Deep Dive into Co-Founder Agreements and Tokenization of Web3 Projects
As a founder, the early stages of building your startup are exciting and challenging. You're working to validate your idea, develop your team, and secure the resources you need to grow. At this nascent stage, it's critical to get the foundations right—from aligning with your co-founders on strategy and responsibilities to formalizing your business structure and equity split.
At soonami, we aim to support founders through this crucial phase. Our Foundance platform enables startups to create, build, and scale by leveraging Web3 and AI solutions. A key part of this is facilitating the signing of on-chain agreements between co-founders to split equity clearly and transparently from the very beginning.
Reaching an Inflection Point as a Startup
It's crucial to work towards an inflection point where you can demonstrate progress to potential investors, whether that's initial traction, market validation, or even early revenue.
The reality is that most startups never reach this inflection point. They get stuck iterating and optimizing in those first stages without gaining real momentum. As someone who has been through the entrepreneurial journey multiple times, I can attest that this is a common challenge. It usually takes time and multiple pivots to find a true product-market fit.
The key is to stay flexible while also maintaining alignment as co-founders. Some founders are very adaptable and want to reconsider things constantly. Others prefer having a decided structure and moving forward on that path. Managing this tension, especially pre-inflection point, is one of the biggest challenges for founding teams.
While there's no one right answer since you can only do the reality test once, it's important to be aware of these dynamics. Don't feel you're alone in grappling with this. At soonami, our goal is to help you navigate this phase as effectively as possible to reach that crucial tipping point.
Leveraging Equity Distribution Pre-Funding
One of the ways we do this is by enabling you to use tokenization to bring in contributors and distribute equity, even before you secure outside funding. Through Foundance (powered by soonami), you can create a non-tradable token to serve as a representative of equity for paying team members, advisors, and service providers who are helping develop your venture.
This allows you to move faster and go further, without being limited by lack of capital. You can grant tokens to co-founders, vest them over time, and mint new tokens to be earned by key contributors, aligning incentives and compensation with the stage of your business. Importantly, these tokens are not tradable or liquid like ICO tokens - they solely represent equity in your startup.
We see this as a game changer for giving early-stage startups more runway and autonomy. Rather than getting discouraged if a few investors pass, you can keep building your team and product until you're truly ready for outside capital. Through Foundance, we aim to connect you with top talent willing to contribute in exchange for tokens, from developers to advisors.
Of course, we still believe deeply in the importance of founders maintaining a strong ownership stake. We typically advise reserving around 15% of tokens for outside contributors, with the remainder staying with the core founding team. This helps you get the help you need while still preserving your leadership of the venture. Read our Co-founder Agreement copy to understand the nuances of this topic in depth.
Choosing the Right Equity Distribution Model
In working with startups, we've identified a few primary models for founder equity distribution, which can be customized to your needs:
- Fixed Equity Split: This is the simplest model, where co-founders agree to a specific percentage ownership split (e.g., 50/50), which is then represented by token distribution. This provides clarity and is easy to message to investors.
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- Dynamic Equity Split: A more flexible model where co-founders vest tokens over time based on their contributions. This is well-suited for situations where founders are contributing different amounts of time to the project. Tokens are minted proportionally to the work put in.
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- Contributor Pool: A fixed pool of tokens (up to 15% as mentioned before) is set aside for advisors, service providers and new team members, with the core team splitting the remainder. This provides both flexibility and structure.
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There are pros and cons to each model which we can help you think through. Ultimately, the right fit depends on your unique co-founder dynamics and goals. The important thing is to formalise an agreement early and encode it on-chain for transparency. This will serve you well as you bring on investors and scale.
Tips for Founders
If you're an early-stage founder looking to establish a strong foundation for your startup, here are some tips for you:
- Discuss and align with your co-founders on your equity split and vesting schedule. Have an open conversation about each person's expected contributions, responsibilities and long-term commitment to the venture.
- Explore whether tokenization could be a fit for your startup. This may be especially relevant if you're looking to bring in advisors or contributors in exchange for equity, or if your co-founders will be contributing different amounts of time.
- If you decide to pursue tokenization, work with your co-founders to select the model that best fits your situation. As mentioned, the core options are a fixed split, dynamic split, or contributor pool. Consider the pros and cons of each in your context.
- Formalise your equity agreement in writing and consider encoding it on-chain for transparency and immutability. This is where a platform like Foundance can help with generating the necessary legal and smart contract frameworks.
- As you bring contributors onboard, be thoughtful about how you allocate tokens from your pool. Ensure you're providing meaningful incentives while still protecting the founding team's stake and decision-making power.
- Communicate openly with your team and stakeholders about your tokenization model. Provide clarity on what the tokens represent, how they vest, and any limitations on trading or transferring them.
- Stay focused on reaching your key inflection points, whether that's shipping your MVP, securing your first customers, or hitting initial revenue targets. Use your token model as a tool for growth, but don't let it overshadow your core business goals.
- As you engage with investors, be prepared to explain your tokenization structure and how it supports your long-term vision. Emphasise how it has enabled you to build a strong team and to be capital-efficient in getting to meaningful traction.
- Continue to learn and iterate as you go. The world of startup tokenization is still nascent and best practices will continue to evolve. Stay connected to communities like soonami and Foundance to share knowledge and adapt your model as needed.
Practical Steps for Implementing Tokenization
Now let's dive into the specifics of how you can implement tokenization for your startup using the Foundance platform.
Step 1: Ensure All Co-Founders Have a Foundance Account and Wallet
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Before you can set up your on-chain co-founder agreement, each team member will need to create an account on the Foundance platform and connect their digital wallet. This wallet will be used to sign the agreement and receive any allocated tokens. Make sure everyone has completed this step and has some ETH in their wallet to cover any gas fees.
