We’ve helped multiple web3 protocols and foundations work through a specific recurring problem: an earlier round of capital came with token-economic commitments that the next round refuses to inherit. The clean path forward requires negotiating those prior commitments down or out before the new investors will close.
What the legacy commitments look like
Early-round investors in a protocol often receive some combination of:
- A SAFE plus a token warrant entitling them to a fixed percentage of the eventual token supply.
- Foundation governance rights — sometimes a board seat, sometimes a council position, sometimes a unilateral veto on protocol parameters.
- Anti-dilution mechanics on the token side that adjust their allocation if the supply schedule changes.
- Pro rata participation in future token sales.
- Lockup terms that don’t align with what later investors want.
Why the next round wants those rights gone
A new lead investor pricing the next round wants a defensible token supply table, a clean governance structure, and certainty that the rights they’re negotiating for won’t be diluted or contradicted by what an earlier investor signed. If the earlier investor’s commitments crowd the supply table or carry veto rights over protocol parameters, the new round can’t price.
The negotiated termination
The cleanest fix is a written termination agreement: the earlier investor releases the protocol from the token-economic and governance commitments in exchange for some consideration. The consideration varies — sometimes a fixed cash payment, sometimes a smaller-but-clean token allocation under the new terms, sometimes an equity-side accommodation. In our practice we see this resolved most often as a combination.
The key drafting points are: (1) a clear scope of release (every clause being terminated, named), (2) survival of any protections that should outlast the relationship (NDAs, indemnities, IP licenses), (3) the consideration mechanics with timing tied to the new round’s closing, and (4) a clean exit from any governance role with formal resignation letters and replacement officer/director consents.
Securities-law overlay
The substitution of consideration in these terminations can carry its own securities-law analysis. Issuing new tokens or new equity as part of a termination needs to fit under an available exemption — typically Rule 506(b) for accredited investors. A cash buyout is structurally simpler but requires the protocol or foundation to have the liquidity.
What we tell clients to look for
If you’re raising the next round and your earlier investor stack has token warrants, foundation seats, or governance vetoes, start the termination conversation before the new term sheet hardens. The new lead’s diligence will find these commitments; better that you’ve already mapped a path to resolve them than that you discover them on a deal call.
The structural lesson for founders raising for the first time
If you’re raising your first round, build sunset triggers into the token warrants and governance rights from the start. A clean expiration on the warrant or a step-down in governance role at the next priced round saves the negotiated-termination work later.
Talk to a Florida Business Lawyer
If you are navigating a transaction with this pattern, schedule a consultation with Montague Law at 904-234-5653 or use the contact form.
Related resources from Montague Law
This case study describes a recurring pattern across multiple matters and does not identify or disclose information about any specific client. It is provided for general informational purposes only and is not legal, tax, or financial advice; reading it does not create an attorney-client relationship. Specific deal numbers, dates, and industry details have been omitted or generalized. Consult counsel for guidance tailored to your facts.
