Thread by Robin D. Ji

twitter.com
1 Recommender
1 Mention
Recommend
Post
Save
Complete
Collect
Thread
Are you fundraising as a crypto project with future potential tokens?

Get up to speed on raising with SAFEs + token side letters.

To get the best outcome from investors, here’s what you need to know:
Key Takeaways:
1/ Token Side Letter has emerged as the preferred strategy

2/ There are 3 main types of token rights for distribution

3/ Have a token side letter BEFORE you start is key

4/ Get a lawyer to help you draft the right terms for your token allocation plans
(1) What is a token side letter?

Token side letter represents a right, but not the obligation, to receive future tokens.

Tokens you receive is proportional to your equity allocation via SAFE.
Investors are primarily investing in the equity of the company via the SAFE or equity agreement, with an optionality for future tokens.

We've been seeing token side letters used over SAFTs, especially for US-based companies.

*Note, all the above is not legal advice or guidance.
(2) There are 3 main types of token rights:

1. Company allocation method (aka insider supply method)

2. Fully diluted supply method

3. Conversion rate method

Each explained below and example breakdown to follow
Company allocation method is (usually) the most founder-friendly terms:

Token ownership is based on company allocation of tokens

The company has more control and discretion of ownership

Company or Insiders = Founders + Employees + Treasury (and specified in token launch docs)
Fully diluted supply method is the most investor-friendly terms

Investors are allocated tokens based on their equity ownership % (1:1 ratio)

Investors get a guaranteed % of tokens and usually most dilutive

More common, and what investors usually will lead with in negotiations
Conversion rate method splits the advantage between founders & investors

Conversion rate depending on equity ownership % (2 equity:1 token)

Investors get guaranteed % of the supply based on conversion ratio

Conversion rate can be negotiated, which impacts your token valuation
Here’s an illustrative example of showing how different methods results in different token ownership %s
(3) Plan ahead - how do you decide which method to use and what side letter you use?

Use benchmark data for token allocations

Use Dovemetrics for fundraising trends and valuations

Ask other founders and close investors for comparable benchmarks
Amazing token allocation benchmark analysis from @lstephanian @Cooopahtroopa

Breaks down typical %s given to team vs investors vs community vs ecosystem incentives.

Also segmented by project type (DAO vs dApps vs L1 and L2s)

lstephanian.mirror.xyz/kB9Jz_5joqbY0ePO8rU1NNDKhiqvzU6OWyYsbSA-Kcc
Use Dovemetrics for fundraising trends and valuations. Super helpful resource, and imo the best for crypto-specific trends.

www.dovemetrics.com/
Ask other founders, investors, and recent token launches for comparable benchmarks (see examples from dYdX and Uniswap).

Usually these are easy to find on the project's public docs or aggregated on @MessariCrypto.

messari.io/asset/uniswap/profile/launch-and-initial-token-distribution

dydx.foundation/blog/introducing-dydx-token
(4) Actionable next steps as a founder:

Lawyer up before you start fundraising to help you draft your docs

Plan your token allocations

Decide which pro rata method you want

Draft the token side letter

Have it ready and negotiate for terms that make the most sense for you
If you want help with token side letters and crypto/web3 founder tactics, stay tuned for what @liquifi_finance is building and sign-up for the waitlist at h3mpogxaal9.typeform.com/to/fLM8gbD8
For a more detailed explanation on all the above, check out our writeup at:

medium.com/@liquifi_finance/crypto-web3-fundraising-with-token-side-letters-or-token-warrants-33dce66...
Special thank you to @alliancedao @lund_dane @panekkkk @lmrankhan @QwQiao and @LindsayxLin for their thoughts and insights!
Mentions
See All