Crypto Token Cap Tables Explained - Bruno Faviero | Magna

Thank you for tuning in to the Alt Fund Investment Podcast. Please like and subscribe if you find this information helpful. We connect investment fund managers and service providers. This content is for informational purposes only. Welcome to the Alt Fund Investment Podcast. My name is Mike Schroeder. Today we're here with Bruno Faviero, co-founder and CEO of Magna. Magna provides token cap tables, token vesting, airdrop streaming services for crypto companies, and they also provide portfolio management tools for crypto funds. So we'll get into all that today. But Bruno, welcome, man. Thanks a lot for joining us.

No, excited to be here. It's going to be a lot of fun.

Absolutely. So start the conversation. Tell us about your crypto journey and lead us up to your founding of Magna.

Yeah, my crypto journey started in 2013. Um, one of my very good friends at MIT was obsessed with Bitcoin. Was telling everybody to buy it. I bought a couple, I didn't buy enough, and then kind of didn't pay attention to the crypto space too much until 2015. I bought a bunch of ETH and started doing a lot of crypto trading in 2016, and then started a company, and my co-founders were very anti-crypto. And so they were like, you got to stop paying attention to this crypto stuff, got to focus on the company. So when the crash happened, like 2017, 2018, I sold everything, got out of crypto completely, and then totally missed what was going on for the next couple of years, but always knew I wanted to come back. So I spent 2017 to 2020, I was working in the AI space, sold an AI company to Palantir, started another AI company after that. And in that time, I was also doing a lot of angel investment and running small venture funds. So I was helping a lot of founders, spending a lot of time with founders, you know, pre-seed, seed, Series A, helping them with everything from fundraising to operations to management, and also running my own fund as a GP, and I was also an LP in several funds. And so, you know, fast forward, once I had done my time at Palantir post-acquisition, I just went back to advising, investing, and found that The crypto companies I was working with, the playbook that I had for Web2 didn't work for them. The tools didn't port over to Web3, like Clerky, Carta, Gusto, Pilot, et cetera. And so it was kind of like a light bulb moment in my head of, okay, I'm super bullish on crypto. I think the tech is really interesting, but I'm not a trader at heart. So I never saw my entry point into crypto. I realized, okay, I think there are going to be thousands, tens of thousands, hundreds of thousands of crypto companies that are going to start in the next decade. It doesn't really look like there are that many people building tools for them. How can we build those foundational tools that make it easier for someone to start a crypto company, grow a crypto company, and not have to worry about whatever minutia of specific functions that they don't really care about at the end of the day, right? Like Clerky, don't worry about formation docs. Carta, don't worry about equity cap table. Gusto, don't worry about payroll. And when we mapped that to crypto, we just saw kind of the token as really the unifying, you know, atomic unit of value. You know, it's used as equity, it's used as compensation, it's used as an incentive mechanism. We thought, all right, like, let's, let's help crypto companies with their tokens.

I love that. I love that. So tell us about what you guys are doing at Magnum. Tell us about what problem you guys are solving, and we'll go into some of the, you know, more details from there.

Yeah, so, so there's like two, you know, two classes of problem. The first is, you know, we're building tools for crypto companies that have a token, and they're using that token to distribute to their investors, advisors, and other contributors, employees, contractors. And so they need to track, you know, what I call kind of like the off-chain obligations, right? What are the SAFTs and the token warrants you're signing with investors? What are the token grants you're signing with your employees? What are just the agreements you're signing with your contractors? So you got to track like, who have I promised tokens to? Who do I owe tokens to? If your token's far off in the future, you've got to keep all this information in one place and, you know, edit it as people get hired, as people get fired, as investors come out of the cap table. And then once your token's live, you've got the added dimension of like, okay, now I need to actually distribute the tokens to them on time, you know, in the right amount. And so what we do is we're building tools for that token cap table element. So before token launch, we help you track all the SAFTs and other legal agreements and those allocations to each of your stakeholders, and also help you map that to your tokenomics, because we find that a lot of projects, they're, they're making tweaks and changes, you know, right up until they launch, from the total supply, the distribution, even what chain they're on. And then once your token's live, we help you make sure that your tokens are getting distributed to your stakeholders on time. So one way to do that is you can fully lock them up, you can automate the distributions, you can kind of pay as you go, and we just kind of remind you and help you schedule those transfers from your wallet. And then by By default, we have a claim portal, but we can also let you airdrop tokens directly to your stakeholders. At the end of the day, we have a lot of flexible ways to help you make sure that you're fulfilling your obligations to your stakeholders, that all of that logic and kind of scheduling is transparent. And then on the other side, the stakeholders can also log in and understand, you know, how much am I getting? When am I getting it? How am I going to get it? What wallets are going to go to? So some companies reach out to us just because they say, look, like our token hasn't launched yet, but we want everyone to really be able to log in and visualize their allocation, their vesting schedule, their unlock schedule. So there's both this kind of like operational element to it, but there's also this, you know, trust and understanding element because the token exists to, you know, really it's a core part of that relationship between the most important people your company, right, which is your team, your investors, your advisors, and anyone that you're incentivizing. Now, last part is we're also helping kind of in some of the newer projects we're doing, helping teams distribute tokens to the— if they have a game, to their players, their community, obviously it's more— we have like an SDK that lets them do it in a bit more flexible way. But yeah, we help with tracking who you got to give tokens to and then actually get those tokens to them.