Step 2: Input Your Team's Information
Next, go to the Foundance agreement page and input your core team's details. You'll need to provide each co-founder's name, role, and wallet address. Double check that all the information is correct before proceeding.
Step 3: Select Your Tokenization Model
Now it's time to choose which tokenization model you want to use. As mentioned before, the main options are:
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- Fixed Equity Split: Simply input the agreed upon percentage split between the co-founders (e.g. 50/50, 60/40) and Foundance will automatically calculate the corresponding token allocation.
- Dynamic Equity Split: Input the percentage ownership targets for each co-founder, along with a vesting schedule based on time or milestones. Foundance will then set up a smart contract that mints and allocates new tokens to each co-founder over time based on their respective contributions.
- Contributor Pool: Designate a fixed percentage of tokens (e.g. 15%) to be set aside in a contributor pool. This pool can then be used to grant tokens to advisors, new hires, or service providers over time. The remaining tokens are allocated to the co-founders.
After selecting your model, input the specific parameters, such as vesting periods, milestones, or pool percentages.
Step 4: Add Any Vesting Provisions
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If you want the co-founder tokens to vest over time, rather than being granted all at once, select the vesting option and specify the cliff and vesting period for each co-founder. This is often recommended to ensure long-term alignment. A standard vesting schedule is four years with a one year cliff.
Step 5: Review and Sign the Agreement
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Once all the details are inputted, carefully review the full agreement to ensure everything is correct. If needed, you can download a copy for your records or to share with your legal counsel. When you're ready, each co-founder will need to sign the agreement using their connected wallet.
Step 6: Set Up Your Contributor Pool (If Applicable)
If you opted for the contributor pool model, you'll now need to set up the specifics of how that pool will be managed. This includes specifying what types of contributions warrant token grants (e.g. advisory work, development milestones, etc.), who has the authority to approve grants, and any vesting provisions for those tokens.
Step 7: Mint and Distribute the Initial Tokens
Once the agreement is signed and any contributor pool details are finalised, Foundance will mint the initial token supply and distribute the tokens to each co-founder's wallet based on the specified allocations. These tokens will then vest over time if that option was selected.
Step 8: Manage Ongoing Token Distribution
As your team grows and you bring on new contributors, you can use the Foundance platform to manage the distribution of tokens from your contributor pool easily. Simply input the details of each new grant, including the recipient's wallet address, the number of tokens being granted, and any vesting schedule. Foundance will then automatically mint and distribute the tokens based on your specifications.
Frequently Asked Questions
Q: What happens if a co-founder leaves the project before their tokens fully vest?
A: If a co-founder leaves the project early, they will typically forfeit any unvested tokens. The specifics of what happens to those tokens depend on your agreement - they may be reallocated to the remaining co-founders, returned to the contributor pool, or cancelled. It's important to clearly outline these scenarios in your initial agreement.
Q: Can we change our token allocations after the initial agreement is signed?
A: Yes, you can adjust your token allocations over time as circumstances change. However, this typically requires the consent of all co-founders and may involve signing an amendment to your original agreement. The Foundance platform makes it easy to propose and implement these changes.
Q: What happens to our tokens if our project gets acquired or goes public?
A: In the event of an acquisition or IPO, your tokens will typically convert to shares in the new entity based on the terms of the deal. It's important to consider this scenario when setting up your initial agreement and to ensure all co-founders are aligned on how tokens will convert. You may also want to include provisions around voting rights and lockup periods for tokens in these situations.
Q: Can we use our tokens to pay for services or expenses related to the project?
A: Yes, you can use your tokens to pay for a variety of project-related expenses, such as contractor fees, marketing costs, or software subscriptions. However, it's important to be mindful of the tax implications of using tokens in this way and to properly document all transactions. Consult with a tax professional to ensure compliance.
Q: How do we determine the right vesting schedule for our tokens?
A: The right vesting schedule depends on your specific situation, but a common approach is a four-year vesting period with a one-year cliff. This means that the tokens vest gradually over four years, but the first portion doesn't vest until the one-year mark. This helps ensure long-term commitment from co-founders while also providing some protection if someone leaves early on. Consider your project's timeline, milestones, and growth plans when determining your vesting schedule.
Q: Can we add new co-founders or contributors to our token agreement later on?
A: Yes, you can add new co-founders or contributors to your agreement at any time. This typically involves minting new tokens and allocating them to the new team member, along with specifying any vesting provisions. Keep in mind that adding new co-founders may dilute the ownership percentages of the original team, so it's important to carefully consider these decisions and ensure everyone is aligned.
Q: What are the tax implications of granting and receiving tokens?
A: The tax treatment of tokens can vary depending on your jurisdiction and the specifics of your project. In general, granting tokens to co-founders or contributors may be considered a taxable event, similar to granting stock options. The value of the tokens at the time of grant may be treated as ordinary income for the recipient. When tokens are sold or exchanged in the future, any gains may be subject to capital gains tax. It's important to consult with a tax professional to understand the implications for your specific situation.
Q: How do we ensure the security of our token agreement and distribution?
A: The Foundance platform leverages blockchain technology to ensure the security and immutability of your token agreement and distribution. All transactions are recorded on the blockchain and can be audited at any time. Additionally, the use of smart contracts automates the distribution of tokens based on the terms of your agreement, reducing the risk of human error or manipulation. As with any digital asset, it's important to follow best practices for wallet security and to properly backup your private keys.
If you have any questions about implementing tokenization for your startup or want to learn more about how Foundance can support you, we're here to help.
Reach out to our team at hackathon@soonami.io or Discord, and we'll be happy to walk you through the process and answer any specific questions you may have.