The holder of a token warrant isnt obligated to exercise it. Jonathan Chan is a partner in the corporate practice at Wilson Sonsini Goodrich & Rosati. Rarely used anymore. Consult with your legal counsel on whether the SAFT or SAFTE is appropriate for your fundraising. "Company" shall include, in addition to the Company identified in the opening paragraph of this Warrant, any corporation or other entity that succeeds to the Company's obligations under this Warrant, whether by permitted assignment, by merger or consolidation or otherwise. If you plan to allocate a large percentage of the tokens to the company, it may be better to use the conversion rate methodology. 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. Investors have one alternative that, as of May 2022, is growing in popularity amongst web3 venture funds the token warrant. Investors have a preferred method based on their own experiences, risk profile, and projections about the companys future token allocations. A SAFT is a security issued for the eventual transfer of tokens from web3 startups to investors. American companies should be very careful about how they participate in the distribution and sale of tokens. This is speculative and due in part to 1) token warrants optionality, and 2) the fact that the SEC has specifically called out issues with SAFTs promise to deliver future tokens to investors. 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. This might seem somewhat unfair to investors, and startups might sweeten the deal for investors by offering a sizeable discount on the price of purchasing tokens in the future. They reduce the time and cost of financings and free principals time to focus on high-level issues. All content presented herein is for informational purposes only. This article covers all there is to know about token warrants and includes a free token warrant template created by the team at Legal Nodes. WebWhat is a token side letter or warrant (with a SAFE)? As it is a separate entity, the Token SPV can handle these processes, shielding the DevLab from any involvement in the token distribution process. is the founder of community-owned web3 accelerator and venture fund, Time Rich: Do Your Best Work, Live Your Best Life. That price would, naturally, be lower than the standard price during the token generation event. The number of tokens that they will be able to buy with the discounted price is then calculated pro-rata to the equity ownership of the investor. All Rights Reserved. Multi-Signature Support. SAFTs (secure agreement for future tokens) is one such mechanism. 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. The token warrant, however, requires a discount or a discounted price as one of its substantive terms to function. For the avoidance of doubt, the Lockup Period and Transfer Restrictions shall not apply to any Tokens received by any Holder as a reward for staking Tokens on the Protocol or any network or protocol pursuant to the proof-of-stake protocol included in the Protocol. An investor with a 10% ownership stake would be entitled to purchase only 2% of the total tokens (10% x 20% = 2%)., Token warrants are often mentioned alongside another token-based equity mechanism known as a SAFT, or Simple Agreement for Future Tokens., The structure of a SAFT is based on a similar equity-based mechanism called a SAFE (Simple Agreement for Future Equity). Similar supply-demand issues may arise if a bunch of separate warrants are exercised at the same time. WebCheck out the article below to learn 5 Things to Know About Token Warrants. Emerging Countries. In terms of issuing tokens, the way they function is fundamentally different. "_ Preferred Stock _" means any series or class of preferred stock that is or may in the future be defined in the Certificate. 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. To do that, it first receives the allocated number of tokens from the token-issuing company, the Token SPV. While not the same, properly drafted token side letters and warrants are intended to achieve the same outcome and are used interchangeably for this article. 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. Nothing should be construed as legal advice, Pulley's SOC 1 Type 1 audit was performed by BARR advisory. Basically, its the token equivalent of a warrant for equity, or granting share options. WebThe NVCA Model Legal Documents are the industry-embraced model documents that can be used in venture capital financings. For example, if youre raising at $10M equity valuation for just the company, and you have tokens involved, you may also value the token network at $20M based on comparable companies. The Company shall be entitled to assume the validity of any network address provided by a Holder and has no duty to verify such network address. Issued on ____________, 2022 (the " Issue Date"). WebA SAFT is similar to a simple token warrant agreement for future equity (SAFE), allowing early-stage investors to convert their cash investment into equity later. For purposes of this calculation, any SAFE that has not yet converted to equity will be considered to convert at its valuation cap. WebSAFE + Token Warrants - A combination of a SAFE and a token warrant has become increasingly popular for fundraising in Web3. It does not take into account the specifics of all national frameworks and infrastructure of all existing blockchain protocols. But this promise for future tokens has run afoul of the Securities and Exchange Commission (SEC). WebTHIS SIMPLE AGREEMENT FOR FUTURE TOKENS ( SAFT ) HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE ACT ), OR UNDER THE The warrant, requested by state police criminal investigator Trooper Justin Bedford of the Schuylkill Haven station, outlined the events that occurred at 222 Second St. Something went wrong while submitting the form. Any attorney-client relations are between clients and legal providers only. WebSeedSAFT is the SeedLegals automated version of a SAFT (Simple Agreement for Future Tokens). Find him on Twitter at @steveglaveski., This site requires JavaScript to run correctly. But if