We've prepared this guide for founders of Web3 projects and their legal advisors, so that they can better understand how to use a SAFT (a simple agreement for future tokens) document in fundraising and whether a SAFT is the right instrument for fundraising for certain cases.
In this article, you will also find a SAFT template developed by the Legal Nodes team that is free to download and use. The draft has been created for informational purposes only and is not to be treated as legal advice or legal opinion. To get the best use out of this draft, consult with a qualified legal professional who can tailor it to your specific needs.
⚡️ In a nutshell, here's the most important information to know about SAFTs for fundraising:
Alright, let's dive into the guide and learn more about the specifics that you might need to know when using a SAFT for fundraising.
A simple agreement for future tokens is a legal agreement, which intermediates a pre-sale of tokens.
To launch a token pre-sale, Web3 founders need to:
By missing any of these steps, it would be hard (pretty much nearly impossible) to set up a SAFT agreement that will protect investors’ rights to receive future tokens.
The SAFTs are often signed in a period just before the Network & Token Launch (the NTL), typically around six to 12 months beforehand. Both the NTL date and the price of the token at the time of the initial release are very dependent on market conditions, which are difficult to predict more than twelve months ahead; however if the discount rate formula is used in SAFT, it might provide the founders with more flexibility when defining a token price at the NTL.
Founders often use SAFTs during the fundraising stage called the ‘seed’ round. This stage of fundraising usually takes place between a ‘pre-seed’ round, which is structured by signing a SAFE + token warrant, and the ‘treasury’ round, which is structured via a Private Token Sale or Public Token distribution campaigns (when the Treasury is controlled by a DAO).
Holding a token pre-sale via a SAFT helps founders accumulate the financial resources for future public token distribution campaigns, which will later take place to build a community of tokenholders and usually requires significant marketing budgets.
Watch our Head of Web3 Legal, Nestor Dubneych, explain the SAFT’s role in a seed round of fundraising and how SAFTs work:
As both documents are used for fundraising before the tokens are issued they are often confused as being the same document with a different name, or people simply aren’t sure which document is best to choose. So, how are they different?
SAFTs are used to organize the pre-sale of tokens. In other words: investors pay you now and receive the tokens later. On the other hand, token warrants are used to give investors the right to purchase tokens in the future., Put simply: investors pay you now to purchase “the right to buy tokens” in the future.
Consequently, investors signing SAFTs will not need to make any additional payments later. This is different from token warrants, where investors buy tokens in the future at a predetermined price or with a predetermined discounted price.
The SAFT always mentions a fixed price for the token. Without this clause, the “pre-sale” of the token is impossible. On the other hand, the token warrant can indicate either the price of the token or its discounted rate. The reason being is that the Token Warrant does not facilitate the pre-sale of tokens, but rather a sale of a token purchase right, which is the investor's right to buy tokens in the future. Therefore, the latter offers much more flexibility for the token pricing.
The conversion of a SAFT into tokens takes place in one step, as the company that signed the SAFT (at the time of issuing tokens) converts the SAFT into tokens and releases the tokens to investors,
The conversion of the token warrant takes place in several stages:
Typically at a pre-seed stage, you would sign token warrants or token side letters and investors expect to see much more detail on your tokenomics and the plan for the Web3 project’s development. SAFTs are signed at more mature stages of Web3 project development, so usually, after a pre-seed stage.
Therefore, you can expect your investors to raise the following questions:
To elaborate on the last question from the investor due diligence checklist, it is important to remember that the SAFT is signed by the company that will also be responsible for token minting protocol launch and, as a result, the company will be obliged to ensure that all terms of the SAFT have been correctly incorporated into the token minting protocol so that the SAFT conversion will take place in a proper manner. Because of these factors, the company in question must be registered in a jurisdiction where:
As there are only a handful of legal regimes that satisfy both criteria, namely Switzerland, Liechtenstein, the Cayman Islands, the BVI, and a few others, the company responsible for releasing and/or distributing tokens is sometimes also called the Token SPV. It serves a single purpose and is registered just to release and distribute tokens. Hence its title, the Special Purpose Vehicle.
To structure a SAFT for fundraising, a founder ideally needs a legal professional who understands how to structure these kinds of deals and can manage all the legal works in the process.
This professional needs to:
This is a general overview and some steps might vary in accordance with the project's details, but this should give an estimate on what professional background and resources are needed.
At Legal Nodes, we help Web3 founders to legally structure fundraising effectively via a single legal platform. That means there's no need for founders or in-house counsel to find lawyers in each jurisdiction that a company operates. Instead, our Virtual Legal Officers (VLOs) source and manage all the different legal specialists. 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. 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.
To get help with structuring a fundraising process and to learn more about how our VLOs could help you, request a demo with our team. We'll be glad to chat with you.
In the previous section, we determined why a company that signs a SAFT is also called a Token SPV, as well as where those Token SPVs are usually registered. At the same time, the SAFT investors are often NOT based in the same jurisdiction as the Token SPV.
Therefore, it is also important for the founders to analyze what additional authorizations or permissions they need to obtain in the jurisdictions of their investors’ domicile. For example, when talking about U.S. investors, it is important to know the exact regulatory compliance procedures found in the U.S. securities legislation that need to be taken by the Token SPV, which could be incorporated in Switzerland or the BVI, for example. In addition to this, these compliance procedures often also require verification of the investors’ “accredited” status before the investor can even consider entering into the SAFT.
Lastly, the founders need to take care of all financial compliance matters for their SAFT round, namely:
The second point is especially relevant for cryptocurrency investments, which are very common in SAFT rounds.
Despite its name, a SAFT is quite a complex legal document. It is much more complex than a Token Side Letter, for example. Our template has been designed to be as user-friendly as possible. Here are some additional notes to remember when working with any SAFT template:
Finally, since the template of our SAFT is jurisdiction- and protocol-agnostic, it does not consider the specifics of all legal systems and blockchain networks. Our team here at Legal Nodes would be happy to help you customize your SAFT template to make sure it meets your fundraising needs in the best way possible.
Disclaimer: the information in this guide is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice. Mentioning any of the assets in this article is not an endorsement to purchase them.
