Valuing Illiquid and Pre-Launch Tokens: A Guide for Law Firms and Their Clients

As crypto projects take shape, it's common for founders to issue tokens alongside equity, often assuming valuation can wait until trading begins. However, that assumption can be costly. The IRS and SEC don’t equate “no market” with “no value,” and without a defensible valuation, companies risk tax exposure, regulatory scrutiny, and confusion around how tokens fit into their funding structure.

Redwood works with law firms and their clients to help them navigate this increasingly complex landscape. Our goal is to provide a clear, practical framework for advising on token lists—one that helps structure deals with confidence, avoid common pitfalls, and stay ahead in a space where the rules are still being written.

What Is the Purpose of a Token Valuation?

A token valuation establishes a defensible fair market value for a token before it becomes tradable. Most often, this supports 83(b) elections, which allow founders and early employees to pay tax on the token’s value at issuance, rather than when it’s worth more after listing.

Without a proper valuation, clients risk tax bills based on post-list prices, and suddenly, a founder is on the hook for millions in taxes.

But it’s not just about taxes. A token valuation also plays a critical role in ensuring regulatory compliance, helping clients avoid inadvertently issuing securities. It promotes transparency for investors, particularly when SAFEs, SAFTs, and token warrants are involved, and clarifies the legal and financial boundary between tokens and equity, which are too often treated as interchangeable. As Redwood expert Krishna Gandikota put it, “We need to establish a clear distinction between the token component and the equity component, ensuring they are treated as separate and independent elements.” That separation is not just technical—it’s foundational.

Who Benefits from a Token Valuation?

Founders and Early Employees

Valuation enables founders to make timely 83(b) elections and lock in tax treatment based on today’s value, not tomorrow’s potential market price. Without it, they face massive tax burdens on illiquid assets they can’t touch. As Gandikota put it, “Founders may not have that capital. Most of the time, a lot of these tokens have vesting schedules and lockups… so it’s not like they can just liquidate their assets and pay the tax bill.” Getting the valuation done early helps founders protect their upside without draining their cash.

Law Firms and Their Clients

For legal counsel, token valuation is a cornerstone of proper structuring. It equips firms with a practical tool to guide clients through IRS- and SEC-compliant token offerings, draw a clear line between token and equity financing, and avoid drafting errors that could lead to ambiguity or legal exposure.

In practice, law firms are often the first line of defense. A token valuation gives them the backing they need to help clients steer clear of costly mistakes.

Investors and Venture Firms

Token-linked financings require precision. A reliable valuation removes ambiguity around token pricing and ensures that investor expectations align with the startup’s compliance framework.

Common Pitfalls and Key Considerations

Navigating token valuation requires more than just technical know-how—it demands a clear understanding of the evolving legal, financial, and regulatory landscape. Whether advising a pre-list project or structuring a complex token offering, advisors must be aware of several common pitfalls and key considerations that can significantly impact outcomes.

Structuring Token Issuances Incorrectly

Many crypto founders don’t realize they can’t simply wrap tokens into equity financing documents. SAFEs, token warrants, and token contracts need to be carefully structured to avoid conflict, mispricing, or triggering securities treatment.

Timing the Valuation Too Close to Listing

Timing matters—a lot. The ideal window for a token valuation is at least 90 days before the token list. Sixty days is generally acceptable, but once you’re within 30 days, the risk increases significantly. A valuation too close to listing can lose its credibility because the token market value during or after listing might be considered more relevant. However, in the event that you have fewer than 30 days to list, Redwood has pioneered bespoke defensible valuation methodologies specifically crafted to address such time-sensitive engagements and align with client circumstances.

Understanding Value Accrual

Tokens aren’t equity. Their value is based on utility, governance, and functional use, not on ownership or cash flow, traditionally. If you’re issuing tokens, they must stand on their own merits.

