legal Officers (VLOs) source and manage all the different legal specialists. Copyright 2023 Prolific Labs Incorporated. There are a couple of reasons why a SAFT is usually not signed before these steps have taken place. Something went wrong while submitting the form. If founders have registered the DevLab outside of the US (i.e. On February 28, 2023, the Company issued an unsecured promissory note (the "Note") in the amount of $875,000. "_ Protocol _" means software or code developed by the Token Issuer operating through a peer to peer network of computers operating the same software or code and holding an identical copy of a ledger of transactions, to which any Token relates. WebSeedSAFT is the SeedLegals automated version of a SAFT (Simple Agreement for Future Tokens). Equity term sheets are relatively standard, and today, when funds invest in an early-stage company, they typically use an instrument such as a convertible or a SAFE note (secure agreement for future equity) the latter popularized by Y-Combinator. The involvement of the DevLab in token distribution often occurs after the Token SPV issues tokens, and reserves a part of the tokens for key contributors (founders, advisors, team) and investors, subsequently transferring this pool to the DevLab. (secure agreement for future tokens) is one such mechanism. SAFT (Simple Agreement for Future Tokens) investing capital for the right to purchase tokens or % of token supply at a specified price or discount rate. With it, the purchaser pre-pays for tokens that havent been released yet and the company uses that money to develop the tokens. Investors have a preferred method based on their own experiences, risk profile, and projections about the companys future token allocations. The use of the covered warrant structure in the digitized security token era of 2019 introduces a critical structural enhancement to the industry overall and we are 5.1. The Token Warrant will be for companies who might wish to issue tokens to investors as a sweetener for making an equity investment in a funding round, or perhaps to an advisor in return for services. Either way, the important part is that the DevLab is excluded from any token matters to avoid any unnecessary regulatory risks. WebThe Holder agrees that this Warrant is an agreement solely between such Holder and the Company, and the Holder shall look solely to the Company to enforce its rights hereunder, The concept of the token purchase right in a token warrant can be roughly reduced into its three main features: Its important to note that these three circumstances apply to the signing of the token side letter too. The terms and additional documents you require may depend on whether you plan to launch a DAO or not. If Web3 founders plan to control the emission of tokens and the process of token distribution in a centralized way, and do not plan to launch a DAO to decentralize the governance of their project, then at later stages of investment, investors may start requesting the control rights over the Token SPV. It then makes transfers to investors who hold token side letters, as well as other core contributors to the project ecosystem such as developers, advisors, etc. As a founder, you should fundraise when you have the most leverage with measurable progress and traction for your business. Find him on Twitter at @steveglaveski., This site requires JavaScript to run correctly. The two primary documents used for fundraising as a crypto company are: At LiquiFi, weve observed that the SAFE with the Token Side Letter has emerged as the preferred fundraising strategy due to the flexibility and other benefits they offer to the company and the investors. It is the Token SPV that will be responsible for the sale of tokens and will have also received regulatory approvals to organise the distribution. In summary, if a DevLab is registered in the US, then it's best to use a token warrant along with SAFE. LiquiFi, Inc. does not assume any liability for reliance on the information provided herein. Oftentimes, a projects tokenomics model develops over time, and it can be difficult to predict the future value of an individual token so early in a projects life. "_ Insider Reserved Percentage _" means the percentage of the Total Network Tokens, in the aggregate, reserved for issuance to Insiders in connection with the applicable Token Launch. Multi-Signature Support. Jonathan Chan is a partner in the corporate practice at Wilson Sonsini Goodrich & Rosati. At this stage, founders wont usually have a detailed White Paper with developed tokenomics, or any kind of token distribution plan, although these steps may have been preliminarily mapped out in the startup's Web3 roadmap. Fortunately, Pulley makes it easy to track both traditional equity and tokens in the same place., With Pulley, you can create a single source of truth that allows you to issue, track, and record all token agreements and token sales the same way you do with your equity agreements. because its native tokens, GRAMS, were found to violate federal securities laws. If it is not ready yet and depending on where the DevLab is registered, then, in addition to standard equity instruments, the DevLab can also sign a token warrant in the U.S. or can sign either a token warrant and a token side letter if the DevLab is a non-U.S. entity., When