Got it. And you highlighted a couple traditional firms that are kind of doing this. Tell us about some of the differences between traditional cap tables versus where they are today with tokens and some of the differences that, you know, you might find there and some of the issues that these other companies might run into.

Yeah. I think there's just a lot of nuances, both on the legal side and on, you know, kind of the on-chain side that are really unique to crypto. Right. And a lot of these things are at the end of the day, like they're legal agreements, legal obligations, and you really have to both track those terms of those agreements correctly. And then you have to then track your fulfillment of those obligations correctly. So I'd say, you know, on the legal side, you know, what we're doing is really understanding the ontology of these agreements. Right. So when you're talking about token grants and you're talking about 83(b), Often, you know, you might have a reference token price, you're dealing with token valuation reports, you know, that, that's one example where it can be really different than equity. Token valuation reports, they can go stale more quickly, they have to get done more often, and there's really some best practices about when you should do them and, you know, even how to structure your rounds such that the token valuation firm has an easier time than, you know, if you use certain instruments that make it harder. So I'd say on the one hand, yeah, it's like getting the legal details right, specifically for crypto companies for whom the token is really at the core of what they're doing. And so it's not just like an add-on that they, oh, yeah, and let's also track our tokens. No, we got to get this right. And then there's the whole on-chain component that has its own incredible set of nuances. I mean, you've got to make sure that Unlocks can be defined in a number of different ways. You know, some people do linear unlocks, periodic unlocks, exponential unlocks. There's all kinds of unlocks that, you know, we support on our platform. And then tracking those on-chain transactions, initiating those on-chain transactions. On the distribution piece, the way to think about it, right, if you think about Carta, they're an information ledger. They're not actually transferring the shares. When a company goes public, they switch off of Carta and they switch to Shareworks, or a share transfer agent. They actually get you the shares of the public company you work at. In crypto, you have to do both. You have to keep a record of ownership, of vesting, of these legal agreements, but then you also have to do the actual transaction of getting the token from the company to the person. In all the nuances around the different access controls they're in. I'll give you just one example. There's a lot of different levers you can tweak in terms of some of these arrangements. So on one extreme, you have companies that are like, or investors that are like, hey, we want the tokens locked up, company can't touch them. You know, they're guaranteed to go out, right? Like they're fully scheduled. You see some of that with some of these altcoins, you know, the team's ain't on, like there's no trust, right? And so they're like, I need to see the on-chain lockup. On the other hand, you've got some teams that are like, hey, we're still figuring out our tokenomics. We have this stuff in cold storage. We have pretty ironclad legal agreements with our investors. We're all doxxed. We're in the US. The investors, they might not be as worried that they're going to cut and run. And so they might be okay with a little more flexibility because no one wants certainty until someone loses access to their wallet and they're like, hey, those tokens that vested to my wallet, actually, like, I can't access those. I need them to go to this other wallet, right? Okay, so you actually want whatever. Yeah, so it's like, oh, so you actually do want the ability for the company to go in, take the tokens back that had already, you know, unlocked, that had already vested, and put them somewhere else. And we try to be like unopinionated to that. But look, if you want that flexibility, great. If you want the safety, security, and rigidity, great. We'll facilitate it either way.

Good deal. And there's a lot to dive in there. So we'll kind of jump to some of those points in a minute. But one thing that comes to my mind is, is there any significance to having a third-party cap table provider? Just like, you know, you want a third-party fund administrator because nobody wants to trust returns that are coming from a fund manager. They want to see that a third party has kind of verified it. So is there any significance to having a third-party cap table provider?

Yeah. So I think it goes again to kind of the difference between the ledger and, you know, again, that like transfer utility, right? Because I want to make it clear, at the end of the day, we're not transferring anything, we're not custody anything, the company's using our tools to set this up themselves. And so what you're talking about is, you know, really relates to kind of trust. Between the two parties and how do you trust but verify, right? And so on the one hand, we try to make it easy for the company to be transparent with each stakeholder about what's their allocation, how many tokens have been set aside, what's the unlock schedule, what's the vesting schedule. And then we also make it very clear, you know, are the tokens locked in the contract? If so, how many are locked in the contract? Because we have some companies I'll give you one example. We work with one where the operating company gets tokens quarterly from the foundation, so they can't lock up all the employee tokens, right? They get them once a quarter, and then once a quarter they go and they kind of fund the next quarter of distributions. But we make that very clear. We're like, hey, like, you have a 4-year unlock schedule, but there's only 4 months worth of tokens in here, you know. But that's between you and your company, you know. Go talk to them if, if you want the arrangement to be different. But that's the nice thing about crypto, if you had asked me what's my favorite characteristic of crypto, is the on-chain logic is extremely clear, right? So in the cases where, you know, the tokens are, you know, fully locked and the logic dictates, hey, you are going to get 1,000 tokens a month for 48 months, you know, we'll share the code with, with the customers and they can go in, look at the logic, verify what the logic is saying and be like, all right, okay, like I feel good, the tokens are locked and I know when I'm going to get them. I think the other reason it's really important to have a third-party platform help you track all this information is because there's a lot of information to track, right? Like, you've got to get a lot of the details about these legal agreements that, you know, maybe sometimes a founder might even forget that they need, right? If you've got a token grant, you've got to track You know, is an 83-B applicable? Was it filed? When was it filed? What was the reference price? You've got to track the board approval. Was that done? Are the vesting milestones taxable or not based on that 83-B? So you need to get all that information correctly because that's going to come up later when the company is doing their taxes, when your employees are doing their taxes, when someone vests and you got to know, you know, should I be withholding? How much should I be withholding? Which is also something we help companies with. And so when we think about the status quo is a lot of companies are reinventing the wheel, but, you know, they might miss things or they might do some things that are not, you know, in the best of ways because these workflows are so complex that our user base is not just the founder, it's the general counsel, the CFO, the VP of finance, the head of HR, and building something that helps them all be on the same page in a standardized way as the rest of the industry, especially in a world where these companies are hiring people. I mean, no one has that much crypto experience. And so you can hire a head of HR from FAANG and they'll be like, great, I've been doing equity management for 20 years. How do I have to track this token stuff? And you want to make sure that they also don't miss anything. Important. So that's, that's why I think it's key, is because it really just helps you maintain the right structure and the right accountability.

