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Token allocation (cap table) planning

Robin Ji
Robin Ji
Robin Ji
Robin Ji
CEO & Co-Founder at Liquifi
Token allocation (cap table) planning
Key takeaways

Token allocation is crucial in a token project’s success. A good allocation strategy will align the incentives of the community, core team, and investors, while the wrong design could spell poor traction, conflicting incentives, or mistrust from your community.

The Rough Outline

Setting up allocation correctly is part art, part science. We provide benchmark data across 100+ projects from our previous analysis.

For the community

Most often, we see around 50% of tokens allocated toward the community, with a portion set aside exclusively for early community members via retroactive airdrops and liquidity/engagement incentives.

For the treasury

Another 20% is allocated towards the treasury, which provides ongoing support for the protocol post-launch. Treasury expenses include development and growth initiatives, forming partnerships, operating expenses, and general community management.

For private investors

Most projects also take on outside capital from venture capital investors to fund early development and distribute around 15% of the token pool to investors. For projects who raise venture capital investment, the average is around 20% allocation while other projects choose not to raise from investors at all.

For core contributors

The remaining portion (around 15% of the token pool) is allocated towards the founders and core contributors. These tokens are typically subject to vesting restrictions (see our previous post on token vesting and lockups).

Thinking about allocation

While the rough outline is great as a starting point, each project has its unique needs which will influence allocation.

Generally, the thought is how to maximize community ownership and decentralization while also balancing the needs of core contributors, investors, and reserving enough for the treasury.

For deciding investor allocations: “How much funding do we need to achieve PMF (product-market fit)?”

Some projects require more cash to get to launch, which mean more investor funding and more tokens allocated to investors. Other projects like ENS and Hop Protocol required no outside capital, which meant their token allocation skewed more towards the community and treasury.

For core contributors: “How expensive will our core team be?”

As a token project, you have three methods of compensation: cash, equity, and tokens. Different types, quantities, and quality of talent will require different token allocation strategies.

For example, if most of the team are short-term contractors, it makes sense to raise more funding from investors and compensate the team primarily in cash. On the other hand, if you’ve hired a team looking to remain long-term, then it makes sense to increase the core team’s token allocation to properly reward and incentivize them.

For an extremely competitive and technical field, you may need to pay above market-rate to incentivize A+ talent to join your team.

For community allocations: “What will it take to jump start and incentivize network participation?”

Some projects require lots of marketing and fixed costs up-front. For example, to launch Helium’s network of hotspots, they had to heavily incentivize early backers by subsidizing hardware. The other side of this spectrum is one where organic discovery is quite strong for the token. In these cases, the project can allocation fewer tokens to the community because of more natural adoption.

There’s no single, 100% correct answer to any of these three questions. Rather, they’re meant to serve as guidelines to help you find the right strategy for your project.

Rules of Thumb

Generally speaking, the more a community is actively engaged with the token, the more likely the project will become a success. As a result, it’s a good idea to leave plenty of budget for community allocation to maximize decentralization and post-launch growth.

After community, the next piece of the puzzle is core team allocation. You want to make sure that you have a large enough pool to attract great talent to start the initial protocol before decentralizing.

Some venture capital investors require minimum ownership targets. As a result, be thoughtful about which investors you partner with, construct your group of investors thoughtfully, and make sure you have enough budget to bring on the highest value-add partners.

Further, once you publish the token allocation plan, it’s very hard to make changes and it’s impossible to take back tokens once granted. Designing the right allocation plan is a vital step for token projects, and it’s important to use tools like Liquifi to track and update token allocation as you distribute tokens over time.

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Robin Ji
Robin Ji
CEO & Co-Founder at Liquifi
Token Vesting and Compensation Guru

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