This guide provides a comprehensive overview for understanding and reviewing a Simple Agreement for Future Tokens (SAFT). It is designed for both investors and issuing companies to navigate the complexities of SAFTs effectively. Key aspects covered in this guide include:
Simple Agreement for Future Tokens (SAFT) is a legal instrument designed to facilitate the investment process in a crypto project before the tokens are fully developed and functional. This agreement operates under the premise that the tokens will be issued to investors at a later stage, typically when the project reaches a certain level of maturity or a specific milestone.
Key Advantage of SAFTs including:
The SAFT is an adaptation of the SAFE (Simple Agreement for Future Equity) protocol, originally invented by Y Combinator (YC). The SAFE model, crafted for conventional startups, was re-envisioned into the SAFT. Alongside the SAFT, the crypto sector often employs another popular financing method, the SAFE+Token Warrant. This approach merges the traditional SAFE agreement with a warrant for future token purchases under certain conditions. Both SAFT and SAFE+Token Warrant represent the most mainstream methods of financing in the realm of crypto enterprises
The first crucial step is to ensure that the concept of the token is precisely defined.
👉 Good Practices (Pro-SAFT investors): **“*Token(s)*” means** any network cryptocurrency, decentralized application tokens, protocol tokens, blockchain-based assets or other cryptofinance coins, tokens or similar digital assets created and issued in connection with the Project that is a governance token of the Project, provided that the Tokens will not include any Tokens issued or used solely for development, testing or experimental purposes. **** ***Pro Rata Rights*.** The Investor shall have the right to purchase its pro rata share of any Tokens sold by the Company (or other tokens sold by Company) at any time after the date hereof and on or before the Token Delivery Date (the “*Pro Rata Right*”). Pro rata share for purposes of this Pro Rata Right is the ratio of (x) the number of Tokens issued or issuable to the Investor pursuant to the SAFT to (y) the Total Token Supply as of immediately before the occurrence of such Token sale or the Token Delivery Date, as applicable. The Pro Rata Right described above shall automatically terminate upon the Token Delivery Date.
A key consideration is to accurately understand and differentiate between the token issuer (which could be a foundation, trust, or DAO, etc.) and the signatory of the SAFT agreement. This distinction is crucial because, in the early stages of a crypto project, the entity signing the SAFT might not be the same entity that will ultimately issue the tokens.
👉 Good Practice (Pro-SAFT investors): **“*Token Issuer*” means the Company; the Company’s present and future parents, subsidiaries and Affiliates and their respective successors and assigns; the present and future Key Team Members; and any foundation or similar entity that issues, distributes, creates, generates, mints or produces Tokens and is related to the Company, or its present or future parents or subsidiaries with respect to software code developed by the Company, or by any of the Company’s present and future parents, subsidiaries and Affiliates.**
The token launch deadline in a Simple Agreement for Future Tokens (SAFT) refers to the specified date by which the project's network must be launched and tokens are to be issued to the purchasers. This deadline is significant as it protects the purchaser by providing a clear timeframe for the project's delivery. Without a specified deadline, the agreement may resemble an indefinite, interest-free loan from the purchaser to the company, which can be risky for investors. The consequences of not meeting the deadline vary, including potential refunds or write-offs, as seen in cases like the Telegram token sale.
👉 **Good Practice (Pro-SAFT investors):**This Agreement shall be terminated:
- by mutual written consent of the Parties;
- by the Buyer (without relieving the Vendor of any obligations arising from a prior breach of or non-compliance with this Agreement) if the Token Launch does not occur within [] years following the Effective Date, or a longer period as agreed by the Parties in writing (the “Deadline”);
- by the Vendor pursuant to this Agreement.
For the avoidance of doubt, if this Agreement is terminated, the Vendor shall immediately refund the Buyer an amount equivalent to the Buyer’s Purchase Consideration minus necessary expenses within seven (7) days.
Refund in a Simple Agreement for Future Tokens (SAFT) are critical clauses that outline the conditions under which investors can receive their funds back. These conditions typically include scenarios such as the network not launching by a specified deadline, dissolution events affecting the company, or cancellation rights within the agreement.