And what does it look like to create a distributed token? Just walk us through— new token comes to you, how do you look at that process? Where do you start?

Yeah, I'll say that, you know, companies usually come to us once their token is created, it's launched, they're about to start distributing it, about, about to start the unlocks. Sometimes companies come to us earlier and we don't want to be— we're not a legal firm, right? We're not financial advisors. And so we'll happily introduce startups to accountants, tokenomics advisors, lawyers, exchanges, launchpads, market makers, etc. And we also don't do the transaction piece, right? Like we introduce them to launchpads or people like TokenSoft for when they want to do their their community sale, their public sale. And so they really come to us when they are at the point of like, hey, we've got these insiders, again, the contributors, the investors, we need to get the tokens out to them and track the tokens. Can you help us do that? And so that's when we'll take their token and then we'll work with them to basically set up smart contracts correctly such that they can manage it through our UI. And then sometimes we meet companies that are trying to do something and maybe a little more creatively with their tokens. Like I mentioned, most recently gaming companies we've been working with that say, hey, you know, we want to incentivize our players and we want to be able to give them an allocation that vests or unlocks based on how much they play the game or how much they interact with the contract. And so we've built an SDK that lets companies figure out more creative ways to align incentives between them and their community and their players in a way that's really easy to manage. And so, you know, honestly, like companies can come to us at any time. They're about to launch a token, we'll help them distribute. They're earlier than that, we'll onboard them onto our token cap table management product or tracking product. And if they're later than that, we're rolling out a lot of features related to tax reporting, tax withholding, and accounting exports. That, you know, some of the companies we work with, they're in the hundreds or thousands of employees range and are struggling to track all that information. We can onboard them even if Magna isn't necessarily doing the distributions. We can still help them track all of these allocations.

Good deal. And then let's start with tracking ownership. What does that look like on your end? If a company comes to you later, let's say later on in their cycle, how do how are they keeping track of it before they bring it to you? And then how does it get— like, how do you— how do you keep track of these, you know, share ownerships after the fact?

Yeah, I'd say right now people are using a lot of spreadsheets, which, you know, spreadsheets work fine until you start having like multi-dimensional data, right? And the moment you've got employees, you know, they all have different unlock start dates, they've got potentially different unlock schedules, some of them have 83B, some of them don't. The data itself can get pretty complex, right? So even just tracking the data correctly, who's vesting when, who's unlocking when, because those can be very different, vesting and unlocking, depending on like the legal ownership versus the on-chain ownership. And so the first thing we're doing is building a really accurate ontology that can capture that data of those legal agreements, of those allocation arrangements, those unlock schedules. And then we also have, you know, the like HR component of it too. So, you know, when someone gets fired, you terminate their vesting, you kind of decrease their allocation and then kind of adjust accordingly, right? So you might take those tokens and put them back into the token pool, right? Into the team pool, because with crypto, we don't yet have a precedent for issuing more tokens like you do equity, right? It's usually, hey, that's a 20% team allocation and kind of that's where it's going to come from. So we help them with that kind of, you know, accounting. And then the second piece is then the actual like distributions themselves. And that's when, you know, if you're doing them through us, like we can account for that, but otherwise, you know, we make it easy for you to import distributions that you might have done manually, you might have done off Magna. So you can always track, hey, Mike, you know, he's halfway vested, should be halfway unlocked and okay, cool, like check. Like I see we've already done our previous two quarterly distributions and the next distribution isn't until next quarter. So, you know, we're good. And that's like the main, you know, one of the main states that companies exist in. It's like, there's a lot going on when you onboard someone and you raise a round and then, you know, they're vesting, but then when they vest, then it's like, you gotta have, okay, are there tax considerations? Is there legal filings we have to be wary of? But yeah, that's how we think about it, right? It's about having that accurate data record and then figuring out what are the actions they want to take against that data and what are the most useful alerts and insights they might want from that data. They're going to be different from the general counsel that might be doing like a Rule 701 volume limitation, which limits a dollar value. Of token awards that you can issue in a given year might be different than, you know, the accountant that's doing the offsetting of like the employee compensation costs on the books might be different than head of HR. That's just like, hey, Johnny had a million tokens, but shit, like his tokens have gone down 90%. Like maybe we should refresh him. And he's mostly vested. Maybe we should refresh him. Maybe we should give him something else. You know, those are the kinds of questions that each of these stakeholders are asking about the same data.

And then when it comes to vesting and unlocking, what is that like? So, you know, I have these tokens that are— let's relate it to like a more traditional equity where, you know, a lot of stock options have the 1-year cliff, and then after that you start getting your stock. So at that point, do your tokens become unlocked, you know, after that, that cliff period? You start, you know, you start getting your token allocation every month Are those automatically unlocked? Could I transfer those to an exchange if they're listed, sell them, or how does that look like when it comes to digital assets?

