Token Cap Table: why Web3 investors need one and how to use it
Token Cap Tables are a vital part of tokenomics, and therefore of great importance and interest to any investor on the hunt for an investment-worthy Web3 project. Nestor Dubnevych, co-founder and COO at Legal Nodes, a legal platform that helps innovative tech companies solve their legal needs all in one place, explains what really is a Token Cap Table and what types of token pools can be included in a Token Cap Table.
More articles about Web3 legal issues you can read in Legal Nodes blog.
What is a Token Cap Table?
A Token Cap Table is an essential component of any tokenomics. It contains information about the total token emission and the division of tokens into different pools and explains the distribution methods.
This information, similar to an Equity Cap Table in traditional (Web2) startups, is usually presented in the form of a table. A Token Cap Table is instrumental for determining the company valuation because investors use it to decide on the investment amount and calculate the expected number of tokens.
More articles about Web3 you can read in Legal Nodes blog.
What types of token pools can be included in a Token Cap Table?
We can categorize token pools into two groups:
- default token pools, which are present in practically all Web3 projects “by default”; and
- custom token pools that are reserved for specific participants of the project’s ecosystem.
Default token pools include the following:
- founders’ pool – tokens reserved for the founders of the Web3 project;
- team & advisory pool – tokens for employees and advisors;
- investors’ pool – tokens for fundraising; and
- community pool – tokens for the community members, such as ambassadors, users, contributors, creators, etc.
Examples of custom token pools:
- validators’ pool – tokens for transaction validators in the blockchain protocol;
- oracles’ pool – tokens for oracles validating cross-protocol transactions; and
- liquidity pool – tokens that are used in smart contracts in DEX, DeFi, and token swaps, which provide liquidity to those services to make it possible to exchange one virtual asset into another.
How do you distribute different token pools?
Each token pool has its final recipient and a distribution method. For the founders’ and team pools, this is often the allocation (reservation) of tokens via Token Options with vesting. SAFTs or private token sales are the preferred distribution mechanism for the investors’ pool. Tokens for the team and investors are sometimes also subject to a lock-up, a prohibition on selling the tokens for some time after the execution of the Token Option or SAFT conversion.
You can distribute the community pool via channels such as airdrops, launchpads, public token sales, staking rewards, etc.
Here’s an example of a Token Cap Table for a Web3 project:
Why is a Token Cap Table important for Web3 projects’ fundraising?
There are three reasons why a Token Cap Table is vital for your Web3 project’s fundraising:
- investors want to know how the project’s tokenomics will work. The Token Cap Table is a key component of Tokenomics and therefore has a big impact on it;
- investors want to know the valuation of the Web3 project, which is later reflected in the SAFTs/SAFTEs. It is impossible to determine a valuation without knowing both the total token emission and its allocation across different pools; and
- investors want to understand how you legally structure the token distribution from different pools (this is often a part of the investor’s Due Diligence).
The final point is closely related to choosing the proper jurisdiction for a Token Issuer Company incorporation. You need to understand the regulatory requirements imposed on the distribution of each token type because these requirements affect the legal documents you’d need to use for the distribution and the requirements for token purchasers’ verification.
How to get help with structuring your Web3 project
Although structuring your Web3 project might seem hard, it’s quite simple if you follow the best practices that we distill in our Web3 resources center.
If you’re at the point where you need help with the legal structuring of your Web3 project, consider booking a Legal Discovery Session with Legal Nodes.
During the session, you will get:
- an intro to crypto-friendly countries – specifically which ones may be the best jurisdictions for your project;
- an intro to token legal design to better understand all the implications of issuing a token; and
- a checklist of all the tasks to be completed, to legally structure your Web3 startup.
Written by Nestor Dubnevych, co-founder & COO of Legal Nodes