The rapid evolution of Web3 is reshaping the intersection of technology and finance, demanding innovative funding models that go beyond traditional startup financing. While early-stage Web3 projects may rely on conventional equity financing, they typically transition toward token-based fundraising as they mature. This shift reflects the broader vision of Web3—where tokens serve not just as speculative assets, but as functional instruments enabling governance, utility, access, and decentralized ownership.
This comprehensive guide explores the full lifecycle of Web3 project financing, from initial concept to public token distribution and decentralized governance. We’ll break down each funding stage, examine key legal frameworks, and help founders and investors choose the right financing instruments based on project maturity, jurisdiction, and business model.
Understanding the Web3 Funding Lifecycle
Web3 fundraising unfolds in distinct phases, each with unique investor expectations, legal entities, compliance requirements, and documentation. The journey generally progresses through five core stages:
- Angel Round
- Strategic Round
- Private Token Sale
- Public Token Distribution
- Future Token Governance via DAO
Let’s dive into each phase in detail.
Angel Round: Laying the Foundation
At the earliest stage, founders seek seed capital to build a team, validate their concept, and develop a minimum viable product (MVP). Investors at this stage typically expect both equity in the development entity and future rights to project tokens—especially if intellectual property (IP) resides within a centralized company.
Key legal actions during the angel round include:
- Registering a Development Lab (DevLab): A corporate entity (often in crypto-friendly jurisdictions like Delaware, Singapore, or the UK) that holds IP and employs core contributors.
- Issuing Convertible Instruments: Use tools like SAFE (Simple Agreement for Future Equity) or convertible notes to raise funds without setting an immediate valuation.
- Adding Token Side Letters: These supplemental agreements grant early investors the right to receive tokens when the project launches its native token.
This hybrid approach allows startups to delay complex token decisions while securing capital and aligning incentives with investors.
Strategic Round: Building Tokenomics and Ecosystem Partnerships
Once the MVP is live and product-market fit begins to emerge, the focus shifts to tokenomics design and ecosystem growth. This “strategic” round often involves blockchain foundations, major exchanges (like OKX or Binance), DeFi protocols, or venture arms with deep industry connections.
Investors here aren’t just providing capital—they’re offering liquidity support, exchange listings, wallet integrations, and marketing reach.
Legal priorities at this stage:
- Establishing a Token Issuance Entity (Token Co or Token SPV): A separate legal vehicle registered in a jurisdiction favorable to digital assets (e.g., Cayman Islands, Switzerland) responsible for token creation and distribution.
- Creating a Token Cap Table: Similar to equity cap tables, this outlines token allocations across teams, investors, treasury, and community incentives.
- Conducting Legal Analysis: Assess whether the token qualifies as a security under relevant regulations (e.g., U.S. Howey Test).
- Using SAFT Agreements: The Simple Agreement for Future Tokens becomes the standard instrument here, especially for pre-launch token sales.
If investors want exposure to both equity and tokens, projects may opt for SAFTE (Simple Agreement for Future Tokens or Equity), which offers conversion into either asset class depending on project milestones.
Private Token Sale: Transitioning from Promise to Reality
By now, the token has been minted or is ready for issuance. The private sale marks the transition from theoretical promises to actual asset transfers. It serves two main purposes:
- Raise capital to fund public launch activities.
- Distribute tokens under lockup agreements to prevent market manipulation.
Critical components of a successful private token sale:
- Regulatory Compliance Checks: Determine if the Token Co needs licenses such as VASP (Virtual Asset Service Provider) registration or exemptions under SEC rules like Regulation D or S.
Executing Private Token Sale Agreements (TSA): These contracts define:
- Number of tokens allocated
- Purchase price
- Vesting and lockup schedules (typically 12–36 months)
- Delivery mechanics (e.g., wallet address submission)
- Converting SAFTs to Tokens: Holders of earlier SAFT agreements receive their promised tokens upon TGE (Token Generation Event).
At this point, the project moves closer to decentralization—but still retains significant control over supply and distribution.
Public Token Distribution: Going Live to the Global Community
The goal of public distribution is to onboard a broad base of users and create organic demand. There are several popular models:
1. ICO / TGE (Initial Coin Offering / Token Generation Event)
- Direct sale via project website
- Funds collected by Token Co
- Requires strict KYC/AML procedures and regulatory clearance
2. LBP (Liquidity Bootstrapping Pool)
- Auction-style launch on platforms like Balancer
- Designed to discover fair market price and resist whale dominance
- Requires a DAO wrapper to manage pool governance
3. IDO / IEO / Launchpad
- Hosted on third-party platforms (e.g., OKX Jumpstart, Binance Launchpad)
- Platform handles user verification and compliance
- Project must provide legal opinion on token status
Each method carries different legal implications based on jurisdiction, fund flow ownership, and investor eligibility.
👉 See how leading projects leverage launchpads to maximize visibility and trust.
Future Token Governance: Transitioning Control to DAO
After public distribution, many Web3 projects aim to become truly decentralized by forming a DAO (Decentralized Autonomous Organization).
At this stage:
- Decision-making power shifts from founders to token holders.
- Treasury management, protocol upgrades, and future token emissions are governed by on-chain voting.
- Founders become participants rather than controllers—though they may retain special roles per DAO constitution.