The high-level distinction is that vesting exists in a legal context for contributors like employees. So let's use employees as an example. An employee vests the right to tokens, right? Where, for example, let's say if I give you a million tokens, over 4 years, if you leave after 2 years, you might only get— earn the right to half a million tokens based on, you know, what the unlock schedule might be. And then that vesting can happen before the token even launches. There's different instruments you can use. And then depending on whether or not you file something called an 83(b), you might get taxed when you get the grant initially or you might get taxed as the tokens vest. And so there's, there's a lot of different scenarios to consider. There's a lot of different variables here, uh, but at the end of the day, you know, vesting is kind of the legal ownership of the tokens. And then, you know, unlocking is like, you know, an unlock schedule. It could be a release schedule, distribution schedule. At the end of the day is like, how do I then actually get those tokens in your hands, whether they unlock via claim portal, whether I airdrop them And the vesting is usually related to how long you've worked at a company. Like, when was your first day? And usually unlock schedules will be based off of like the TGE or, you know, the, the IEO or the kind of initial, you know, trading launch of the token. And they can happen if you join, say, you know, a company like Solana today, you're probably gonna, you know, vest and unlock at the same time. But if you join a company pre-launch, then you've really got to think about that distinction. The last piece, right, is we help track the vesting and that's more often than not like an off-chain, you know, piece of data. And then we help you automate that unlock or that release or those distributions.

Is there any advantage to having a token versus an equity?

That's like the million-dollar question, right? I think a lot of companies in the space where the token has a real utility, there is a difference between the equity and the token, is you're getting ownership in the company, its developers, the specific IP it creates. A lot of times, these companies have a labs division. And then the token, in most of these companies that are progressively decentralized, the token slowly becomes a property of the community, like open source contributors. The company is but one of the contributors to the token. It's owned largely, in some cases majority, by the community. And companies will make the argument that the value of that token is derived from its utility and its consumptive value. You derive it based on the on-chain activity or the fees or whatever you have it. And so I think that there's talking about the difference between equity and tokens, I wouldn't want to do as, as someone that's not a lawyer. But I think that what I would say is that a token doesn't make sense for every company. At the same time, equity doesn't make sense for every company. And some companies will have value accrue to both. Some companies will have value accrue to one or the other. Some companies go on to launch multiple tokens. Associated with different projects. And so I think that's kind of from the legal perspective, the ownership aspect. Separately, I think tokens, crypto are really incredible technology, right? And it helps facilitate transactions more easily, transfer of ownership more easily. I have a big belief that tokenized securities are going to be huge in the future from the perspective of, you know, I've been in venture for 10 years. And when you do venture deals in the equity world, there's all these terms that lawyers have to define and lawyers have to execute. You've got a drag-along, co-sale rights, liquidation preferences, different waterfalls. And in my mind, those types of things make tremendous sense just written right into the smart contract. And so eventually there's going to be some acquire company button and it's going to go through the the token cap table, go through the terms, go through everything, and net out, okay, at the end of the day, who gets how many tokens, who gets how many dollars. And so I think from a technology perspective, I think it's a lot more interesting and a lot easier to work with because it's defined in code, executed by code, whereas equity is, you know, defined in PDFs and executed by lawyers.

That makes a lot of sense. I mean, the thing One of the things that comes to my mind, I'm kind of speaking something I don't know that much about, but when it came to the GameStop, GME saga, where my understanding was that there was a large number of shares unaccounted for that they used on the short side, it seems like an issue that crypto could kind of resolve where you could really track everything on-chain.

And you don't even have to go back to GameStop. I mean, you can just go back to these centralized exchanges that went under, a lot of it was non-transparent uses of assets. It was non-transparent calculation of collateral value. In contrast to the decentralized exchanges, DeFi borrow-lend platforms where you've got transparent calculation of collateral value, and you've got transparent use of funds and transparent source of funds. Now, these systems aren't yet perfect. I think we're still iterating. I think the There are some oracle manipulation attacks, price manipulation attacks that exist because we're still figuring out where the weaknesses are in these systems. But I really do think that every— some people say, okay, are we just speedrunning all the financial crises and 50 years of fraud? And I think that when it happens in crypto, we come out of it stronger because we come out of it with better code, more transparent systems, and and more robust platforms.

What are some of the things that founders could do wrong, or, you know, maybe even, you know, shoot themselves in the foot, per se?