the tokenomics is finalized, the Token SPV signs either a SAFT or a token sale agreement, where the choice depends on whether the tokens have already been issued before.. These two documents are used in pre-seed Web3 fundraising and share a number of similarities. Get early access to token side letters, token vesting, and cap table management solutions at LiquiFi. WebThis particular warrant agreement allows Hedge Fund Mast Hill to buy bulk shares at 0.175, which is well above the current stock price. This space will no doubt evolve over coming years as more regulatory clarity is offered. a clearly defined date for issuing tokens, or a specified event that will be a trigger in the SAFT for the issuance of tokens and their transfer to investors. How do you know if your tokenomics is ready? is ongoing, then for the purposes of Web3 fundraising, founders should consider the private token sale agreement (TSA) as a fundraising document. When using our token warrant template, remember that it is jurisdiction- and protocol-agnostic. For early-stage crypto companies, theres a new fundraising document called the token side letter, that is being used to raise capital from accredited and institutional investors. WebWARRANT tokens can be issued in conjunction with any tokens, which in turn are called warrant-linked tokens. All content presented herein is for informational purposes only. SAFTs do not Notice of Expiration. So the equity and the probability of not launching a token has to be valued accordingly and will be reflected in the token side letter terms. Delivery of Tokens. To do that, it first receives the allocated number of tokens from the token-issuing company, the Token SPV. Any Tokens issued hereunder will be subject to such restrictions on transferability as required by applicable laws and regulations as determined by the Company's Board of Directors and as set forth in Section 3.3 hereto; provided, however, that such restrictions shall be no more stringent than those applicable to Tokens owned by or allocated to any Insider and shall be adjusted, as applicable, to accelerate or otherwise align with any such less stringent restrictions. Having over seven years of legal consulting experience, Nestor loves working with innovative startups and Web3 projects, helping them navigate the regulations and scale on global markets. In cases where the investor expects to get not only the future tokens, but also the shares of the company, founders should consider using a simple agreement for future tokens and equity (SAFTE) instead of a SAFT. That means there's no need for founders or in-house counsel to find lawyers in each jurisdiction where a company may be registered or operating. Investors usually structure these rights in the form of a right of veto on certain decisions of the company or as a list of reserved matters for which the company requires investor consent. For the token side letters, the same company that signs it, the DevLab, is also responsible for converting the document into tokens. | Your token side letter should reflect the 2:1 rights on the equity, reflecting the valuations of the equity and tokens together. The number of tokens that will be issued is commensurate with the However, it could alternatively take place just before the token generation event. and the type of signatory company youll be using to sign your fundraising documents, youll have a number of different fundraising documents you can choose from. Hence, this sale to the investor is also called a pre-sale. In recent actions brought against the messaging startups Telegram and Kikboth of which attempted to use the SAFT for unregistered securities offeringsthe U.S. Securities and Exchange Commission (SEC) has suggested that it sees otherwise.. The number of tokens issued to the holder upon exercise of the warrant is typically commensurate with the holders investment stake in the company, though it may also be affected by the total allocation of tokens for investors. Watch this clip from our "Fundraising for Web3 Projects" talk that covers token sale agreements and their use in more detail: If the Web3 founders of the project plan to decentralize its ownership and governance by launching a DAO in the future, it will be important for the investor to understand exactly how the members of the DAO will be selected, and how exactly the governance rights for these DAO members will be structured, as the investor is likely to apply to participate in the DAO themselves. This Warrant may be exercised any number of times by Holder, prior to the Expiration Date, to provide Holder the opportunity to purchase up to Holder's Portion at each applicable Token Launch, less any Tokens purchased by Holder pursuant to any prior exercise of this Warrant with respect to such Tokens. Consult with your legal counsel on whether the SAFT or SAFTE is appropriate for your fundraising. If the tokens have already been issued and the process of their distribution (private/public sale, airdrops, issuance of token options, etc.) 2. during the twelve months following the Cliff, 1/12th of 25% of the total number of the Tokens of Holder shall become unlocked on each monthly anniversary of the Cliff; When fundraising, you want to have a valuation benchmark by looking at the market of comparable companies in recent