This final phase represents the ideal end-state of many Web3 projects: self-sustaining ecosystems where value accrues directly to users and stakeholders.
Core Web3 Financing Instruments: When to Use What?
While equity financing remains relevant—especially for infrastructure-focused Web3 ventures—token financing introduces new dimensions of flexibility and alignment with decentralized principles.
Here’s a breakdown of key instruments:
Equity Financing Tools
1. SAFE (Simple Agreement for Future Equity)
Best for early-stage startups seeking fast, low-cost funding.
Core clauses:
- Investment amount
- Valuation cap or discount rate
- Trigger events (next funding round, acquisition)
- MFN (Most Favored Nation) clause
Commonly paired with token warrants or token side letters in Web3 contexts.
2. SPA + SHA (Share Purchase Agreement + Shareholders Agreement)
Used in later rounds where detailed governance and investor rights are needed.
Includes provisions on:
- Valuation
- Option pools
- Vesting schedules
- Board composition
- Exit mechanisms
Often includes “token mapping” clauses allowing equity investors to receive proportional token allocations.
Token & Hybrid Financing Tools
1. SAFT (Simple Agreement for Future Tokens)
Designed for compliant pre-token sales.
Key sections:
- Token description and utility
- Total supply and pricing
- Conversion event (usually TGE)
- Lockup and vesting terms
- Legal disclaimers (not a security)
Only suitable once tokenomics are well-defined.
2. TPA (Token Purchase Agreement)
Used when tokens are already created but not yet publicly available.
Similar structure to SPA but focused on digital asset transfer instead of shares.
3. SAFTE (Future Tokens or Equity)
Offers investors a choice: receive tokens or equity based on what happens first.
Ideal for projects uncertain about long-term capital structure.
4. Token Warrant
Gives investors the right—but not obligation—to buy tokens at a discount during TGE.
Requires payment upon exercise; commonly used alongside SAFE deals.
5. Token Side Letter
A lightweight add-on to SAFE agreements granting pro-rata token rights without additional cost.
Does not specify price or exercise date—giving founders more flexibility.
⚠️ Key difference: A side letter is supplementary; a warrant is a standalone contract with binding obligations.
6. TSA (Private Token Sale Agreement)
Standard contract for transferring already-minted tokens under lockup conditions.
Used in late private sales before public launch.
How to Choose the Right Financing Instrument?
Selecting the appropriate tool depends on three factors:
1. Project Stage
| Stage | Recommended Instruments |
|---|---|
| Early (idea + MVP) | SAFE + Token Side Letter/Warrant |
| Mid (tokenomics ready) | SAFT |
| Late (tokens issued) | TSA |
2. Jurisdiction
- U.S.-based DevLabs: Prefer SAFE + Token Warrant model to minimize securities law exposure.
- UK/Singapore/HK DevLabs: Can use Token Side Letters due to more flexible regulatory treatment of tokens.
3. Business Model Type
| Project Type | Example | Financing Strategy |
|---|---|---|
| Web2 + Utility NFTs | NFT ticketing platforms | Primarily equity-focused |
| Centralized Web3 w/ Ecosystem Tokens | Axie Infinity (AXS), Binance (BNB) | Hybrid: SAFTE + TSA |
| Decentralized Protocols w/ Governance Tokens | Uniswap (UNI), Compound (COMP) | SAFT → DAO governance |
Frequently Asked Questions (FAQ)
Q: Can a Web3 project raise funds using only tokens—no equity involved?
A: Yes. Many fully decentralized protocols issue tokens directly via grants, liquidity mining, or public sales without creating equity structures. However, this limits access to traditional VC funding and complicates legal liability management.
Q: Is SAFT still relevant after TGE?
A: No. SAFTs expire once tokens are delivered during the TGE. Post-TGE distributions should use TSA or direct airdrops governed by smart contracts.
Q: Do I need a separate legal entity for token issuance?
A: Strongly recommended. Using a dedicated Token SPV isolates regulatory risk and streamlines compliance across jurisdictions.
Q: What happens if my token is classified as a security?
A: You’ll need to comply with securities laws—register the offering or qualify for exemptions (e.g., Reg D in the U.S.). Failure can lead to fines or forced refunds.
Q: Can investors get both equity and tokens from one investment?
A: Absolutely. SAFTE and hybrid SPAs with token allocation clauses allow dual exposure—ideal for balancing short-term liquidity (via tokens) with long-term upside (via equity).
Q: How do lockup periods affect investor interest?
A: Reasonable lockups (12–24 months) build trust by showing commitment to long-term value. Excessively long locks may deter institutional investors seeking portfolio liquidity.
Final Thoughts: Plan Your Funding Roadmap Strategically
Web3 financing blends innovation with regulatory complexity. Success hinges on choosing the right instruments at each stage—from angel rounds using SAFE + side letters, to strategic rounds with SAFTs, culminating in public launches via IDO or LBP.
Founders must balance speed, compliance, investor appeal, and decentralization goals. By aligning financing tools with project maturity and ecosystem vision, teams can build sustainable models that attract capital while staying true to Web3’s decentralized ethos.
👉 Access expert templates and frameworks used by top Web3 legal teams worldwide.
As DAOs become mainstream and cross-border crypto regulation evolves, expect even greater innovation in how Web3 projects fund, govern, and grow.
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