Yeah, I mean, at the end of the day, the number one thing founders do wrong is, is they don't talk to lawyers early on. And I think good lawyers early on, because there's kind of this cadre of people that you need to get involved when you're working on a token project at the beginning, right? You need a good lawyer that knows what they're doing. You got to think about the token valuation firm, probably someone on the finance side, though usually lawyers can give some guidance on that. And so there's a couple of— when you talk about SAFTs, token warrants, SAFTs are a thing. The instrument you choose has a tremendous difference on the legal implications and the tax implications. So they're really not at all interchangeable. That's probably one thing I'd want to get across to founders. The other is that Founders really need to think about how they are papering over those agreements for token grants themselves and their early employees. If they don't do it correctly, I see founders or teams come to me and say, hey, man, our token's worth a lot, about to come up on a huge tax bill. How do I avoid that? And my answer is like, go back in time 2 years and sign the correct token agreement you should have signed 2 years ago. And lawyers these days have a bunch of different solutions, whether it's that's, you know, sometimes just mint a token, don't let it trade, get a valuation report so that it's worthless. And then, you know, get that token, restricted token grant with an 83(b), file that, pay a minimal tax and carry on. Some lawyers have a creative approach to future token interests where, you know, they have a way of structuring that such that you can file an 83(b) on that as well. And then there's a lot of little tips and tricks in the industry. I mean, it's funny, I've dug into with some of these people that they don't even want me to reveal their secrets, but let's just say, you know, even like the length of the unlock schedule, projects might think, okay, like it's arbitrary, or, oh, all that matters is, okay, when is the token going to get into their hands? But it's actually a huge component of the token valuation. A valuation firm can make a bigger argument for why your employees' tokens are actually worth a lot, lot less because they're on a longer lockup than the investors that are on a shorter lockup. Then there's a few tips and tricks there. So little things like that, I think it's important for founders to know that those decisions aren't arbitrary, or at the very least, they don't just affect one part of the business. They don't just affect the sell pressure or the community dynamics. They also have huge implications on taxes, on legal obligations, token valuations and a whole lot more.

That's a great point. I think that's definitely something that people should be thinking about ahead of time. It's just even just the legal aspect, definitely taxes aspect as well, because it could really come back to bite you. When it comes to tokens and creating a wallet, what does that aspect look like? You know, you got a new client, they're looking to launch this token project. Now we got to create the wallets for these tokens. Can you walk us through that at all? And, you know, providing transparency there?

Yeah, I think that, you know, the wallet is where the token lives, right, on one hand. On the other hand, it's often used as a piece of identity, right? You might have an anon contributor, etc., you know, all you know is their wallet. And so from the security, that custody perspective, you know, we're seeing teams I think the hot wallet is probably the riskiest, most basic way of storing tokens. We're starting to see more and more teams move to multisigs where you've got, you know, multi, multi-threshold signatures, and that can be implemented in a couple of different ways in terms of the security. And more and more we're seeing investors mandate use of multisigs instead of using a hot wallet. Because hot wallets get hacked all the time. You know, multisigs can get hacked, but you, you know, need to really, you know, hack each of the signers or, you know, kind of the minimum threshold number of signers.

Yeah.

And so more and more teams are using multisigs, and, you know, we're building multisig support natively into our platform. And then the other layer is we're seeing larger projects in particular start working with institutional custodians from day one, especially if they're custodying a really large dollar value of tokens. They'll use potentially a multisig for more operational day-to-day uses, and then they'll keep a large percent of their reserves or treasury in a custodian like BitGo, Anchorage, Fireblocks, which have different nuances on you know, whether they're the qualified custodian or, you know, whether you own the keys, there's a few different considerations there. But yeah, I think most projects will use a bunch of different things. They'll have a hot wallet for some, you know, DeFi stuff they might be interacting with. They'll have a multisig for some of their more frequent interactions, and then they'll have a custodian for, you know, the bulk of their funds.

And what about the actual creation of the wallets? Like, I mean, in terms of you got a new coin, it's never been traded before, doesn't exist. How does that circulation of that begin? Where's the, you know, site zero?

Yeah, so, so there's a couple different, you know, ways, right? I mean, if you're— if you have just say like an ERC-20 token, um, you know, a lot of the, the multisigs might, might support that out of the box, whereas the institutional custodians, you have to go and you have to be like Hello, Mr. Custodian, can you please add this token? And if it's an ERC-20, they'll say, great, we can do it in a couple of days or a couple of weeks. If it's a whole new chain, they might say, you know, that's going to take a couple of months and hey, you actually got to justify the effort to us. And then you're seeing that with some of these, you know, if you look like Aptos or Sui, you know, I'm sure they had to go through this. But you also see this with app chains on Cosmos where these custodians have to go in and add support for each individual app chain. And that can be a bit of a pain in the ass. And so sometimes projects will start with a multisig hot wallet and then work with the custodians over time. I think the interesting thing here as well is wallet management. Some lawyers will advise really trying to keep wallets as separate as possible in the beginning. So they'll say, hey, take those investor tokens, move them into one segregated wallet. Where it's clear which tokens are coming in and out. It's also clear that, you know, those tokens are not trading for compliance purposes. There's some Safe Harbor provisions related to, you know, how quickly can people trade your tokens as well. And similarly, I might say, hey, take those employee tokens, put them into another wallet to make it clear that those are set aside. And we even see some teams that want to keep those locked up from the beginning. So they'll come to us and they'll say, hey, we actually want to put them in escrow, lock them up, even before we know the exact, you know, TGE start date or the exact unlock details. And so yeah, there's a lot of like, you know, how do you figure out your wallet strategy over time, you know, where do these tokens live, and being very intentional about that. Um, and then of course, you know, getting advice from your lawyers on how to best structure this for your purposes. And then there's, you know, the one thing you talked about, you know, in terms of minting as well is Again, it's very nuanced in terms of some of these token projects. They'll have a US entity, they'll have an international entity, and it can really have a huge impact, like which entity is actually minting, which entity is custodying, which entity is receiving and when. And so one of my big gripes of the space is that there's not a lot of great open source material or playbooks about best practices. It really does live in the brains of a lot of lawyers or founders that have to go through this. So one of our hopes is that we can start generating more content to make this stuff more transparent to founders. But the reason I say talk to a lawyer is because today, it's really the lawyers that are up to date on what are the best practices to keep yourself from shooting yourself in the foot by moving something to the wrong wallet or mingling funds that shouldn't be commingled.

