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. Finally, for those who are considering launching a DAO, well look at all you need to know about using token sale agreements. Homepage. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. Something went wrong while submitting the form. Have your token side letter docs ready to go with the terms that you want before you start fundraising. 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. "_ Business Day _" means a weekday on which banks are open for general banking business in San Francisco, California. The regulatory landscape in the US is still under development, which causes some regulatory uncertainty, particularly concerning the legal status of tokens in the U.S., as well as the high risk of tokens being considered as securities. 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. This eradicates the need for the agreement to be validated by a lawyer. In this guide, well be focusing on fundraising for Web3 projects. Therefore, a detailed White Paper with a description of token use cases, tokenomics, and token distribution plans is necessary to prepare a fully-fledged SAFT. Token Warrant Agreements Free Template and Guide, By submitting this form you agree with our privacy policy. We refer to that certain Warrant to Purchase Tokens of the Company issued on _________, 2022 (the "Warrant"). 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. Unlike SAFTs, Hence, this sale to the investor is also called a pre-sale. 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. because its native KIN tokens were also found to violate securities laws. 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. 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.. For the avoidance of doubt, in the event of any increase in the Total Network Tokens following a Token Launch, (i) Holder's Portion with respect to such Tokens shall be recalculated to take into account such increase. 1. General advice for startup fundraising applies here. Payment for Holder's Portion of Tokens upon each exercise may be made by (a) a check payable to the Company's order, (b) wire transfer of funds to the Company, (c) cancellation of indebtedness of the Company to Holder, (d) by net exercise as provided in Section 2.5 hereof, (e) any other method of payment approved by the Company, or (f) any combination of the foregoing. The Holder hereby agrees that, without the prior written consent of the Company, the Holder will not: (a) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any Locked Tokens, or (b) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any Locked Tokens; provided, however, that Holder may stake, vote or otherwise participate in the Network with respect to all of its Locked Tokens. Ultimately, the decision will come down to a few factors, which we will explore further on in this guide., Scenario 2: You have finalized your White Paper, registered a Token SPV company, and know when you plan to issue tokens. In the event that a Token Launch has occurred, then the Company shall provide notice to Holder no later than 30 days prior to the Expiration Date, which notice shall specify all Tokens that have been issued by a Token Issuer to such Holder during the term of the Warrant and the maximum number of Total Network Tokens issuable under this Warrant to such Holder. Three main types of managing the pro-rata rights of the token supply: Each of the pro-rata right methods has its advantages and disadvantages for the company or the investors. who hold token options and either have contracts with the DevLab or are employed by it. Otherwise, the United States is likely to face a brain drain at a time when it can ill afford it. Restrictions on Exercise. Consider the following three points when comparing the registration of DevLabs in the US vs outside the US. This, in turn, can be reflected in the token sale agreement in the process of structuring the investment round or specified in the DAO Constitution, which is similar to a shareholders agreement in traditional Web2 investing. This company is usually registered in a jurisdiction where the legislation permits token issuance and provides defined rules for taxation of token-sale transactions. In the event that legal counsel to the Company advises the Company that it is necessary or advisable for regulatory reasons, Holder shall also be required to deliver, as a condition to exercise, an accredited investor verification letter from a qualified third party verifying that Holder is an "accredited investor" within the meaning of Rule 501 of the Securities Act (as defined above). Developed Nations. Check out sources like Dovemetrics and fundraising announcements on Crunchbase and Twitter to get this data. A SAFT is a security issued for the eventual transfer of tokens from web3 startups to investors. 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? The transaction contemplates an enterprise value of approximately $45 million for Jet Token, and additional earnout warrants with a Black Scholes valuation of $60 million. Holder may update such network address by providing written notice in accordance with Section 7.5; provided, that the Company need not consider such updated network address to be valid until the Company has confirmed receipt of such notice and has approved such updated network address. Investors mint warrant tokens when they deposit capital into the aggregate pool. SAFTs (secure agreement for future tokens) is one such mechanism. Your best option in this scenario is likely to be using a SAFE/Convertible Note + token warrant/token side letter. As the token warrant is signed together with the SAFE, the prices set out in the SAFE includes the value of the token warrant, which is also called a token purchase right. Choosing a Web3 Fundraising Document in 2023: a Playbook for Founders. The Holder acknowledges that the Company is not obligated, and the Company has not made any determination, to launch a Protocol or generate Tokens. | One increasingly popular way to do this is via the issuance of token warrants.. Certain Public Warrants of AST SpaceMobile, Inc. are subject to a Lock-Up Agreement Ending on 28-FEB-2023. Web3 startups can use funds from the sale of SAFT to develop their project, mint their tokens, and issue their tokens to investors who have an expectation that there will be a secondary market to sell these tokens to. Thus, like a SAFT, or Simple Agreement for Future Tokens, a token-based award in any event may be deemed a security, and its issuance should be compliant with As a part of this process, investors are also pricing the equity valuation in a scenario where there is no token launch to make sure that their investment is protected. Comparatively, the current price is 215.40% higher than the all-time low price. Other investors prefer the direct alignment with the founders with the company allocation method. WebIts not just vanilla SAFEs anymore, its all manner of complicated token and warrant agreements. 