What it means
Many blockchain projects need money to build their software long before their tokens can be issued. A SAFT lets them raise that money from early investors, who receive the right to tokens once the network is live.
The investor takes the risk that the project may never launch or the tokens may be worth less than what was paid. The contract usually sets out how many tokens the investor will receive.
This is often based on a discount to the launch price, a cap on the project's valuation, or both. A discount rewards early backers for taking more risk, so an investor who pays $1 million might receive tokens that would cost $1.25 million at the launch price.
SAFTs were designed partly with regulation in mind. The idea was that the SAFT itself is an investment contract sold to a limited group of qualified investors, while the tokens delivered later would be a functioning product rather than a security.
Regulators in different countries take different views, and some have said that the label does not decide the legal treatment. For accountants, a SAFT raises questions about how to record the cash received.
The money may be treated as a liability, as deferred revenue or as equity-like funding, depending on the terms and the accounting rules in use. Advice from auditors and lawyers is essential before the deal is signed.
Investors should read the contract for the vesting schedule, which controls when they may sell their tokens, and the conditions that trigger delivery. They should also consider what happens if the project fails to launch.
Some SAFTs allow a refund or a payout, while others leave the investor with nothing.
In practice
Real-world examples.
Example
A start-up building a decentralised data storage network needs $3,000,000 to hire engineers. It sells SAFTs to ten qualified investors for $300,000 each. The investors will receive tokens when the network goes live.
Example
A venture fund buys a $2,000,000 SAFT in a payments protocol with a valuation cap. The cap means that even if the project is later valued far higher, the fund's tokens are priced as if the valuation were no more than the cap. The fund's analysts model several launch scenarios before agreeing.
Example
A corporate treasurer at a technology group is asked to record a $1,000,000 SAFT investment. The auditors review the contract to decide whether it is a financial asset or an intangible item. The finance team documents its judgement and the reasons for it.
Formula
Calculation
Discounted token price = launch price x (1 - discount)
Tokens received = investment / discounted token price
Suppose an investor puts $500,000 into a SAFT with a 20% discount, and the planned launch price is $0.50 per token. The discounted price is 0.50 x (1 - 0.20) = 0.50 x 0.80 = $0.40 per token. The investor receives 500,000 / 0.40 = 1,250,000 tokens. At the full launch price those tokens would be worth 1,250,000 x 0.50 = $625,000.Case study
Seen in the real world.
Driftwood Protocol is an illustrative, fictional blockchain project that wanted to build a network for sharing computing power. It raised $4,000,000 through SAFTs sold to eight investors, each with a 25% discount to the future token price.
The team launched its network 18 months later, and tokens were delivered under a one-year vesting schedule, so investors could not sell them all at once. One investor who had paid $500,000 at a discounted price of $0.30 per token received 500,000 / 0.30 = about 1,666,667 tokens.
The launch price fell short of expectations, and the investor's tokens were worth less than the amount invested. The illustrative lesson is that a discount rewards early risk, but it does not protect against a project that fails to deliver value.
Watch out
Common mistakes.
- Assuming a SAFT is a share in the company, when it is a right to receive tokens and gives no ownership of the business.
- Believing the label settles the legal question, when regulators may treat the sale as a securities offering.
- Ignoring vesting and lock-up terms, which can stop the investor from selling for months or years.
Questions
People also ask.
What is the difference between a SAFT and a SAFE?
A SAFE gives an investor shares in a company at a later date, while a SAFT gives an investor tokens at a later date.
What happens if the project never launches tokens?
It depends on the contract, since some allow a refund or a payout, while others leave the investor with no recovery.
Who can invest in a SAFT?
It is usually limited to accredited or qualified investors, who meet wealth or income tests set by regulators.
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