The Rise of Refundable VC Terms in Crypto: A New Frontier for Risk Mitigation and Capital Preservation

The cryptocurrency venture capital (VC) landscape in 2025 is undergoing a profound transformation, driven by institutional-grade risk management strategies and a renewed focus on capital preservation. As the sector matures, innovative financing structures-such as refundable VC terms-are emerging as critical tools to navigate the inherent volatility of blockchain projects. These terms, once rare, are now being deployed to align investor incentives with project sustainability, particularly in an environment where regulatory clarity and market discipline are reshaping the ecosystem.

The Berachain Case: A Blueprint for Zero-Risk Investing

One of the most striking examples of refundable VC terms in 2025 is the $25 million investment by Brevan Howard's Nova Digital into Berachain. This deal granted the investor a one-year window post-token generation event (TGE) to demand a full refund of its principal, effectively eliminating downside risk while retaining upside potential from token performance. Such terms are exceptionally rare, with four legal experts noting that refund rights after a TGE are "unusual" and "highly unconventional". This structure reflects a growing appetite among institutional investors to hedge against the unpredictable nature of crypto markets, particularly in projects with speculative token economics.

The Berachain model highlights a broader trend: investors are increasingly prioritizing capital preservation over speculative bets. By embedding refund clauses into term sheets, VCs can mitigate losses in scenarios where token prices collapse or projects fail to meet performance benchmarks. This approach is particularly appealing in a post-2023 environment, according to Q3 2025 data, where regulatory scrutiny and market corrections have forced investors to adopt more disciplined strategies.

Structural Shifts in Crypto VC Agreements

The prevalence of refundable terms is part of a larger structural evolution in crypto VC. According to Q3 2025 data, $8 billion was deployed in crypto startups, with 60% of funding directed toward infrastructure, compliance, and revenue-generating projects like CeFi. This shift underscores a preference for ventures with tangible use cases and measurable outcomes, reducing reliance on speculative narratives.

Later-stage investments now dominate the landscape, accounting for 56% of Q3 2025 capital inflows, while institutional investors-particularly U.S.-based firms-have become the primary drivers of funding. Regulatory developments, including the U.S. GENIUS Act and the CLARITY Act, have further reduced legal uncertainties, encouraging more structured financing models. These factors collectively create an environment where refundable terms can thrive, as investors seek to balance innovation with risk mitigation.

Risk Mitigation Beyond Refund Clauses

While refundable terms are a novel tool, they are not the only mechanism for preserving capital in crypto. Projects are increasingly adopting token unlock schedules, vesting periods, and side pocket structures to align incentives between founders and investors. For instance, Berachain's decision to release 21% of its token supply at launch-compared to 7.28% for Starkware and 5% for Sui-was designed to stabilize liquidity and prevent post-TGE dumping. Similarly, vesting schedules for team tokens ensure long-term commitment, mirroring practices in traditional web2 startups as noted in a 2025 report.

Derivatives and hedging strategies are also gaining traction. As noted in a 2025 report, blockchain VC funds are leveraging futures and options to hedge against liquid token volatility, particularly in Bitcoin and Ethereum-based projects. These tools allow investors to lock in gains or limit losses without sacrificing exposure to upside potential.

Challenges and Criticisms

Despite their benefits, refundable terms are not without controversy. Critics argue that such clauses could incentivize project teams to prioritize short-term performance over long-term value creation, potentially undermining innovation. Additionally, high fully diluted valuations (FDVs) in VC-backed tokens have raised concerns about overvaluation, with some projects being criticized for inflating metrics to justify capital deployment as reported in a 2025 analysis.

Regulatory risks remain a wildcard. While the U.S. and EU have made strides toward clarity, enforcement gaps and evolving standards could still disrupt even the most carefully structured deals. For example, the SEC's ongoing scrutiny of token sales has forced projects to adopt more transparent governance models, adding complexity to refundable term negotiations.

Conclusion: A Strategic Imperative for the Future

Refundable VC terms represent a strategic response to the unique risks of blockchain investing. By combining these clauses with robust tokenomics, institutional-grade compliance, and hedging strategies, investors can navigate the crypto landscape with greater confidence. While still rare, such terms are likely to become more common as the sector matures, particularly in projects targeting institutional capital.

For now, the Berachain case serves as a cautionary tale and a blueprint: in a space where volatility is the norm, the ability to preserve capital while retaining upside potential is not just an advantage-it's a necessity.