Snapshot: Equity vs Tokenised Models
- Staff
- Jan 28
- 8 min read
Raising capital is one of the most critical challenges for startups. Founders face many choices, from traditional equity fundraising to newer token-based models. Each approach has unique benefits and risks. Understanding how equity fundraising, SAFEs, revenue-based financing, and tokenisation work can help founders build a funding strategy that fits their business goals and market realities.
This article compares these fundraising methods, explains when tokenisation complements equity rather than replaces it, and outlines what founders must prepare to succeed. You will also find a practical hybrid approach playbook to combine the best of both worlds.
Understanding Traditional Equity Fundraising and SAFEs
Equity fundraising means selling shares of your company to investors. This is one of the most common ways that startups raise capital, especially in early stages. Investors get ownership and voting rights proportional to their shares. This method aligns incentives but dilutes founders’ control.
Equity and SAFEs: The Standard Playbook, and Its Limits
For most early-stage founders, equity is the default language of fundraising. You give investors a share of the company in exchange for capital, and everyone's interests align around making that share worth more over time. The ownership structure is clean and well understood, and it sits on decades of legal precedent that investors, lawyers, and courts all know how to interpret. That familiarity has real value, especially when raising from institutional or professional investors who have done this many times before.
The SAFE, or Simple Agreement for Future Equity, emerged as a refinement of that model rather than a departure from it. Y Combinator, the influential Silicon Valley accelerator, introduced the instrument in 2013 as a response to a specific friction point: the convertible note. Convertible notes had become the standard vehicle for bridging rounds, but they came with interest rates, maturity dates, and debt-like obligations that created unnecessary tension between founders and early investors.
The SAFE stripped all of that out. It is not debt. It carries no interest. It does not expire. It is simply a contract that converts into equity at a later priced round, typically at a discount or subject to a valuation cap that rewards early investors for taking the earliest risk.
The appeal was immediate in the US market, and it spread quickly. A SAFE allows a founder to raise money in days rather than months, without the time and legal cost of a full priced round, and without the pressure of agreeing a valuation at the moment it is hardest to justify one.
In the UK, the picture is slightly more complicated. SAFEs are used, but they sit alongside instruments with deeper roots in the British market.
The ASA, or Advanced Subscription Agreement, is the UK's closest structural equivalent: it works on a similar principle, deferring the conversion of cash into equity until a qualifying round, but it is drafted under English law and carries meaningful differences in tax treatment. This matters because the ASA can be structured to qualify for SEIS and EIS relief, the government-backed schemes that form a substantial part of the incentive stack for early-stage UK investors. A SAFE, drafted as a US instrument, does not automatically carry those qualifications, and getting the structuring wrong can disqualify investors from relief they were counting on.
Revenue-Based Financing as an Alternative
Revenue-based financing (RBF) lets startups raise capital by promising a percentage of future revenue until a set amount is repaid. Unlike equity, RBF does not dilute ownership or require giving up control.
Pros of Revenue-Based Financing
No equity dilution
Payments scale with revenue, easing cash flow pressure
Faster and simpler than equity rounds
Cons of Revenue-Based Financing
Can be expensive if revenue grows quickly
Not suitable for startups with unpredictable or slow revenue
Lenders may require financial reporting and controls
Tokenised Funding Models Explained
Tokenisation, in a funding context, means issuing a digital token on a blockchain that represents some claim or right related to a company or its assets. That claim can take several forms: access to a product or service (a utility token), a vote on governance decisions, a share of revenue, or an equity-like interest in the company itself. The instrument, and therefore the regulatory treatment, depends entirely on what the token actually does.
Most UK founders will encounter this in one of two regulated forms. A Security Token Offering, or STO, is the closest analogue to a traditional equity raise: tokens are issued to investors and represent a financial claim, which means they fall squarely within the FCA's regulatory perimeter.
That is not a disadvantage, but it does mean the process carries compliance obligations comparable to a conventional securities issuance. Utility tokens occupy a different space, representing rights to use a product rather than a financial return, and in well-structured cases they sit outside the securities framework entirely, though the line between the two is not always clean and legal advice is essential before assuming which side of it you are on.
What makes tokenised instruments meaningfully different from their conventional equivalents is not the underlying claim but what becomes possible once that claim is on a blockchain. Tokens can be transferred without the friction of traditional share transfers.
They can be held in self-custodied wallets. They can be used as collateral in financial applications that do not require a bank or broker as intermediary. And, crucially, they can be made tradeable on secondary markets in a way that private company shares ordinarily are not.
The secondary market question
Secondary liquidity has historically been one of the most significant structural limitations of private market investing. When an investor puts capital into an early-stage company, they are typically locked in until an exit event: an acquisition, an IPO, or a secondary transaction if a buyer can be found. That illiquidity premium is priced into the return expectations of early investors and shapes the entire dynamic of a fundraise.
Tokenisation offers a partial answer to this problem. A token representing equity or revenue rights can, in principle, be listed on a secondary trading platform, giving investors a route to exit before a formal liquidity event and potentially widening the pool of buyers willing to come in at the primary stage. Platforms operating in this space vary considerably in their regulatory status: some operate under existing securities frameworks, others function as regulated multilateral trading facilities, and the FCA's Digital Securities Sandbox is specifically designed to test how this infrastructure should be authorised and supervised over time.
The qualifier "in principle" is doing real work in that paragraph. Secondary token markets for private company equity are still early in their development, liquidity in practice can be thin, and the legal mechanics of token transfer need to be properly aligned with the company's articles of association and shareholder agreements. The theoretical appeal of liquidity and the operational reality are still some distance apart for most UK startups.
