Token Warrants, SAFEs, and SAFTs: A founder’s guide to Web3 fundraising instruments

DAO SPV

— 7 min read
Token Warrants, SAFEs, and SAFTs: A founder’s guide to Web3 fundraising instruments
Digital raybans: helping founders to flip the investment script

Why web3 needs its own capital formation toolkit

If you’re building in Web3, you’ve probably realized quickly that raising capital is a little different from raising money for a Web2 startup. Traditional venture financing is built around equity: founders sell shares in a company, investors write a check, and everyone hopes for an exit event (IPO, acquisition).

But Web3 companies often build networks, not just corporations. They issue tokens that represent governance rights, access rights, or economic participation in a protocol. This duality -  legal entity on one hand, token ecosystem on the other - creates unique challenges for fundraising.

Enter the hybrid instruments: Token Warrants, SAFEs, and SAFTs. These tools have become a standard part of fundraising in crypto, allowing investors to back projects before tokens exist, while giving founders breathing room to actually build.

This article unpacks each instrument, shows how they fit into the Web3 capital stack, and highlights the legal and operational traps you’ll want to avoid.

1. SAFEs: The Starting Point

What is a SAFE?

The Simple Agreement for Future Equity (SAFE) was created by Y Combinator in 2013 as a founder-friendly alternative to convertible notes. Instead of lending money that later converts into equity, a SAFE is simply an agreement that investors will receive shares in a future financing round, usually at a discount or with a valuation cap.

Key features:

  • No interest, no maturity date (unlike convertible notes).
  • Conversion into equity triggered by a priced equity round.
  • Often includes terms like valuation cap and discount rate.

How SAFEs Translate to Web3

In the Web3 context, SAFEs are often used in early rounds, before a token even exists. At that stage, the startup is still a Delaware C-corp (or BVI/Cayman entity) building software. A SAFE gives early investors equity exposure, while delaying the complexity of token issuance.

Founders sometimes use “SAFE + Token Side Letter” — investors get both equity via the SAFE and a promise of future tokens (often formalized in a warrant or SAFT later).

Pros of SAFEs in Web3

  • Speed and simplicity: easy to execute, standard templates exist.
  • No immediate valuation pressure: you don’t have to price the round now.
  • Familiar to VCs: especially those straddling Web2 and Web3.
  • Entity choice matters: SAFEs assume equity in a corporation; foundations may complicate conversion. This often leads founders to set up foundations and a separate entity for investment.
  • Token promises create tension: if investors expect tokens but only get equity, disputes can arise.
  • Jurisdictions vary: issuing SAFEs from Cayman or BVI entities can be different to those issued from a U.S. Delaware C-corp.

SAFE checklist

Before using a SAFE, check:

  • Incorporation: You’ve got a corporate entity (C-Corp, limited company, or LLC) ready to issue equity.
  • Cap table: You understand how SAFE conversion will dilute founders and early investors.
  • Valuation cap / discount: Ensure this is negotiated with investors and documented.
  • Token side letter? Decide if you need to offer token rights separately (common in Web3).
  • Jurisdiction check: U.S. startups default to Y Combinator-style SAFE; outside U.S., local law compliance required.
  • Board/consent process: Internal approvals to issue SAFEs.

Pro tip: SAFEs are fast and founder-friendly, but don’t forget token rights—otherwise early investors may demand a side letter later.

2. SAFTs: Future Tokens Without Equity

What is a SAFT?

The Simple Agreement for Future Tokens (SAFT) emerged around 2017, when projects were experimenting with ICOs but needed a “cleaner” way to raise funds pre-token launch. The SAFT is a contractual agreement where investors fund the project today, and in exchange, receive tokens once they are launched.

It borrows from the SAFE structure, but instead of equity, the payout is future tokens.

How SAFTs Work

  • Investor provides cash today.
  • Tokens are delivered in the future when the network launches.
  • Often restricted to accredited investors to avoid U.S. securities law violations.
  • Typically includes lockups/vesting to prevent immediate token dumping.

