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SAFTs - How Web3 startups raise money through Token Pre-Sale

Ever wondered how Web3 companies raise money through token sales when the network isn’t even ready? They raise it through SAFTs - Simple Agreement for Future Tokens. Let’s do a breakdown of why we need SAFTs and how they work 👇🧵

Whether a side chain, an L1 or an ERC-20 token, most token projects raise funds even before they’ve written a line of code. They would generally have only a whitepaper in hand. This is called a token pre-sale. Before SAFTs, companies used to run direct token sales. i.e. they would sell the right to non functional tokens beforehand. They used to raise largely from unaccredited, retail investors - which was not ideal as most did not understand the risks associated.

It was also very ad-hoc and non standardised. Some companies simply recorded each sale and promised to deliver a token when the network is built and functional. Others, immediately upon the execution of the sale, created and issued pre-functional tokens - ones that could not yet function as intended on the network beyond the limited ability to be issued and traded on a secondary market exchange.

The company would then use the funds on developer salaries, office rent, utility bills, and more to build the network. However, the companies weren’t obligated to its investors to build it out. They could abandon it at any point with little legal recourse for the investors. It wasn’t just about investor protection, though. The Direct token sales were structured in such a way, that the utility tokens became unregisterd securities being sold. This brought a lot of governance and tax overhead to each project, forcing them to incorporate in tax havens.

In 2017, @protocollabs, Cooley, @AngelList, and @CoinList came together to start the SAFT project. After extensive research, they created the SAFT document modelled after the SAFE document created by Ycombinator. SAFT effectively acted as a futures contract for the tokens that were to be created. This made the SAFT itself a security, and made the utility tokens a non security. Taxes become a lot simpler, as both the company and the investor have to pay lesser, and they can offset losses.

What does a typical SAFT contain? Let’s start with defining events. The SAFT describes the Network Launch as the instant when the project actually goes live. It states that the company will hand over the tokens to the investor as soon as the network is live.

Upon dissolution, i.e. liquidation, the SAFT stipulates that the company attempt to pay back the principal amount to all investors through cash in hand, and a sale of assets. If there’s not enough to be distributed, whatever exists is distributed pro rata amongst investors. Liquidations are generally an acquisition before the SAFT is converted, or a shut down. This distribution has to be done prior to the company actually being dissolved. The SAFT is terminated only when either a network launch, or a liquidation event occurs.

The standard SAFTs also contain MFN amendment provisions i.e. if the company issues any SAFTs to further investors before this SAFT is terminated, the company has to notify existing investors and provide all necessary and relevant documents. The MFN states that if the investor believes the new SAFT gives the new investor rights / terms which are better than theirs, they can ask the company to amend the original SAFT to be at par with the new one. Subsequent SAFT count only those issued to investors. They exclude tokens issued for employees, tokens issued to vendors / partners, and tokens issued for research, collaboration, licensing, development, and other such use cases.

The Procedure for Purchase Rights in the SAFT define how the payment has to be made by the Investor for e.g. in a single tranch, in ETH / BTC / USD etc. It also defines how the investor shares wallet details and what wallets are acceptable. Custodial wallets are not accepted.

Beyond all the standard terms, there are token pricing terms. This can be in the form of a fixed price per token e.g. $1 per token, or a discount on the price of the token at the time of the public sale e.g. 15% discount (One can buy $1 worth of tokens for $0.85).

Most SAFTs also have a delivery schedule for the company which defines timelines for the project completion and token delivery. Another term is the vesting schedule - These define how tokens are made liquid for investors to sell over time.

SAFTs are a very simple way to raise funds for projects through a promise of future tokens. They do have their limitations though. a. SAFTs are not a recognised security by the SEC b. It works only for projects without a live network. c. It works in a select few countries.

If you’d like to learn more about SAFTs, you can check out the SAFT project website at saftproject.com

Here are a couple of examples of SAFTs to check out : SAFT Example 1 SAFT Example 2

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