Yeah, that makes a lot of sense.

Yeah. And again, it's different considerations. Some US, some international teams might say, ah, some of this KYC processes can be a little onerous. And so they might opt for a more multisig approach. Increasingly, I'd say these custodians are doing a better and better job of adding DeFi integrations to make it easier to do things with your tokens instead of having to move them into a multisig or a hot wallet before you do anything with them. And it's something that we're spending a lot of time with these custodians and saying, for teams that want the option, we'll automate those distributions straight from the custodian. They don't even have to go into our smart contract.

In terms of operational best practices for private companies, what are some of those things that they should really be keeping in mind when it comes to you're distributing a new token.

For companies, right, that are distributing tokens, most important things are always like, do you just have a really clear and up-to-date record of, you know, your stakeholders and their allocations and where they are and their vesting, their unlock? The other one is, you know, at least use a multisig to, you know, custody and control the flow of your tokens, um, or an institutional custodian where appropriate. And then I'd say the last part is always double, triple verify the wallets that your investors, your employees, your contributors are sending you. Send test transactions. We're building in features at Magna where we'll email you to confirm the wallet and have you sign a transaction. And potentially, if the company wants, even confirm a small deposit because we've seen people that are absolutely sure that's the wallet they put in, and then later they're like, oh, there was a typo, or, oh shoot, no one told me that we didn't use this wallet anymore. And so those are kind of the biggest ones. I mean, there's a lot of other more nuanced things, but I think every team, if they're auditing their own internal processes, it's like, is the custody in a good place? Are we using kind of a secure way to to store and move tokens? And then, you know, are we really like double, triple checking these investor addresses?

Definitely. Yeah, it's always hard sending a crypto transaction where you're just like, you know, did I copy it right? Like, yeah, I love the QR codes for that.

Yeah, it's very stressful when you're like sending a large amount of money. And you're like, okay, are you sure you pasted this incorrectly? And so these are some of the things that we think a lot about of like, how can we make it easier for a founder to send test transactions? And because sometimes you really need to, no matter how many times people look at the address, you really need to tell them like, no, no, go look in your wallet. Like, tell us that the tokens are actually there before we send more.

100%. What type, what type of tokens you guys seeing? Is it— I mean, is it mostly, uh, you know, are you mostly seeing governance tokens? You know, what are you seeing out there?

Yeah, um, I think we're, we're seeing it really run, runs the gamut, right? I mean, I think there's a lot of utility tokens, there's a lot of governance tokens, um, you know, but at the end of the day, I think people are sticking a lot to the common standards Ethereum, TRC-20, and Solana, it's SPL. I think there have been some other interesting token standards like 1404, 1400. There's been some attempts at creating a security token standard that has whitelists and all these various restrictions. But I think that at the end of the day, it's interesting how a lot of lawyers have absorbed some of that complexity. For example, there's restrictions on Hey, you can't trade a token in under a year because of legal exemption reasons, but the lawyer will say, hey, everyone's on a 1-year lockup and don't send the tokens for a year. I think people have worked around some of the biggest restrictions from just an operational perspective instead of on-chain. At the end of the day, people are using the most common token standards because they're most widely adopted, they're getting the most innovation, they're seeing the most iterations. Most deeply integrated throughout the ecosystem. I think we're always going to be seeing continuously new and interesting and creative uses of tokens, which is why we love crypto, because people are always doing new things or thinking about things in different ways. One more thing I think is that what we saw once the market crash happened, not just in June, but also in September, is that a lot of teams were postponing their token launch. So teams were saying, hey, we're— we were going to launch in Q4, now we're going to launch in 2023, maybe 2024. Some teams postponed it indefinitely. But I think what we saw was a lot of teams went really back to the drawing board of like, okay, you know, what are the mechanics? How does it derive its value? You know, does the token even make sense? And so I think right now we're still in that phase where a lot of teams are seriously thinking about their token and how it fits into their community or their game or their app. And so I think in, you know, later in 2023 and 2024, we're probably going to see some of the most, like, thoughtful, you know, creative and intentional uses of tokens than we've seen in the last couple of years when it really was just like, oh, everyone's doing it a certain way, like, let me also get out a token that does it the same way.

Let's take a step back and walk into funds. You know, there's crypto hedge funds, there's crypto VC funds. Yeah. Let's talk about how these different funds are interacting with tokens today. How are they dealing with private company shares in particular?