Why SAFTs Took Off

They allowed projects to:

  • Raise capital pre-token launch without conducting a public ICO.
  • Align investors with network success rather than company equity.
  • Segregate risk — investors don’t get shares in the company, only exposure to tokens.

Challenges With SAFTs

  • Regulatory uncertainty: In the USA, SEC has suggested that tokens sold via SAFT may still be securities, even after delivery; other juridictions may have similar rules. 
  • Jurisdictional limits: Many U.S. investors are excluded, forcing projects offshore.
  • Operational risk: If the token never launches, SAFT investors may be left with little recourse.

Practical Use in Web3

Today, SAFTs are still used but often in combination with equity. Many founders structure fundraising as:

  • Equity (SAFE/Convertible Note) for company value.
  • SAFT for token exposure.

This creates dual exposure for investors and reduces founder liability.

SAFT checklist

Before using a SAFT, check:

  • Token design: Tokenomics are modeled, vesting schedule drafted, and smart contracts underway. Make sure you don’t ruin a good project by getting this stuff wrong.
  • Token SPV? Consider whether tokens will be issued by the opco or a separate foundation/SPV.
  • Regulatory filter: Legal review under U.S. Howey Test or EU MiCA to avoid selling unregistered securities.
  • Trigger events: Define what counts as “token launch” (mainnet, TGE, exchange listing).
  • Vesting / lock-ups: To align investor incentives and prevent immediate sell-off.
  • Investor profile: Only raise from accredited investors in U.S. (or compliant investors elsewhere).

Pro tip: SAFTs work when your token path is clear. If still early, consider SAFE + warrant instead.

3. Token Warrants: Bridging Equity and Tokens

What is a Token Warrant?

A warrant in traditional finance is an option to purchase stock at a set price in the future. In Web3, Token Warrants adapt this idea: they give the holder the right to receive tokens once issued, often linked to an equity investment.

So, if a VC invests in your Delaware C-corp via a SAFE or equity round, they might also receive a Token Warrant, ensuring they get tokens when the project issues them.

Key Features

  • Conditionality — Tokens are delivered only if/when they exist.
  • Link to equity — Typically bundled with equity financings.
  • Flexible terms — Can include vesting, lockups, transfer restrictions.

Why Token Warrants Matter

They solve a fundamental mismatch:

  • VCs want exposure to tokens, which may be the primary value driver.
  • Founders need capital for the company to build the protocol.
  • Legal entities don’t issue tokens (protocols do), so a warrant bridges the gap.

Operational Flow

  1. VC invests $X into the company.
  2. Company issues equity/SAFE + token warrant.
  3. Once tokens are minted, warrant holders exercise rights and receive an allocation.

Pros

  • Aligns investor expectations with token upside.
  • Keeps fundraising compliant — equity and tokens are separated but connected.
  • Flexible enough to integrate lockups and vesting schedules.

Cons

  • Legal complexity — Token warrants require careful drafting to avoid securities pitfalls.
  • Accounting headaches — Warrants may create liabilities on the company’s books.
  • Regulatory exposure — Regulators may still treat the warrant or delivered tokens as securities.

Token warrant checklist

Before using a Token Warrant, check:

  • Link to equity: Decide whether warrant allocation is pro-rata to equity or discretionary.
  • Exercisability: Clarify conditions — automatic on TGE, or optional exercise?
  • Token pool: Ensure sufficient tokens allocated in the cap table/tokenomics model.
  • Regulatory check: Token warrant = derivative → may trigger securities treatment. Get legal review.
  • Vesting: Match warrant exercise with equity vesting (to prevent misaligned incentives).
  • Investor disclosure: Be transparent about risks—tokens may never launch.
  • Jurisdiction fit: Warrants are common in U.S. VC deals; some offshore structures may prefer side letters.

