Instruments

The prevailing structure at early stage is a standard equity instrument, typically a simple agreement for future equity, paired with a token warrant or token side letter that entitles the investor to a share of any tokens the project later issues, usually in proportion to its equity. The pairing separates the equity claim, which is well understood, from the token claim, whose legal treatment is still developing. A warrant fixes price and exercise mechanics; a side letter leaves more to the issuer’s discretion.

A simple agreement for future tokens is a contract to deliver tokens once a network launches, usually from a dedicated token-issuing entity in a jurisdiction chosen for that purpose. It carries no equity. Its treatment under securities law depends on the facts, and the instrument has become less common at seed stage as the equity-plus-warrant structure has matured, though it remains used for later token rounds.

Where a token already exists, an allocation is a purchase of locked tokens under a token purchase agreement with a vesting schedule. The holder owns the tokens subject to the lock, not a promise of them. Diligence shifts from the entity to the token: its function, distribution, unlock schedule and the market it trades in.

Conversion or exercise mechanics; pro-rata and information rights; vesting and lock-up; transfer restrictions; what happens if no token is ever issued; governing law and the entity the investor actually faces. These terms determine whether an attractive project is an attractive investment, and they are reviewed by counsel before any commitment.