PISCES: a parallel development worth watching
Running alongside the tokenisation story, and addressing some of the same underlying problem, is PISCES: the Private Intermittent Securities and Capital Exchange System. PISCES is a new type of private stock market that gives investors more opportunities to buy stakes in growing companies, operating through intermittent trading events that connect buyers and sellers of shares in private companies.
Unlike AIM or Aquis, PISCES allows intermittent rather than continuous trading. Companies can choose when and how often to open trading windows, set a floor and ceiling price for their shares, and retain control over who gets access to company information. Importantly, PISCES is a secondary market only and will not enable companies to raise new capital through the issue of new shares. It is a liquidity mechanism, not a fundraising tool.
The FCA has approved the London Stock Exchange and JP Jenkins to operate PISCES platforms. The first-ever share sale on PISCES involved Oxford Science Enterprises, a £1.3 billion investment company commercialising research from the University of Oxford. The regime is currently operating as a sandbox, and retail investors are generally excluded, reflecting the framework's focus on professional market participants.
PISCES and tokenised secondary markets are not the same thing, but they are working on the same problem from different directions: how to give private company shareholders a route to liquidity without requiring a full public listing. For founders thinking about capital structure, both are worth understanding, because the infrastructure for secondary trading of private company interests is being built in the UK right now, and it will change the options available to early-stage companies within the next few years.
When tokenisation complements equity
Tokenisation works best when it is layered on top of a conventional capital structure rather than substituted for one. A startup can run a seed round using SAFEs or ASAs in the normal way, and simultaneously issue utility tokens that give early users access to a product, a vote in a community, or some other defined right. The two instruments serve different purposes and reach different audiences: the equity round funds the business, while the token sale builds a community, validates demand, and can generate revenue before the product is fully built.
This approach has real commercial logic, particularly for companies building platforms, protocols, or products where early user engagement has a direct bearing on the value of the thing being built. It is also where the regulatory complexity compounds quickly. Running a token sale alongside an equity round means operating in two different regulatory frameworks simultaneously, with different disclosure obligations, different investor protection rules, and different tax treatments. That is manageable with the right legal structure, but it is not a shortcut, and treating it as one is a common and costly mistake.
Pros of tokenised funding models
Secondary tradability creates a potential route to liquidity for investors before a formal exit event
Fractional ownership lowers the minimum investment threshold, widening the investor pool
Utility tokens can fund development while building a user community simultaneously
Onchain record-keeping simplifies cap table management over time
Compatible with equity structures: tokenisation can complement a conventional raise rather than replace it
Cons of tokenised funding models
Regulatory complexity is significant: securities tokens require FCA authorisation or applicable exemptions, and the line between utility and security tokens is not always clear
Secondary liquidity, while theoretically available, is often thin in practice for early-stage company tokens
Legal costs to structure a compliant token offering properly can be substantial
Token sales that are not carefully structured can create problematic obligations or investor expectations
The market for tokenised private company equity in the UK is still developing; investor familiarity and appetite varies considerably
What Founders Must Prepare for Tokenised Funding
Launching a token sale requires careful planning beyond traditional fundraising.
Cap Table Strategy
Decide how tokens fit into your existing equity structure and have a clear understanding of your 'why' and how this approach works for you.
Plan token allocation between founders, investors, advisors, and community
Avoid overcomplicating the cap table with too many token classes
Token Utility and Distribution
Define clear token utility: access, governance, rewards, or revenue share
Design fair and transparent distribution mechanisms to avoid concentration
Consider vesting schedules to align incentives
Compliance Considerations
Understand securities laws in relevant jurisdictions to avoid legal risks
Engage legal counsel early and enusre they are experienced in blockchain and fundraising regulations
Prepare disclosures and investor protections similar to traditional fundraising
Pros and Cons of Tokenised Funding
Pros
Access to a global pool of investors and community supporters
Liquidity through secondary token markets
Builds engaged user communities early
Flexible token design for various use cases
Cons
Regulatory uncertainty and compliance complexity
Risk of token price volatility and speculation
Requires technical expertise and infrastructure
Potential dilution of equity if tokens represent ownership
Hybrid Approach Playbook for Founders
Combining equity and tokenised funding can unlock the strengths of both models while managing risks.
Start with equity or SAFEs to secure foundational investors who provide strategic support and governance.
Issue utility tokens to early users and community members to fund product development and validate demand.
Align token utility with business goals such as access to features, voting on product decisions, or rewards for engagement.
Maintain a clear cap table that integrates equity and token holdings transparently.
Ensure compliance by consulting legal experts and following best practices for disclosures and investor protections.
Communicate clearly with all stakeholders about the role of tokens and equity in your business.
Monitor and adjust your fundraising strategy as your startup grows and market conditions evolve.
Building a funding strategy that combines equity and tokenised models can help startups raise capital efficiently, engage communities, and reduce go-to-market risks. Founders who prepare their cap table, token utility, distribution, and compliance carefully will be better positioned to attract investors and supporters.
Disclaimer
TokenisingStartups.com provides independent educational content relating to equity tokenisation and capital raising. Nothing published on this site constitutes financial, legal, tax or investment advice, nor should it be relied upon as such. All investment and fundraising decisions carry risk. Readers should conduct their own due diligence and obtain advice from suitably qualified professional advisers before acting on any information contained within this site.
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