Pro tip: Warrants are the most flexible bridge between equity and tokens, but can complicate governance and token cap tables if not modeled early.

4. How These Instruments Fit Together in Web3 Fundraising

Founders rarely use just one instrument. Instead, combinations are common:

Stage 1: Early Fundraising

  • SAFE (equity exposure).
  • Sometimes with a token side letter (a vague promise of tokens later).

Stage 2: Pre-Token Raise

  • SAFT used to raise capital specifically for token launch.
  • Equity investors sometimes retroactively get token rights.

Stage 3: Institutional Rounds

  • Equity (preferred stock or SAFE) + Token Warrants issued in parallel.
  • Investors now get both equity upside and token allocation.

This layered approach allows founders to sequence fundraising while managing legal and regulatory risk.

No discussion of fundraising in Web3 is complete without acknowledging the minefield of regulation.

5.1 Securities Law

  • U.S. context: The SEC’s Howey Test looms large. If tokens are sold as investment contracts, they are securities. SAFTs, warrants, and even token distributions may fall under this.
  • Other jurisdictions: Some (e.g., Switzerland, Singapore) provide clearer token frameworks, distinguishing utility from security tokens.

5.2 Tax

  • Token warrants and SAFTs may have tax implications on issuance, exercise, or token delivery.
  • Token distributions to employees or investors may trigger taxable events even before liquidity.

5.3 Corporate Structure

  • Equity and token rights often sit in different legal entities: a Delaware company for ops, and a Cayman Foundation for token issuance.
  • Instruments must be drafted to align across entities, avoiding mismatches between who promises what.

5.4 Investor Protections

  • Lockups, vesting, and transfer restrictions are critical to prevent token dumping and ensure alignment.
  • Disclosures around regulatory risk should be explicit to avoid disputes later.

6. Operational Considerations for Founders

Beyond the legal fine print, there are practical issues founders face when deploying SAFEs, SAFTs, or token warrants:

  1. Cap Table Management Mixing equity and token promises creates complexity. Use proper software or legal counsel to track investor rights.
  2. Communication with Investors Be explicit about whether investors are getting equity, tokens, or both. Ambiguity can create disputes.
  3. Entity Structuring Often requires multiple entities:
    • OpCo one or more (Delaware C-corp or BVI company) for team, holding IP, and receiving investment.
    • Foundation (Cayman, Swiss, or Panamanian) for token governance.
    • Warrants and SAFTs may bridge between them.
  4. Timing of Token Issuance Warrants and SAFTs create future obligations. Ensure your tokenomics allocates sufficient tokens for investors.
  5. Investor Mix Crypto-native investors may prefer token exposure (SAFT/warrants). Traditional VCs may insist on equity. Structuring both keeps the round inclusive.

7. The Future of Web3 Fundraising Instruments

The landscape is still evolving. Trends to watch:

  • Token warrants becoming standard in institutional rounds, replacing informal side letters.
  • Hybrid rounds (equity + tokens) as the default fundraising model.
  • Regulatory convergence — more jurisdictions providing clear token classifications, reducing reliance on offshore structuring.
  • Secondary markets for SAFTs and warrants — liquidity for early investors, but more regulatory scrutiny.

Conclusion

Raising capital in Web3 requires navigating a dual world: the world of traditional corporate equity and the world of tokens. Instruments like SAFEs, SAFTs, and Token Warrants exist precisely to bridge this gap.

  • SAFEs are simple, equity-focused, and familiar — great for early rounds.
  • SAFTs let investors bet on tokens before launch — but come with legal risk.
  • Token Warrants elegantly connect equity investments to token upside — increasingly the preferred approach.

As a founder, your job isn’t to become a securities lawyer. But you do need to understand the mechanics, trade-offs, and risks of each tool, so you can raise capital while keeping your project compliant and sustainable.

At the end of the day, these are just tools. The real work is building a protocol and community worth backing. But with the right structuring, you can raise funds without painting yourself into a legal or operational corner.

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