This is where Redwood comes in. We typically engage with projects at a very early stage, when there’s only a general thesis or initial concept for the token. At this point, a conservative valuation is often more defensible, and the analysis can focus on how value will actually accrue as the project takes shape. Our experts assess how the token is intended to function—whether it’s tied to access, governance, or utility—and help determine how that functionality translates into value. We also look at what it actually costs to build and deliver the underlying service or infrastructure. Gandikota shares, “As [Redwood partner and CPA] Kris Day often explains, if a subway ticket costs $5 and you tokenize that experience, then one token should be worth $5—it’s about mapping utility to real-world cost.”

The point isn’t to guess at market value, it’s to demonstrate rational, supportable value based on real utility and infrastructure.

Avoid Premature Vesting Schedules and Tokenomics

We strongly recommend that law firms and founders engage us before finalizing token economics. Why? Because detailed governance, vesting terms, or token caps can lock in assumptions that limit what the valuation can support. The earlier we’re involved, the more flexibility and defensibility we can offer.

Redwood’s Token Valuation Playbook

So what’s the right approach?

Engage Early

The biggest mistake we see is clients coming to us too late. Token valuations should be done at least 90 days before listing, ideally before any pricing discussions, pitch decks, or verbal agreements. Redwood’s reports are generally valid for about three months, and we offer a one-time complimentary refresh. Note that token valuations can get stale quickly due to rapidly changing market dynamics and material events.

Use Defensible Valuation Methods

We apply methodologies aligned with regulatory expectations:

Asset Approach:

•Cost to Recreate: What it would take to rebuild the token’s infrastructure from scratch.

•Cost of Utility: An approach that values the token based on its actual function (re:  subway ticket example above). These methods are designed for regulatory defensibility, not speculation.

Market Approach:

•Scorecard Method: Estimates the token’s value by benchmarking it against comparable ventures and systematically adjusting a baseline valuation using weighted criteria such as management team, market opportunity, product stage, and competitive environment.

•IPO style Fully Diluted Scenario: Applies an IPO-style valuation framework by defining a target fully diluted market capitalization at token listing, informed by near-term expectations for the token sale event and anticipated market reception.

Income Approach: Derives value by estimating reasonable future cash flows to the token or token holders. These expected cash flows are discounted to present value using a risk-adjusted discount rate that reflects the uncertainty and risk associated with the forecasted returns.

Keep Tokens and Equity Separate

It’s worth emphasizing: early-stage token valuations should ideally come before introducing valuation caps, fixed token pricing, or exchange listing agreements. To maintain clarity and compliance, tokens and equity should be priced and documented through separate, distinct processes.

Implement Clear Vesting and Lock-Up Structures

We recommend that token agreements clearly delineate between vesting and lock-up schedules, as each serves a distinct purpose in both value creation and regulatory compliance. Vesting schedules govern the gradual allocation of ownership or equity rights over time and should be thoughtfully structured to incentivize long-term commitment. 

Lock-up periods, by contrast, restrict the transfer or sale of tokens for a defined period, which can help maintain price stability by reducing the risk of market volatility.Additionally, temporarily restricting the sale of tokens can signal a degree of regulatory prudence and foresight to investors and market participants. While vesting addresses when a holder earns rights to tokens, lock-ups determine when those tokens can be liquidated—both of which have important implications for fair market value, tax treatment, and investor perception. Being intentional about how these contracts are designed can go a long way in supporting a defensible valuation and ensuring regulatory readiness.  

Partner with the Experts

At Redwood, we don’t just dabble in token valuation—we specialize in it. We’ve worked with law firms, crypto startups, and VCs across the spectrum, bringing a disciplined, technically sound approach to one of the most ambiguous corners of the private markets.

Final Thoughts

Valuing illiquid and pre-list tokens isn’t just about checking boxes; it’s about protecting your clients from future fallout. Done correctly, a token valuation helps founders lock in fair tax treatment, ensures regulatory alignment, and supports clear, compliant structuring. If done poorly or skipped altogether, it can lead to audits, tax liability without liquidity, or failed lists.

The takeaway for law firms and founders is simple:

Act early. Structure smart. Partner with valuation experts who understand the nuances of crypto.

Get in touch with us to discuss how Redwood can support your clients’ next list.