👉 **Good Practice (Pro-SAFT Company, if you have to include a refund clause):** **Refund of Purchase Amount.** Upon 30 days after a Dissolution Event, the Company will, after the payment of all other creditors, refund to the Purchaser an amount equal to One Hundred Percent (100%) of the Purchase Amount, net of applicable taxes and expenses associated with the SAFT Offering (such amount, the “**Returned Purchase Amount**”) to the extent funds are lawfully available. For the avoidance of doubt, funds from the business operations of the Company other than funds received in this SAFT Offering shall not be available for payment of Returned Purchase Amount. The Purchaser acknowledges that there may be circumstances in which the Company will not be able to refund all or a portion of the Purchase Amount to Purchaser.
The amount of tokens define how many tokens the investor is entitled to receive. You must ensure that the SAFT clearly outlines either a specific number of tokens to be allocated to the purchaser or a detailed mechanism for calculating this number.
The token price provision in a SAFT determines the cost per token that the investor will pay. This can be set as a fixed price or a variable price. A fixed price offers certainty, but may not account for market fluctuations. A variable price, meanwhile, adjusts according to certain future events or market conditions, potentially providing more fairness in rapidly changing markets.
Cancellation provisions often outline the conditions under which either party can terminate the agreement. This may include failure to launch the network by a deadline, failure to raise a specified amount of funds, or other predetermined events. Understanding these provisions is crucial as they dictate the circumstances under which the SAFT can be nullified and what happens to the funds already invested.
Resale provisions in a SAFT refer to the clauses that restrict or regulate the ability of purchasers to resell their tokens or assign their rights under the SAFT in the secondary market, especially before the network launch. These provisions are essential because they directly impact the liquidity of the investment and compliance with regulatory frameworks. Resale restrictions are significant for maintaining control over the token distribution and ensuring regulatory compliance, such as under Reg D or Reg S in the United States. For the company, it prevents premature circulation of tokens in the market, which can affect token economics and market stability. For investors, these restrictions impact their ability to liquidate their investment before the network is operational.
Lockup and delivery schedule dictate the timeframe during which investors are restricted from selling their tokens after the network launch or public listing. This period often ranges from 12 to 48 months and is crucial for stabilizing the market post-launch. Additionally, these provisions detail when and how tokens are delivered to investors.
👉 **Good Practice (Pro-Company):**Token Unlocking Schedule: during the period commencing from the expiration of [<>] months following the Token Launch until the expiration of [<>] months following the Token Launch, the total number of the Buyer Tokens will unlock on a [] basis.
The foregoing schedule may be modified by the Vendor at its sole discretion in connection with any listing, partnership, co-operation or participation in connection with a major digital asset exchange.
For the avoidance of doubt, unless unlocked, the Buyer shall not engage in and/or cause any transactions that will or may result in the transfer of, use and/or disposal of, and/or cause the sale and/or disposal of any part of the Buyer Tokens that has not been unlocked.
The Most Favored Nation (MFN) clause in SAFTs is designed to ensure that an investor receives no less favorable terms than any other investor in subsequent financing rounds. If the company offers more advantageous terms in later-issued SAFTs to new investors, the MFN clause allows the original investor to amend their SAFT to match these more favorable terms. An MFN clause is a significant protection for investors. It ensures that early investors are not disadvantaged compared to later investors, which is particularly important in the dynamic and rapidly evolving landscape of token financing.
👉 **Good Practice (Pro-Investor):** **“MFN” Amendment Provision.** The Vendor may offer and sell SAFTs or similar outstanding warrants to purchase Tokens to any Person, or grant such warrants or Tokens to management team member of the Vendor and/or the Project (including any outside advisors, consultants, counsels and officers) in multiple rounds at different times and on different terms (“Subsequent Offerings”). If the Vendor enters into any arrangement regarding Subsequent Offerings, the Vendor will promptly provide the Buyer with written notice thereof, together with any information related to such Subsequent Offerings as may be reasonably requested by the Buyer. In the event the Buyer determines that the terms and/or conditions granted to any Person under the Subsequent Offerings are preferable to the terms and/or conditions of this Agreement, the Buyer will notify the Vendor in writing. Promptly after receipt of such written notice from the Buyer, the Vendor agrees to amend and restate this Agreement to be identical to the instrument(s) evidencing the Subsequent Offerings.