fundraising. What a token warrant agreement is and how it actually works, When a token warrant agreement is typically signed, Similarities and differences between the token warrant and the, How to choose between a token warrant and a token side letter, What the terms of the token warrant (and the token purchase right terms) include, the token warrant is not used for automatic (unconditional) issuances: the, the price at which the investor buys the tokens in the future is fixed by the token warrant. Similar supply-demand issues may arise if a bunch of separate warrants are exercised at the same time. General advice for startup fundraising applies here. Therefore, for our template to work for more early-stage projects, we have decided to go with a discount-based model. You can speak to the team at Legal Nodes to find out more about how we can help you use these documents. The earnout warrants have a strike price of $15 and a term of 10 years. "_ SAFE _" shall mean any Simple Agreement for Future Equity or substantially similar agreement entered into by the Company. Some investors prefer a guaranteed amount of tokens with the fully diluted supply or conversion rate method. Transfer Restrictions; Lockup Period. You signed in with another tab or window. It thus. "_ Total Network Tokens _" means the total number of Tokens ever to be issued on (i) the Protocol, or (ii) any Token Issuer's network or protocol. If the DevLab is registered in the U.S. a founder should strongly consider using a standard SAFE document. Foreword: Thank you to the Alliance DAO team and Lindsay for their insights and help in writing this article. Upon each exercise of this Warrant and subject to the restrictions provided in Section 3.2 hereof, Holder may elect to make such exercise without the payment by Holder of any additional consideration, by submitting a copy of the exercise notice attached hereto as Exhibit 1 with the net exercise election selected, duly executed by Holder, for the number of Tokens that is obtained under the following formula: where X = the number of Tokens to be issued to Holder pursuant to a net exercise of this Warrant effected pursuant to this Section 2.5. VLOs analyze all the legal tasks needed to structure the fundraising, prepare cost estimates and then select the best legal providers from the Legal Nodes Network for each task. Depending on where the DevLab is incorporated, the following scenarios will unfold:. The mechanics surrounding early-stage investment in company equity is a well-worn pursuit, honed over decades since HBS professor George Doriot raised a $3.5 million fund to invest in technology companies back in 1946. This Warrant shall be exercised by submitting a copy of the exercise notice attached hereto as Exhibit 1, duly executed by Holder, and by payment in a form specified in Section 2.2 hereof of an amount equal to the Warrant Exercise Price or, if applicable, an election to net exercise this Warrant as provided in Section 2.5 hereof for the number of Tokens to be acquired in connection with such exercise. These equity types generally allow investors in web3 startups to receive a certain number of tokens commensurate with the size of their investment.. is the founder of community-owned web3 accelerator and venture fund, Time Rich: Do Your Best Work, Live Your Best Life. But what happens when youre investing not in equity but in a web3 startups native tokens - an instrument that doesnt come with the same regulatory clarity? All Tokens distributed to or received by Holder pursuant hereto shall be subject to a mandatory Lockup Period. LayerZero claims it is well-capitalized with approximately https://lnkd.in/gTadru7d A SAFT (a simple agreement for future tokens) is a document that is usually signed with a startup that has already decided on the type of tokens it plans to issue, and already has detailed the tokenomics, and created a token distribution plan (including prices and stages of distribution) and a White Paper (which describes all of the above). As a founder, you want to communicate the nature of the business, and how value may accrue to either the tokens, equity, or both token and equity. Date of Issuance. Disclosure: I am not a lawyer, this is not legal advice, and you should seek out independent legal counsel for your unique circumstances. |, Title:(please print or type full title) | The key differences between the two are that the token side letter gives founders more flexibility in terms of whether they will issue tokens or not and what the token price would be. Have your token side letter docs ready to go with the terms that you want before you start fundraising. (To be completed and signed only upon each exercise of the Warrant). "_ Insider _" means any current or former investors, stockholders, Founders, employees, officers, directors and advisors or other consultants of the Company and any Token Issuer (if other than the Company). Homepage. Restrictions on Exercise. This agreement sets out the Basically, its the token equivalent of a warrant for equity, or granting share options. Lets explore these in the next chapters of this guide.. Automatic vesting ensures that tokens are seamlessly moved to connected wallet addresses upon vesting, and token holders can access advanced views that help them track the projected future value of their tokens.