(Image credit: bitcoinmagazine.com)
(I originally published this article on Medium)
I created a special fundraising document (Github, Google Docs) to accommodate both traditional investors who prefer equity financing (e.g. including equity pre-sale, such as YC’s SAFE), and progressive crypto investors who may prefer token sales / ICOs. The result enables investors to take advantage of not only the equity appreciation and legal protection in traditional equity financing, but also the benefit of the liquidity offered by ICO / token sales (if the company offers one in the future). I already asked an attorney to review and revise this document, and I have raised money from multiple investors based on this document. However, if you notice any issue with this agreement, please let me know. I have made this agreement public on Github and Google Docs. I hope this could help other crypto startups and investors. In this article I want to summarize the highlights of my document, and compare it against YC’s SAFE, Protocol.ai’s SAFT, and Colony.io’s SAFTE. I will also explain the benefits of using this document for both investors and startups, and why I did this.
If you want to use this document, you need to replace things in [bracket] with the actual information (company name, etc.). The APPENDIX is included as a sample only. You do not need to fill anything there. This document is backward-compatible to SAFE. That means if you already raised money based on YC’s SAFE, you can still raise money using this document. In that case, your new investors will have addition rights offered by this document compared to SAFE investors. You can discuss with your previous investors to see if they want to switch to the new document, or just stick to the old SAFE agreement.
When I was raising money for Qokka, I noticed many investors can’t invest in cryptos or token sales, even though they want to participate. There are multiple obstacles: confusion from limited partners, regulations, tax issues, security requirement, and many others. It may take multiple years to overcome each of these factors. Therefore, traditional fundraising instruments could remain appealing until token sale could offer the same level of legal protection and acceptance from general investors.
I like the fundamental ideas of token sales: cut the middleman, raise money from the people, and build something for the people. It is also one of the many applications that made possible only through blockchain. However, like many conservative tech people out there who are skeptical about ICOs, I am reluctant to raise large some of money from people I don’t know, before I could launch a product and reach some milestones.
I reviewed many fundraising documents people shared on the Internet, but couldn’t find any that incorporates the good things from both equity financing and token sales. In the end, I created my own fundraising agreement, SAFTE. Our third investor (first non-individual investor) was the first to put their signature on the document. It was not long after when Bitcoin hit all time high (~$20000), and almost every crypto startups seemed to be launching their token sales (ICOs), successfully raising tens of millions of dollars.
My SAFTE document is based on:
- Y Combinator’s SAFE (Simple Agreement for Future Equity), an equity “pre-sale” agreement which is one of the most popular traditional fundraising instruments for early-stage startups.
- Protocol.ai’s SAFT (Simple Agreement for Future Tokens), a token-sale agreement that gives discount to pre-sale investors. This is a “pure crypto” agreement, which not uncommon among crypto startups, but the downside is this agreement does not offer any equity to investors.
- Colony.io’s SAFTE (Simple Agreement for Future Tokens or Equity) by Jack du Rose, an agreement that offers investors either tokens in the future, or equity in the future, whichever happens first, but not both. Additionally, investors are not offered with the flexibility to convert equity into tokens. Moreover, the agreement is incompatible with a valuation cap.
I also borrowed some languages in section 1(a) from the SAFE-t agreement by CoinAlpha, whose co-founders generously shared their fundraising documents with me. Please check out their blogs and platform if you are interested in cryptocurrency hedge fund.
Compared to YC’s SAFE, I made the following improvements:
- Investors may get one of two things, or part of both:
a) equity in the future, subject to a valuation cap or a discount rate similar to those in SAFE; the equity has a special share class, which allows conversion to tokens (detailed explanation comes later).
b) tokens in the future, based on a discounted price compared to the minimum price offered to the public.
- If there is a token sale in the future, and the investor has not received any equity, the investor may:
a) choose to receive tokens for this token sale. If the investor chooses to do so, the investor won’t receive any equity when there is an equity financing in the future. The amount invested will be immediately converted to tokens, at the lowest price offered to the public in the token sale, multiplied by a discount rate (customizable).
b) choose not to receive tokens.
- If there is an equity financing in the future, and the investor has not received any token, the investor will automatically get certain amount of equity, just like how they would in YC’s SAFE. However, the equity would be part of a special share class “SAFTE Preferred Stock”, which offers the right of conversion to tokens, if there is a token sale in the future. See (4) for details.
- If there is a token sale in the future, and the investor has already received equity, the investor may:
a) exercise the right of conversion to tokens for all or some of their equity, and receive corresponding amount of tokens, based on the following: i) first, determine the value of these equity, by the multiplying market value of Standard Preferred Stock at the time of Equity Financing (or token sale, if so desired, which may require another independent 409a valuation); ii) divide the value of these equity by the minimum price per token offered in token sale.
b) not exercising right of conversion for any equity, thus not receiving any token, and not losing any equity.
Because of (3) and (4), the equity received by investors is not longer just “paper money”. When the company decides to make a token sale, the investor may immediately liquidate some equity into tokens and cash out at the most favourable rate, when an exchange market becomes available (usually a few months after the token sale). Furthermore, because of (3), the investor may enjoy the appreciation of equity like those in YC’s SAFE, if valuation cap and discount rate are set appropriately. Additionally, the appreciation of equity carries over to “conversion to tokens”, which gives investors some incentives to hold off from “cashing out” as soon as possible, and pushing token sales further down the line, giving the company more time to refine the product and grow.
Because of (2), even the company launches a token sale before equity financing for various reasons (e.g. short on cash), the investor may still benefit by having the option to buy tokens at the most favourable rate plus a discount, using the money they already invested. Equity investors also have the option to just ignore the token sale and hold on to equity instead.
I believe this could be a more balanced fundraising approach for startups doing something related to cryptos or blockchain, but are not quite ready for token sales. I hope this helps, but if you decide to use this document, please also consult with your own lawyers. I do not assume any responsibility or consequence for using this document.