I. How to Launch a Token: Pre-Launch

How to Launch a Token: Pre-Launch

Editor's note: "What do I need to know to launch a token?" is one of the most common questions we get from crypto founders, especially given the industry's dynamic regulatory landscape. To ensure compliance, security, and long-term success for your project, it's crucial to approach token launches from proper principles, especially during "hot" market periods.

In this series, we break down the token launch process into 3 distinct phases: (1) pre-launch, (2) preparing for launch (the lead-up to the token generation event, aka TGE), and (3) post-launch. We aim to provide founders a comprehensive, tactical resource at every stage of the token launch process. For more in-depth information on topics like specific types of token grants, allocations, and 83(b) elections, visit our resources.

Launching a token is an exciting, complex process that requires careful planning and execution. 

In this first post of our three-part series, we'll focus on the essential steps and considerations for the pre-launch phase. 

Jump to each of these sections by clicking on the sidebar.

1. Choose the right crypto counsel
2. Understand how to fundraise as a crypto company with a token
3. Set up your foundation entity in the right jurisdiction
4. Create a securities compliance plan
5. Choose the right tax firm
6. Structure token grants
7. Plan for token grant allocations and lockup windows
8. Implement foundation directorship and governance
9. Plan for tax-specific considerations
10. Plan for custody/token management
11. Plan the token minting process

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#1 — Choosing the Right Counsel

Selecting a law firm with a specialty in digital assets is likely the most important step to complete as you gear up for token launch. Your counsel will be a crucial resource for navigating the legal landscape of token launches.

‍Potential partners: 

• Large, US institutional firms
  
  • Fenwick & West
  • Cooley
  • Goodwin
  • Latham & Watkins
  • Orrick
  • MWE
  • Fried Frank
• Medium-sized, US firms‍
  • Horizons Law
  • Ashbury Legal
  • Wilkie Farr‍
• International firms:‍
  • MME Legal (Swiss)
  • Carey Olsen (Cayman/BVI)
  • Campbell (Cayman/BVI)
• ‍Others:‍
  • MetaLeX
  • OC Advisory

These firms have experience in the crypto space and can provide valuable guidance throughout the process.

Note: This is not an exhaustive list of crypto law firms in the space! Many quality firms deal with digital assets and tokens. If you’re one of those firms (or if you know another we should include in this list, please reach out to dmdesa@liquifi.finance).

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#2 — Fundraising as a Crypto Company with a Token

When fundraising, you’ll need to decide whether you'll raise with: 

1. Equity
2. Tokens 
3. Combination

Best practice: many projects typically use a SAFE (Simple Agreement for Future Equity) and a Token Warrant/Side Letter to structure fundraising efforts. See here for a deep dive into everything you need to know about SAFEs and Token Warrants.

Another important note: remember to be strategic when choosing your investors. Ensure they align with your project’s vision, mission, and end goals before you raise.

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#3 — Set up your Foundation entity in the right jurisdiction

Choosing the right jurisdiction for your legal entity is an essential part of the pre-launch process. 

Typically these entities are “Associations” or “Foundations.” 

They’ll remain distinct from your US-based “Inc.” 

Popular options for incorporating this entity include: 

• Cayman Islands
• British Virgin Islands (BVI)
• Panama
• Switzerland

Each of these countries has different pros/cons, such as the availability of banking providers, compliance requirements, tax treatment, directorship options, attitude towards digital assets, and more.

Consult with your legal counsel to determine the best fit for your project, working backward from your project’s structure, strategy, and end goals.

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#4 — Create a compliance plan for securities

After you’ve decided where to set up your legal entity, make sure you develop a comprehensive securities compliance plan to ensure your token launch adheres to relevant regulations in your jurisdiction. 

Many projects risk violating securities law with their token, especially when interacting with founders, investors, or customers in regulated jurisdictions like the United States and Europe.

Specifics vary depending on your jurisdiction, legal structure, and your project’s characteristics. 

You’ll work closely with your chosen law firm to navigate this process (again, refer back to #1).