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. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. 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.). It gives both startups and investors optionality. The Company will promptly respond in writing to an inquiry by Holder as to the then current fair market value of one Token. Disclosure: I am not a lawyer, this is not legal advice, and you should seek out independent legal counsel for your unique circumstances. We also offer a number of tools and features with employees and other token holders in mind. We're also going to explore when it may be best to use token warrants instead of token side letters, and how a Token SPV influences the fundraising process. All Rights Reserved. Restrictions on Tokens. "_ 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. and signed agreements in their personal portals. These tokens are used, similar to game credits at an arcade or tickets at a theme park, for interacting with decentralized applications (dApp). the amount of investor allocation of tokens, the price of tokens at the time of transfer to the investor, conversion event (the moment when the SAFT is converted into tokens for the investor). The use of Tokens in connection with the Platform may be governed by other Your token side letter should reflect the 2:1 rights on the equity, reflecting the valuations of the equity and tokens together. Something went wrong while submitting the form. This space will no doubt evolve over coming years as more regulatory clarity is offered. A tag already exists with the provided branch name. Select one of the following two alternatives: Cash Exercise. 5.1. The most important of them are as follows: As you can see from this list of key document details, the terms of the token purchase right sit at the very core of the token warrant. This could influence which token pro-rata right method you negotiate for. Another important point that deserves attention is the process of assigning the token warrant from the DevLab to the Token SPV. Check out our token side letter, token warrant and simple agreement for future tokens templates. Free template:Token Warrant Agreements Template and Guide. Token warrants arent the only way to issue token-based equity, but they may come with some regulatory and practical advantages. But in order for the tokens to maintain a relatively healthy and stable value, their developers must pay attention to tokenomics principles such as supply-and-demand and providing ongoing incentives to holders. 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. Date of Issuance. 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. 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. The number of tokens that will be issued is commensurate with the The token warrant provides investors with a right to purchase tokens in the future at a predetermined price or with a predetermined discount, while also specifying when the Token SPV will be formed. Get started with Legal Nodes by downloading the free template on this page or requesting a demo to find out how we can help you solve your legal needs. 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. WebThe NVCA Model Legal Documents are the industry-embraced model documents that can be used in venture capital financings. 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. As for a legal structure, in most cases, founders will have only registered a product development company (DevLab), most likely in one of the IT/IP-friendly countries currently available, like the US state of Delaware, the UK, UAE, Singapore, Estonia and other countries. "_ Common Stock _" means the Company's Common Stock, par value [$0.00001] per share. 1 for the offer, 1 for the agreement outlining equity and token allocations. Multi-Signature Support. Notwithstanding anything herein to the contrary, even for Tokens that are subject to restrictions on transferability, Holder may exercise the voting and other governance rights linked to the Tokens or deploy them towards staking in accordance with the governance and other rules of the Protocol. Notice of Expiration. Once the startup founders have gathered their core team and developed their idea into the Proof of Concept stage, they can begin to attract their first investments, hire new people, and start the journey to develop a fully-fledged product. In such cases, classic corporate equity investment documents are also signed in addition to the token sale agreement, namely, the subscription (share purchase) agreement and the shareholders agreement. Make sure to be clear with the investors on the value of the equity and the tokens together so that you dont end up with the wrong token side letter terms, or delay closing the deal because of misalignment on valuations. A SAFT broadly follows the same principles as a SAFE (Simple Agreement for Future Equity) or, our SAFE equivalent, a "_ Transfer " means: (x) the direct or indirect sale, assignment, delegation, pledge, charge, lending, hypothecation, creation of a swap or other derivative with respect to, or transfer or disposition of, any Token or any interest, right, claim, obligation or liability with respect to any Token; or (y) a Holder entering into or becoming subject to a contract, agreement or understanding, written or oral, contemplating or relating to any of the foregoing. Get early access to token side letters, token vesting, and cap table management solutions at LiquiFi. "_ Portion _" means, with respect to Holder and as of the date of the applicable Token Launch, a number of Tokens equal to the product of (a) Holder's Fully Diluted Percentage; multiplied by (b) the Insider Reserved Percentage; and multiplied by (c) the Total Network Tokens, in each case as of the date of the Token Launch. Nestor is a Co-founder & Head of Web3 Legal at Legal Nodes. These warrants are often detachable, meaning that they can be separated from the tokens and sold on the secondary markets before expiration. A simple agreement for future tokens (SAFT) is an investment contract offered by cryptocurrency developers to accredited investors. 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. The token side letter or warrant represents a right, but not the obligation, to receive or purchase future tokens. Let us look closely at each of the routes. When fundraising, you want to have a valuation benchmark by looking at the market of comparable companies in recent fundraising. Emerging Countries. Drafting and negotiating on token side letters can take multiple days and weeks, which could delay closing a critical investment deal. FTX TOKEN. Legal Due Diligence of a Web3 startup A Web3 startup needs to prepare several legal documents and materials for its project to negotiate with venture capital firms (VCs) successfully.