Overview
Token warrants are an increasingly popular option for financing emerging blockchain projects wherein investors provide early-stage funding in exchange for tokens. This method of fundraising is growing in popularity as a result of poor market conditions, which are forcing many blockchain project teams to either delay or completely halt token issuance.
Although token warrants share some similarities with equity convertibles like SAFE notes, they also have a few distinct differences, which can be better understood by examining the relationships between equity convertibles, tokenomics, and how these instruments, SAFT (Simple Agreement for Future Tokens) and token warrants connect to one another.
How it works
Equity convertibles are a type of investment instrument that provides funding for a promise of future shares. They originated as debts, but have evolved into a founder-friendly option for early-stage growth. The most well-known of these instruments are SAFE notes, which were popularized by Y Combinator. Early-stage founders prefer convertible notes because they are fast and require less due diligence, and are accepted by early angel investors. Institutional investors, such as venture capital firms, do not like them because the terms of SAFE notes do not allow them to recoup their investment, leaving them with maximum risk exposure.
SAFTs are similar to SAFE notes, but they are used for future tokens instead of shares. Like SAFE notes, they do not reference a defined price per token or allocation.
Token warrants are more similar to traditional equity options and warrants. They contain more information than SAFTs and SAFEs, and provide details such as future allocation, lock-up periods, and vesting. Token warrants enable investors to provide upfront funding with more certainty about allocation because they include information such as the maximum circulation, price per token, and individual investor allocations in the agreement terms.
In the aftermath of the bear market in 2022, many blockchain projects have been delaying their token raises indefinitely and instead exploring the world of private equity. This has led them to meet more sophisticated investors who are opportunistic about the future of the industry and are making informed investment decisions. It is now common to see traditional investors adding additional rights to tokens in the form of warrants in their equity investment proposals or “term sheets”. Note that these may not include additional funding, so founders need to be prepared to raise funding on equity and provide additional token warrants at no cost.
“If you call the tune, you also have to pay the piper when he begs his due.” – Nick Cutter, Canadian author
Equity and token convertibles are investment instruments that provide funding in exchange for the promise of future shares or tokens. While these instruments can be useful for early-stage growth, it is important to note that they will eventually convert into actual shares or tokens, which means that project teams and existing stakeholders will face dilution. This can be a significant impact, and it is easy for founders to overlook the potential impact of dilution when they are focused on securing funding.
In addition to dilution, it is also important to understand who owns which tokens and the percentage of ownership. This information is not only important for founders and project managers, but also for compliance with KYC (know your customer) and AML (anti-money laundering) regulations. Without this information, organizations may not be able to comply with relevant laws and regulations, and may have difficulty managing their ownership structures effectively.
Sprout and Folium are tools that can help organizations create a single source of truth for transparency, governance, and accountability. These tools allow organizations to digitally issue, track, and record all equity and token ownership, including off-balance equity and off-chain digital assets.
Folium and Sprout provide unique methods for managing shareholders and tracking related token wallets to form ownership groups, or “cap tables,” in a world where different assets are converging. Folium helps founders by providing proof of token allocation, managing token vesting, and generating reports for compliance.
It is important for organisations to understand their position on ownership of tokens and fiat cap tables in order to make informed decisions. These tools can help organisations stay on top of their ownership structures and ensure compliance with relevant regulations. schedule a demo