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:
- SAFTs are most often used at Seed rounds of fundraising and signed six to 12 months before the token launch.
- To use a SAFT, founders need to have tokenomics finalized as a SAFT should specify; the total amount of tokens, the number of tokens allocated to the investor, and the exact token price.
- Before signing a SAFT with investors, founders need to register a Token SPV (Special Purpose Vehicle), which is a dedicated legal entity that will be responsible for releasing/launching tokens, and will make sure the token issuance complies with all the regulations that may apply.
- SAFTs are different from token warrants or token side letters, which are signed together with a SAFE (a simple agreement for future equity) and might be more suitable for earlier fundraising rounds (like a pre-seed round).
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.
What is a simple agreement for future tokens (SAFT)?
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:
- select a blockchain network where the tokens will be issued and a technical standard for the token itself will be determined;
- choose the exact date of the token release or a deadline for it;
- determine the price of the token and the discount rate for SAFT investors; and
- allocate a part of the token pool that the founders will sell during the pre-sale, via the SAFTs.
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.
When is the SAFT usually signed?
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.
Which fundraising stage is usually structured with a SAFT?
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:
What is needed to sign the SAFT?
To determine whether SAFTs will work for a specific project's fundraising, the following questions must yield positive answers:
- Do investors only expect to receive tokens and not shares for their investment? If investors are interested in both tokens and shares, founders should consider a SAFTE (a simple agreement for future tokens and equity) instead of a SAFT;
- Is the company signatory to the SAFTs registered? The company issuing SAFTs will also be responsible for token minting protocol release and, as a result, indirectly responsible for the SAFT’s conversion into tokens;
- Is your tokenomics finalized? The SAFT is a document that requires many of the tokenomic details (see below) to be in place. Without a finalized tokenomics plan that includes a strategy for issuing and distributing tokens, preparing SAFTs will be very difficult. Instead, consider using a SAFE + token warrant/token side letter if the tokenomics of the project aren't finalized yet.
- Have the tokens not been issued? If you have already issued tokens, consider a token sale agreement instead of the SAFT.
If all the answers to the questions above are a resounding “yes”, then a SAFT can be considered as a suitable investment instrument to organize Web3 fundraising.
If some of the answers to the questions above are “no”, then it might be best to consider the graph below to help determine the best alternative fundraising instrument given your unique circumstances.
What are the differences between a SAFT and a token warrant?
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?
Pre-sale of tokens vs the right to purchase tokens in the future
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.
Fixed price vs a discounted rate
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 event is different with a SAFT vs a token warrant
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:
- After the registration of a Token SPV, it immediately becomes responsible for selling the tokens to investors at a predetermined price or discounted price. This is structured by assigning a token warrant from the DevLab to the SPV Token;
- Then, at the moment of the NTL, the token warrant is converted into a right for the investors to buy a certain portion of the tokens from the SPV Token at a predetermined price or discounted price; and
- Only after investors holding the Token Purchase Rights under the token warrants have paid for their tokens can the Token SPV finally release tokens to them.
What does the investors’ due diligence entail before signing any SAFTs?
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:
- In which blockchain network will the tokens be issued? What will be the technical standard used for the tokens? These questions are important since some editions of the SAFT may require you to put the address of the blockchain of your investors so that they do not have any technical difficulties with receiving tokens. Therefore, it is important to clarify all the technical points as early as possible.
- What information security measures have been adopted or are planned for the token protocol and the token treasury in order to eliminate the risks of token loss by investors and the team?
- What is the price of the token at the pre-sale stage when SAFTs are signed? What number of tokens will the investor receive at the time of conversion of the SAFT into tokens? What does the token cap table look like: what is the total capitalization / token hard cap; and what token pools are there?
- When will the Network & Token Launch (NTL) take place, and, accordingly, when will the SAFTs be converted into tokens?
- What restrictions are put on investors' tokens after the SAFTs’ conversion? When will the tokens become liquid? One of the most common restrictions is a lock-up, which insures the project against a situation when investors decide to sell all tokens at the time of receipt, which will deflate the token’s price.
- In which jurisdiction is the company-signatory to the SAFT (responsible for its conversion) registered? Investors want to know what regulations might apply to the future token and whether all compliance measures are in place.
💡 Worth checking: Investor Due Diligence Checklist for Web3 Founders
Which company is responsible for signing the SAFT?
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:
- the legislation allows the token release (or, in other words, the company is token-friendly); and
- there are defined rules for taxation of token-sale transactions.
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.
Who can help with preparing a SAFT for fundraising?
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:
- know the best countries for token issuance and help the founder choose the best jurisdiction for the Token SPV
- find the best local lawyers in the chosen jurisdiction where the company will be registered. These lawyers will help register the company and give all the necessary legal opinions on the company's token
- analyze all the regulations that might apply to the token issuance on both the company’s side and the investors’ side and make sure all the compliance measures like KYC (know your customer) and AML (anti-money laundering) are in place
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.
What are the regulatory requirements for signing SAFTs?
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:
- verification (Know Your Customer) of investors who sign the SAFTs and make transactions to execute them; and
- verification of the source of the invested funds (Know Your Transaction & Anti-money Laundering checks).
The second point is especially relevant for cryptocurrency investments, which are very common in SAFT rounds.
How to use the Legal Nodes SAFT template
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:
- Keep in mind that it is a fundraising instrument for Web3 projects that have finalized their tokenomics. This means that you should already have chosen a network and a protocol, as well as have an idea as to when you will be launching your project. Those are the details that you will need to put in the document. If you do not have them yet, consider another document instead;
- Remember that SAFT formalizes a pre-sale of tokens, which means that your investors pay you now and receive their tokens later. You can choose a fiat or a cryptocurrency to receive the investment and also put a deadline on the payment to make sure you get the needed funds in time;
- Do not forget that tokens need to have a lock-up, as otherwise you put your project at risk of price deflation. The most common way to address this is to have a 1-year lock-up, followed by monthly vesting over the next year;
- Pay special attention to who your investors are. Not only do they need to have a special jurisdiction-specific status of accredited or qualified investors, but they also need to provide you proof of that. You will then need to verify their special status to make sure that you do not get a fine (or worse);
- Do not hesitate to put your investors through a rigorous AML/KYC process, especially those that pay in cryptocurrency. Make sure you verify the source of their funds and be certain that they are not paying with laundered money.
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.