they do, the company must mint new tokens equal to the number of tokens in the exercised warrant. This could be done as soon as the Token SPV is incorporated. A tag already exists with the provided branch name. WebRepresented Deconet in drafting the first blockchain-transferable software license, the Deconet Software License Agreement; Advising the founders of a top 10 token by market capitalization on fund formation and investment matters; Advising a leading entertainment company on all aspects of the development and minting of NFTs With it, the purchaser pre-pays for tokens that havent been released yet and the company uses that money to develop the tokens. SAFE (Simple Agreement for Future Equity), track both traditional equity and tokens in the same place. Token Warrant Agreements Free Template and Guide, By submitting this form you agree with our privacy policy. The Token SPV will be responsible for the distribution of tokens, meaning that the company will distribute the tokens once the token warrant is executed. It gives both startups and investors optionality. Schedule a call and we'll discuss your equity and see how we can help. Disclaimer: the information in this guide is provided for informational purposes only. In summary, the choice of an investment document for Web3 projects is mostly influenced by the readiness of the tokenomic model. Unlike SAFTs, token warrants are essentially an informal agreement that is not registered with the SEC and does not promise future tokens. The Holder acknowledges that the Company is not obligated, and the Company has not made any determination, to launch a Protocol or generate Tokens. Select one of the following two alternatives: Cash Exercise. Because the token sale agreement is signed at a more mature stage of a Web3 projects development and the investment amounts are quite significant, investors often have questions about obtaining control rights over the company and receiving tokens. How do you know if your tokenomics is ready? Messaging app Telegram was forced to return US$1.2 billion and pay the SEC an $18.5 million penalty because its native tokens, GRAMS, were found to violate federal securities laws. WebWarrant tokens are ERC-20 tokens which give investors a claim on the portfolio of assets that were financed using their capital. Copyright 2023 Prolific Labs Incorporated. Unlike the token warrant, the token side letter doesn't specify token price or dates for token exercise. A token warrant is a derivative that allows the warrant holder to purchase tokens in the issuing company at a specified price on or before a specified expiration date. Unlike SAFTs, One way a company can avoid this out-of-control minting of new tokens is by setting aside a certain percentage of its total token allocation for investors. 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. "_ Deemed __ Liquidation Event " has the meaning set forth for such term in the Company's Amended and Restated Certificate of Incorporation, as amended from time to time (the " Certificate _"). That being said, it is not the only way to structure the conversion formula, we chose this method as it is an industry practice we think will be most helpful to users of the document, as per our explanation below), So, if your tokenomics is finalised, meaning, the price of the token at the time of its issue and the hard cap is already determined, you will be ready to specify in the token warrant details about the number of tokens available to the investors and their specific price. Until a token launch, there is always some non-zero chance that tokens may never be issued. 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. Come up with potential token allocations using recent token launches and benchmarks, understanding this could still change drastically in the future*. It is, however, rare for the tokenomics to be ready at such an early stage. ContraFect has agreed to issue 128,000 shares of common stock and pre-funded warrants to purchase 2,372,000 shares of common stock. is ongoing, then for the purposes of Web3 fundraising, founders should consider the private token sale agreement (TSA) as a fundraising document. Have your token side letter docs ready to go with the terms that you want before you start fundraising. Legal Nodes LTD is not an attorney or a law firm and does not provide legal advice. Choosing a Web3 Fundraising Document in 2023: a Playbook for Founders. For the token side letters, the same company that signs it, the DevLab, is also responsible for converting the document into tokens. 3. during the twelve months following the end-date of the period described in the immediately preceding clause "(b)", 1/12th of 25% of the total number of the Tokens of Holder shall become unlocked on each monthly anniversary of such end-date; and You signed in with another tab or window. The token side letter or warrant represents a right, but not the obligation, to receive or purchase future tokens. WebA token warrant agreement, commonly referred to as simply a token warrant and also known as a token purchase right, is a document often used by Web3 projects to attract As explained above, our template works with a discount and a core contributors allocation pro-rata formula, which is one of several methods suitable for a token warrant agreement. The SAFT is a derivative of the SAFE and stands for the simple agreement for future tokens. Depending on where the DevLab is incorporated, the following scenarios will unfold:. Remember! Just as a stock warrant allows the holder to buy shares of stock in the issuing company at a specified price in the future, a token warrant allows the holder to buy a certain amount of the companys tokens at a specified price in the future. A SAFT broadly follows the same principles as a SAFE (Simple Agreement for Future Equity) or, our SAFE equivalent, a But this promise for future tokens has run afoul of the. Similar to the SAFE, under the SAFT, an investor, upon occurrence of a "_ Company Intellectual Property _" means all patents, patent applications, registered and unregistered trademarks, trademark