Yeah, so these funds that invest in crypto companies, you know, some of them will exclusively focus on tokens or like, I only care about a token, I only do SAFs or token sales. Some of them are fine doing equity-only deals, and some do a little bit of both, right? They will receive some equity and then there'll be a token warrant, a token side letter. We mostly— I think on the equity side, there's people who have been doing that for decades. I think there's pretty robust support for that at the fund operational level, at the fund admin level. But I think the part of tracking tokens, I mean, as an industry, it's brand new, but I think as a part of a venture fund, it's very different than how venture funds have existed before because the traditional equity venture fund, you're making an investment, and then you're really just tracking markups along the way and maybe deciding whether to double down or sell a bit of secondary, but you're kind of waiting for that exit. And then if you're a traditional venture fund, then great, you have the exit and we'll distribute the shares to the LPs. Though some venture funds have been bucking that trend and becoming RIAs, but that's outside of the scope of this. But You know, with crypto, these venture funds, uh, you know, now when they start getting the tokens, they almost have to think like, you know, some of them like hedge funds, like, you know, do I sell? When do I sell? If they want to sell, how do they sell? And, you know, it's not always bad actors. It's not always like dumpers, you know. Sometimes these funds talk to the projects and say, hey, you know, look, we, we plan on taking profits or taking a specific multiple. But, you know, they have to worry about kind of from an investment perspective, how do they think about that? And, you know, the decision of like when and how to sell. People are always figuring out the best practices there of, you know, who actually sells it. Some funds will have in-house, you know, kind of trading teams. A lot of funds will send the tokens to a market maker to actually execute that transaction. And so that's kind of like, you know, the front office perspective, the middle office perspective. But then there's also like the operations perspective, which is like, okay, like we invested in this company, you know, we maybe did 3 investments to this company, we got in 3 different tranches of tokens, each one has its own unlock schedule. And now they have to stay on top of those tokens. And for each unlock, they have to, you know, on time be like, hey, the unlock's happening, you have to go claim the tokens, they have to verify, that they have the right amount that's claimable, the right amount that got airdropped, and then, you know, really stay on top of all their wallets. And potentially even some of these projects have multiple tokens, you know, multiple chains. And so there's this really newfound operational element that a lot of funds are trying to build out, you know, their own internal teams to wrangle.

What are some of those elements they're looking to battle? Is pricing the assets kind of the hardest part?

Yeah. So I think there's maybe kind of a few different elements. I think one is pricing the elements, pricing the assets, like calculating the net asset value. And there you're thinking, okay, for the liquid tokens, what price feed are we using? What exchange are we using? There's some best practices there. Are we using the spot price? Or are we discounting based on trading volume and liquidity? That was the huge issue with FTX, right? They were marking assets into billions that had trading volumes in the hundreds of millions. And it's interesting because emerging best practices there, even around who has the right to tweak those values, right? And so the reason fund admins exist is because they are supposed to take an impartial look, but we're, for example, starting to build tools that say, let the finance team decide how much to discount so that the frontend team, the GP isn't sitting there trying to mark to the spot price. And so there's that element of like for the liquid tokens, what do you use as the feed? What do you use as the value? And then for the illiquid tokens or for the tokens that are still locked, what's your pricing methodology there, your valuation methodology? Are you marking it at cost? Are you marking it maybe at the last round? Maybe are you marking it at— we've seen some teams use some complicated options pricing models to figure out the price given when it's going to unlock. And so I think that people are still figuring out and still figuring out best practices for. And some teams are more sophisticated, some are less sophisticated. More sophisticated isn't always better. I think sometimes people use more complex models when, you know, some teams will just say, you know, let's just market at cost. And so that's just the pricing. And then there's like the logistics of, you know, for example, one of the funds we work with, they have, let's call it 50 live tokens that they're tracking every week. Several of them are unlocking. Each one they have to go and say, okay, like, when does it unlock? They have to go tell the person how many unlocked, you know, and then where to go to claim it, what the staking URL is. And for some of these companies, like, I— we talked to a fund once where, you know, they had a set of ledgers that they kept their, um, their tokens in. And it, you know, the person in the operations team literally had to go find the right drawer to find the right ledger to go claim that specific token. And so there's even like a literal logistics issue of like, where do you keep those? Where do you track all that data? And so I think there's, yeah, the NAV calculation element. There's kind of the token tracking element. That's one of the ones that we are helping funds with today. And then the third is how do you keep accurate records of all this stuff? Because the reason that a lot of crypto funds take forever to get their LP updates out, their K-1s out, is because again, you're dealing with investments on multiple chains, partially liquid, partially illiquid. You might have dozens, if not hundreds of wallets. The tokens are all over the place and you've got to track the value at the time you unlocked, at the time you claimed, disposition. And if a market maker is TWAPing out of a token, they might have dozens or hundreds of trades. And so there's also like an incredibly complex data record piece of it, in which, you know, we are— one of the things we're working on is helping build tools to wrangle that data from an operational perspective, right? So how can we make it easier to answer those day-to-day questions, week-to-week questions, but then also give the fund admin the data that they need to go in, look at it, see that it all makes sense, and then put their, you know, stamp of approval on it without them having to go and recreate that data record from scratch at the end of the quarter.

Yeah, there's, there's a huge, huge gap right now, uh, yeah, you know, coming from the fund administration space. I get, I get, I can speak.

Yeah. And that's not even talking about funds that have NFTs in their portfolio. They're, you know, providing liquidity, they've got LP positions, you know, they're doing their yield farming, they're staking. I think, you know, a lot of what we help with right now is just like the venture piece, the token tracking piece. But once you layer in all these other aspects it gets quite complex. And I think there's some companies that are good at certain parts of, you know, each of those things, like, you know, just tracking your staking and just tracking your liquidity provisioning. And we are kind of attempting at bridging together a lot of that data to give funds kind of that bird's-eye view.

Tell us about the work that you guys do with, like, when it comes to, like, working with, like, a fund administrator, like, auditor. What do you guys see in there?