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#5 — Hiring the Right Tax Firm Before Launch

Hire a tax firm that understands the nuances of crypto.

This expertise—in crypto taxes, specifically—means they’ll be able to assist with audits, taxes, bookkeeping, accounting, crypto accounting, consulting, and payroll. 

Your token structure will significantly impact your financial operations, so choose a firm with relevant expertise. 

Potential partners: 

• Deloitte
• KPMG
• PwC
• Fried Frank (tax law)
• Eisner Amper
• Cryptedge
• Harris & Trotter

‍Again, this is not an exhaustive list of tax firms! Multiple other firms provide top-tier services. DYOR, and consult with your peers and investors to make the best decision, given your project’s needs and timeline.

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#6 — Structure token grants

‍Note: Law firms often call the same fundamental grant structure by different names. It can be confusing!

e.g. Token Purchase Agreements (TPAs) are also known as Token Grant Forms or Restricted Token Purchase depending on the firm.

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You can use both Token Purchase Agreements or Restricted Token Awards to manage your tax obligations and timing. 

• Token Purchase Agreements (TPA) aka Token Grant Form aka Restricted Token Purchase give your team the right to buy tokens up front.
• Restricted Token Award (RTA) aka Future Token Interest Award (FTIs) give your team the future right to restricted tokens. 

TPAs give your employees or stakeholders the right to buy tokens upfront, while Token Options allow them to exercise the future right to receive tokens. These are typically used before your token is circulating but after the token is minted.

For example, Restricted Token Purchases recognize your taxable income on the date of the grant (typically paired with the 83(b) election). 

Determine which early team members will participate in the restricted token/purchase plan with your legal counsel. This is sometimes known as participating in the “founders round.” Planning ahead here will allow you to help your team members navigate their tax obligations and provide possible tax benefits.

Token Options are recognized upon exercise, meaning the beneficiary can control the timing of recognizing taxable income. At Liquifi, we typically see token options used in Europe due to local regulations that allow token options to be a better instrument for navigating digital asset compensation and taxes.

After your token is live and circulating, most projects will switch to Restricted Token Units (RTUs) with vesting schedules. Having a vesting schedule means that employees will not earn these tokens until they meet a condition, such as duration of employment. Vesting schedules for RTUs also delay the tax obligation until the vesting date.

Consider implementing a “double trigger rule” for vesting. Double trigger is one of the more creative ways to manage tax obligations and timing for RTUs. The main problem that double trigger rules solve for is tokens with lower liquidity and higher volatility. Because RTUs are taxed upon vesting, beneficiaries usually have to cover their taxable income by selling a portion of the tokens they receive. However, if the tokens are highly volatile, a sale of the tokens may not sufficiently cover the tax obligations. 

To manage the dependent, highly variable tax obligations, projects implement a “double-trigger rule” for vesting. 

Vesting includes both a service-based requirement and a milestone-based event to be met. 

This service-based requirement is typically time-based, and the employee must be with the company for a specific amount of time before vesting. Milestone-based events differ but can be based on the token market capitalization or a specific milestone of the token’s trading volume. 

Both of these conditions must be met for the tokens to be considered “vested” and earned by the employee. The milestone-based trigger ensures sufficient liquidity to sell the tokens to cover any tax obligations.

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#7 — Plan for token grant allocations and lockup windows

At this point, you’ll want to establish allocation benchmarks and lockup windows for your token grants.

‍This article provides a detailed explanation of everything you need to know about finalizing these vesting and allocation benchmarks.

Some key points to remember: 

Lockup windows and restrictions 

• Determine if you’ll implement an overall lockup, or how you’ll use vesting or lockup schedules 
• Consider also: if an employee elects for an 83(b) election in the United States, you’ll need to determine if there are token custody requirements to enforce the lockup such that it reflects a true transfer of tokens. 

