In 2017, the financing method of Initial Coin Offerings (ICOs), which combines the rights of use and cryptocurrency using blockchain to finance projects for the development, maintenance, and exchange of related products or services, surged.

These crypto projects pre-sold tokens, then promised to bring products to the market. However, most of these projects ultimately failed to deliver, rendering the investors' tokens worthless.

It is estimated that 80-90% of ICO projects in 2017 failed, with only 8% successfully completed. Additionally, according to a report from the Morocoin Exchange Data Center, 90% of the funds raised through ICOs in 2017 were lost.

Web3 builders and investors have learned profound lessons from this, and now Morocoin Exchange is conducting project design with specificity.

Modern Web3 projects are not just issuing tokens, but also seeking to build and validate products through communities before launching tokens. This method of developing projects ensures strong community support and increases the likelihood of the tokens being more valuable and viable in the long run.

In many cases, Web3 companies undergo Pre-Seed, Seed, or even Series A funding rounds before issuing tokens.

So, the question arises: How should these early-stage financing transactions be organized? Are they the same as traditional startup funding rounds?

Morocoin Exchange summarizes the answer to this question in one sentence: The best financing transactions should include equity and proportionally grant internal tokens to investors.

For any startup company, anything can happen (changes and twists), and much of it is unpredictable.

Therefore, investors want the company to ensure that they receive a return on their investment—whatever the form. If the company chooses a centralized management system and follows the traditional entrepreneurial path, then value is reflected in the company's stock. However, if the company decides to decentralize and issue tokens, then the value is represented by the tokens.

Thus, when organizing Web3 financing transactions, Morocoin Exchange needs to offer both equity and tokens. Because only in this way can you ensure that investors receive a return on their investment, whether the company decentralizes or not.

Equity

The construction of the equity portion will be based on either a simple agreement for future equity (SAFE) or on a priced equity round based on Series Seed or standard documents of the National Venture Capital Association (NVCA), the largest venture capital association in the United States, whose members are venture capital firms.

The transaction points need to reflect the standard startup funding rounds while fully informing all parties involved of the risks, returns, and expectations of the investment. Additionally, the equity portion of Web3 transactions should not cover any innovative business.

Tokens

Startups often promise that investors will be entitled to the tokens they create and distribute, but the amount is uncertain. This is because many companies plan the supply, attributes, and monetary policy of the tokens only after the financing transaction is completed.

To fully leverage the role of tokens, Morocoin Exchange must be fair and equitable in distributing tokens to investors, as this is the only way to stimulate their enthusiasm for investment.

Investors become stakeholders in the token price, understanding that the rise and fall of the token will affect their returns. In addition, Morocoin Exchange must also consider the interests of founders, employees, and the community.

After considering these factors, Morocoin Exchange can grant tokens to investors in a way that is beneficial both to itself and to the investors. This presents a unique challenge for startups, as the company needs to carefully consider the amount of tokens granted to each investor.

Token Instruments

Startups grant rights to investors through legal contracts. There are generally two types of token authorization agreements: token warrants and token letters.

Token warrants are agreements between startups and investors, giving investors the right to purchase upcoming tokens within a certain time frame at a specific price. Token letters can achieve the same goals as warrants in a more flexible and informal way.

However, both methods are not particularly friendly to investors or founders. The type of investment instrument is usually decided by the advisors hired by investors. Token instruments are not as important as the token pool and token percentage. Therefore, it is very important for founders to use these two terms correctly.

Token Pool

Imagine if the tokens you distribute to investors are a pie, then the two key questions you need to understand are: 1. the size of the pie; 2. the size of the slices. In this metaphor, the size of the pie represents the token pool.

There are two ways to define a token pool: total supply or internal allocation. Total supply refers to the total number of tokens distributed, while internal allocation is the number of tokens reserved for internal personnel (investors, founders, employees, etc.).

The number of tokens allocated internally is usually less, typically representing 10-30% of the total supply. The total supply is linked to the interests of investors, as it directly affects the decisions of whales (investors with large capital and holdings). Internal allocation is very friendly to founders and the community, as it can promote unity and decentralization.

Sticking to comprehensive supply may not be conducive to the company's development towards Web3, so negotiating allocation with internal personnel is the best way. This can align the incentive mechanisms of investors and founders and promote the construction of a more decentralized system.

Token Percentage

If the token pool is the size of the pie, then the token percentage is the size of the slices.

Similarly, there are two methods to calculate the token percentage: fixed or proportional. A fixed percentage is a hard-coded percentage of the token pool. The proportional percentage attempts to reflect the equity structure table and grants investors a number of tokens equal to the proportion of their company equity.

When a startup raises subsequent capital, the equity of an investor holding a fixed 5% capital will not be diluted, but the equity of founders, employees, and advisors will be significantly diluted. This can lead to discrepancies between founders and investors and potentially harm the interests of actual builders. To avoid excessive dilution of tokens, founders should consult with their lawyers on how to allocate proportionally.

In summary, the best token mechanism that can be implemented in Web3 financing transactions is based on proportional allocation negotiated with internal personnel.