Yeah, you know, I think it's a lot of what we talked about where, you know, they often find themselves, these auditors, these fund administrators, you know, they're only as fast and as good as kind of the data and the records that the fund maintains during the quarter, right? And so a lot of, you know, the fund admin work can be quite asynchronous, right? It's at the end of the quarter And then in the middle of the quarter, day to day, week to week, you know, funds are claiming, they're selling, they're unlocking. There's all these things going on. And so we've talked to a couple of auditors that say, hey, like, if you can clean up this data better than the funds do themselves, like, that would make our lives a lot easier. And that's really where we see our place, right? It's not replacing fund admins, not replacing the auditor. It is specifically making the lives easier of the fund's own finance and ops teams, helping them do more with less, taking some things off of their plate because those people are overloaded. So Magna, we're trying to build it to be the best friend of your fund's finance and ops team.

Tell us about the 83(b) filing. When is it applicable to an employee of a private company? When should they be thinking about these?

Yeah, there's a lot of nuance here, but high level, If you are getting tokens in a project really early on, they're not worth very much, and you think, okay, let's say you're going to be at that project for 4 years, and optimistically you think that 4 years from now it's going to be worth a whole lot. So there's going to be worth a ton of money. By default, you get taxed as you vest, and so as the token goes up, your tax bill would also go up. And what the 83(b) lets you do is say, hey, I actually want to get taxed on it right now when it's not worth very much at all, and then not worry about taxes until I sell the token. 83Bs are pretty common for founders and the first couple of employees, really, so long as that token is worth a low enough amount that either you feel comfortable paying a tax because you think it's going to go up, or, you know, you can afford the amount and you don't want to have to pay taxes as it vests. There's some Ongoing legal debate about, for example, whether you can file an 83(b) on future token interests. There are certain law firms out there that will structure what's called FTIs for projects that don't yet have a token. It's debatable, depends on who you ask, whether you can file an 83(b) on those, but usually people will file 83(b)s on unrestricted token grants. Right. And those are cases where the tokens exist, they're given to you on a vesting schedule. And you're opting to take that tax hit now because you think it's going to go up in value.

Good deal. So you guys raised $15 million at a $70 million post valuation in September. What was it like raising capital in this market? And what are you seeing from companies today versus maybe a year or two ago when the market was a little bit more forgiving?

Yeah. So it's interesting, right? So we raised when times are really good, times are really exciting. And so people love crypto. I was a third-time founder, and it's always easier to raise when you're a serial founder. I think we had a pretty clear vision as well that investors really resonated with. I think we're building something that's really widely needed in the space. I mean, I think every company, every fund needs the tools that we're building. We had some early customers, we had a product, kind of a beta product out there. And so we had all the ingredients to raise as successful round. Now, after we raised, the macro really turned for crypto. Tokens weren't doing well, prices were tanking, and so generally investors soured on crypto, especially not crypto-native investors. So there's a lot less capital coming into the crypto space from the outside. But then tech, I mean, everything took a hit. I know angels that last April, that were flush with cash that now lost most of their money. I know funds that a year ago had their eye on the next fundraise and now they're afraid to even make capital calls for committed capital. And so I think the markets have really pulled back and in some ways we're back to basics. We're back to investors doing diligence, digging into the business model, the economics, the TAM, things that barely even came up in conversations a year ago. I think teams need to have really good answers to those questions of how are they going to make money? How are they going to grow? What's the market size? I think for us, we're in a really good and very fortunate position that we have 4+ years of runway. We can just be heads down building toward the vision that we have of enabling the token asset class and helping companies and investors manage and work with the tokens that they're distributing or receiving. For a lot of companies, I'm finding myself having to coach founders in the mechanics of fundraising in a way I didn't have to when times were really frothy back in the day.

Yeah, very, very— I mean, just thinking about the risk-free rate changing from 0% to 5% really puts a lot more pressure on any company, but especially for those early-stage companies.

Yeah, I mean, there's also that, right? I mean, yeah, the risk-free rate goes from 0% to 5%. There's a lot. It completely changes the mindset of LPs, of investors, I mean, even other companies, right? If you think about on-chain lending products and all these different yield-generating products, yield farming even. Yeah. Why would you take a risk of a lower on-chain yield or maybe a higher yield, but in kind of a shifting token value when you could just go get 5% from the federal government?

We've covered a lot of things here, Bruno. Any advice that you would give to either a new fund manager or maybe somebody starting a company in this environment?

Yeah. I think For someone starting a new company in the crypto space, again, definitely talk to a lawyer early on, but also I always recommend founders, like find founders that are just ahead of them and have solved a lot of the problems that they're about to solve, not only because they have that experience, but it's also very fresh and new, right? Someone that just had to deal with, say, figuring out the best custodian or the best multisig solution is going to be more relevant than someone that was doing this 2 years ago when the landscape was totally different. And then in terms of funds, I would say, similarly, really try to learn from other fund managers, from other fund operations people, because I think that everyone's trying to figure out the best practices. We're learning with our funds that we work with as well and trying to productize some of those best practices. But I think what's been really amazing is the community that sprung up. I mean, the communities of fund accountants, of fund operations people, of fund managers and especially emerging fund managers. So I think, yeah, look, like anything else, just go find a good community of people to learn from and find the right experts to talk to. And definitely don't try to wing it in terms of figuring out how to do this stuff.

Love it, man. Bruno, this has been amazing. Thank you so much. Where can people go to connect with you and learn more about Magna?

Yeah, so you can go to our website, which is magna.so, and reach out to us there. I'm pretty active on Twitter, always happy to respond to DMs. That's my first initial, last name is my Twitter, @BrunoFaviero. Also on Telegram.

Awesome, man. Much appreciated, Bruno. Thanks so much again, man, and we'll be in touch with you soon.

Sounds good.

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