Employee comp and vesting schedules (deep dive here)

• For employee compensation, determine the percentage of tokens to be released at the Token Generation Event (TGE), plus any additional lockups or cliffs. 
• The percent released also materially impacts your token launch liquidity strategy.
• Example: 10% of your tokens released at TGE, subject to a lockup or cliff for 12 months. 
• Adding lockups on top of your vesting will lower sell pressure. 
• Or, do you want to implement daily vesting/unlocks to smooth out pricing? (Note that this will also depend on what investor schedules look like). 

In the United States, the general rule of thumb is to enforce a 12 month lockup. 

Investor lockups 

• Consider what lockup terms you want to implement for investors (Ex: 6 month cliff, 2 year lockup) 

Community rewards and airdrops 

• Plan out your community rewards schema and airdrops. These typically include determining how/if your engagement programs will translate to tokens and what these specific eligibility criteria will be.

#8 — Implement Foundation directorship and governance

Determine who will manage your Foundation entity. 

Some options include: 

1. Elected director from your DAO

This option often makes sense if you plan to build out a team—but be sure this person is not also an internal employee. 

Not asking an internal employee of the company to manage the foundation entity maintains absolute impartiality, reduces potential conflicts of interest, and maintains separation of the entity managing the protocol versus other contributors to the protocol.

2. A third party provider

Many projects work with third party providers to manage their foundation entity. Common options include:

• Webslinger 
• Marfire 
• Leeward 

Consider how you’ll manage on-going governance and operations. Some good options here include: 

• Autonomous 
• Webslinger 
• Leema
• MugenDAO

#9 — Plan for tax-specific considerations and token valuation

Before you launch your token, consider specific tax implications for your team and investors. 

83(b) Election

For example, in the US, 83(b) elections allow individuals to pay taxes on their tokens' fair market value (FMV) at the time of grant, rather than when they vest.

83(b) elections can be a hugely valuable way for your employees or stakeholders to save on potential tax burdens. In the UK, Section 431 serves a similar purpose. Work with your legal team/counsel to familiarize yourself with all such rules or regulations. 

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Valuation of tokens

Firms like Redwood or Teknos Associates can be great potential partners for token valuation. Again, many quality firms offer these services.  

Best practice: most projects gearing up for launch aim to combine token minting, third-party valuation, and 83(b) election within the same window. Speak with your legal counsel on whether the 83(b) election for tokens applies to your situation.

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 #10 — Plan for custody & treasury management

At this point in the pre-launch process, start thinking through where you want to custody your tokens. 

If you plan to mint your tokens prior to public launch, what provider can support these assets? 

Engage with these providers earlier rather than later to save you the hassle when it’s actually time to mint your token. 

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Common options include: 

Institutional qualified custody 

• Anchorage 
• Coinbase Custody
• BitGo

Institutional custody

• Finoa 
• Hextrust

MPC semi custodial 

• Utila
• Fordefi
• Fireblocks
• Dinara

Self custodial 

• Safe multisig

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 #11 — Plan for token minting

Most projects, in order to maintain separation between their foundation entity and their US-based company, have their foundation mint the actual tokens. 

Some questions to consider during this part of the process: 

• Is there a transfer requirement upon minting to satisfy 83(b), or purchase terms of balance sheet?
• How do you plan on enforcing a buy-back program if an employee leaves?
• Who on the foundation side will perform the transfers from foundation treasury wallets to your US-based Labs / Co?

Other variables to consider: 

• What’s the valuation expiration date? 
• How will you execute the legal agreement to obtain necessary signatures? 
• How will you manage the 83(b) window start time?
• How will you handle the transfer of tokens to an employee-owned wallet, while also being able to enforce any lockup period? 

Your foundation operations partner will be key here in making sure treasury wallets and flow of funds are properly handled.

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Conclusion

By addressing these 11 key areas during the pre-launch phase, you'll be well-prepared to navigate the complexities of launching a token. 

This list is not exhaustive — both in its content and in named vendors and partners. 

However, it is an excellent tactical starting point that outlines all of the major considerations your founding team must keep in mind before token launch.

Our next post will dive into the details of preparation for the actual Token Generation Event (TGE).