applications, registered and unregistered service marks, service mark applications, tradenames, copyrights, trade secrets, domain names, information and proprietary rights and processes, similar or other intellectual property rights, subject matter of any of the foregoing, tangible embodiments of any of the foregoing, and in any and all such cases that are owned by the Company. This is not the same for token warrants, where their value is already included in the value of the SAFE, to which the former is signed as an annex. Free template:Token Warrant Agreements Template and Guide. Chief among these mechanisms are ICOs (Initial Coin Offerings), SAFTs (Simple Agreements for Future Tokens) and token warrants, the last of which well explore in this guide. I co-authored this article with Joseph Perkins, Mark Janoff, and Robert Moore. B = the fair market value of one Token, determined at the time of such net exercise as set forth in Section 2.5(b). 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. 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. Thus, if the rules of the DAO will provide for the issuance of governance tokens for its members or the receipt of Liquidity Provider (LP) tokens by existing tokenholders who have staked project tokens, investors will want to reserve the rights to the governance/LP tokens to become DAO members and participate in the future in its governance. When using our token warrant template, remember that it is jurisdiction- and protocol-agnostic. If the token economics of the project is not finalised, the way to address it is to agree on the discount, which will apply to the investors purchase. WebUnless otherwise stated herein, this Token Sale Agreement governs only your purchase of Tokens. This is different from token warrants, which will usually be assigned from the DevLab to the Token SPV by the time the tokens are initially issued. information about vesting, lock-ups and other encumbrances on the investor's tokens, which are important for the successful operation of the project's tokenomics. and signed agreements in their personal portals. "Locked Tokens" means Tokens issued under the Warrant that remain subject to a lockup or any additional restrictions pursuant to the terms thereof. "_ Affiliate _" means, with respect to any specified Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with such Person, including without limitation any general partner, managing member, officer, director or trustee of such Person, or any venture capital fund or registered investment company now or hereafter existing that is controlled by one or more general partners, managing members or investment advisers of, or shares the same management company or investment adviser with, such Person, where "control" is defined as directly or indirectly possessing the power to direct or cause the direction of the management and policies of the Affiliate, whether through ownership of voting securities, by contract or otherwise. Understand how much negotiating leverage you have when fundraising, and whether you need founder-friendly terms or investor-preferred terms for the token side letter to close the deal. 12/ Token warrants are a mechanism for equity holders to exercise the warrant to get tokens. A token warrant agreement, commonly referred to as simply a token warrant and also known as a token purchase right, is a document often used by Web3 projects to attract early-stage investments. The material terms of the TSA are almost the same as those of the SAFT, except that the TSA lacks a description of the conversion event and indicates a clear date of transfer of tokens to investors. Disclosure: I am not a lawyer, this is not legal advice, and you should seek out independent legal counsel for your unique circumstances. You can view example token side letters with LiquiFi here. because its native KIN tokens were also found to violate securities laws. 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. view example token side letters with LiquiFi here, Cooopahtroopas and Lauren Stephanians tokenomics analysis, Company allocation or insiders supply method, Simpler, no need to manage the equity stake and the conversion of equity into tokens, More straightforward valuations on just the tokens alone, and not have to mix in the equity value component, Similar to SAFTs, with the added benefit of providing investors the optionality of retaining equity. Many web3 companies develop their own crypto tokens as part of a blockchain-based project, and these companies can theoretically mint as many tokens as they want. The Company have accounted for as well as tokens. Consider the following three points when comparing the registration of DevLabs in the US vs outside the US. Our tools connect to third-party token custodians such as Coinbase to help you issue and track token liquidity from one simple interface.. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. 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, (secure agreement for future equity) the latter popularized by. "_ Warrant Exercise Price _" means (a) $1,000 (in the aggregate, to purchase that number of Tokens equal to Holder's Portion) for the initial exercise of the Warrant, and (b) $500.00 (in the aggregate, to purchase that number of Tokens equal to that portion of Holder's Portion remaining to be exercised) for each exercise of the Warrant thereafter. We also offer a number of tools and features with employees and other token holders in mind. You should not construe any such information as legal, tax, investment, trading, financial, or other advice., If youre considering fundraising options for your Web3 projects, youll most likely find yourself in one of the three following, rather common, scenarios:, Scenario 1: Youre at the beginning of developing your project and havent yet registered a token company (i.e. 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. Finally, for those who are considering launching a DAO, well look at all you need to know about using token sale agreements. Be the first to get your hands on a token sale agreement template by registering your interest here.