Not every project starts as a token network.

Many begin as Web2 companies, raise equity over multiple years, and only introduce a token later. By that point, a significant portion of the company (often more than 50%) is already held by early investors and shareholders.

Once a token enters the picture, that equity becomes a constraint.

You are not designing a new system from scratch. You are fitting a new system into an old one.

That old cap table still matters. The expectations, the side letters, the preferred rights — none of it disappears. Instead, token design becomes an exercise in reconciliation. You are building for community, incentives, and governance while managing equity obligations that were never designed for token economies.

And the incentives are rarely aligned:

• Founders want control

• Equity holders want liquidity

• Users want decentralization

• The token needs to function

That is the challenge. But it can be solved with the right structure.

Three Conversion Models

Companies in this situation typically adopt one of three approaches to define how tokens are allocated to shareholders:

1. Insider Pool Allocation

Equity converts only from the team/advisors share, not the full token supply.

In this model, equity holders receive tokens pro-rata from the internal insiders/company allocation.

In this approach, the project defines a fixed percentage of the token supply for insiders (e.g. 20%, which is the market standard), and legacy equity holders take their allocation from within that slice. They don’t get additional tokens from community, public, or ecosystem allocations.

Example:

• Total token supply = 1B

• Insider pool = 30% = 300M tokens

• Equity investor owns 80% of the company

• They receive 80% of 300M = 240M tokens

Why it works:

• Public sale, community, and ecosystem allocations remain untouched

• Retains decentralization optics

• Easy to explain, especially if the token launch is years after initial fundraising

Trade-offs:

• Dilutes the core team and current contributors

• Creates internal politics around who gets what within the insider pool

• If poorly communicated, legacy shareholders may feel shortchanged

2. Fully Diluted Pro-Rata Allocation (The worst)

Equity converts into a direct slice of the full token supply.

This approach matches token allocations 1:1 with equity stakes. If someone owns 15% of the equity cap table, they get 15% of the total token supply — regardless of where it comes from.

Why it’s easy (easy ≠ works):

• Straightforward and clean math

• Requires no negotiation with existing token stakeholders

• Often expected by traditional VC investors

Why it’s risky:

• Reduces available supply for community, ecosystem, and float

• Often forces community and public allocations down to single digits

• Governance is dominated by equity holders, not contributors or users

Consequences:

• Projects that follow this model often fail to decentralize

• Price discovery suffers due to constant selling pressure

• Projects with high allocation to previous shareholders plus new allocation for token sale investors often repel Tier 1 exchanges due to non-compliance with listing conditions (e.g. investor allocation > 13%)

• Any governance system is likely to be non-functional or captured at launch

3. Fixed Conversion Ratio

Equity converts into tokens at a pre-agreed multiple (For projects who gave away more than 50% ownership we recommend a 8:1 ratio)

This model creates a buffer, equity holders get exposure, but the token retains structure and flexibility. It’s often used when a company is converting old equity rounds into a token model post-facto.

Example:

• Conversion ratio = 4:1

• Equity investor owns 20% of the company

• They receive 5% of the token supply

Why it works:

• Protects the token model from being overrun by past equity deals

• Provides a compromise that offers upside without full control

• Can be paired with lockups or additional vesting to smooth market entry

Trade-offs:

• May require renegotiation with investors

• Risk of disputes if conversion logic wasn’t clearly defined up front

• Needs strong legal alignment (especially in multi-round cap tables)

Benefit:

• Allows token governance to remain focused on contributors and community

• Helps preserve room for incentive design, float, and ecosystem growth

Choosing the Right Model

There’s no universal answer — the right structure depends on:

• How much equity is already committed

• What promises were made in side letters or SAFEs

• How much control the team wants to preserve

• Whether governance and float are design priorities or afterthoughts

But here’s the one rule that holds:

If the token is meant to represent a new system, it can’t just inherit an old ownership structure.

Conversion needs to be modeled, capped, and designed, not assumed. Or the token will fail before it starts.

Need help structuring your allocation?

Talk to our team for a data-driven token allocation structure, following the market standards of your niche and being compliant with the best practices