Understanding Token Compensation: A Comprehensive Guide

Felix
Pinkston

Aug
08,
2024
13:14

Explore
how
tokens
fit
into
compensation
strategies,
with
insights
on
structuring
grants,
vesting
schedules,
and
tax
considerations.

Token
compensation
has
emerged
as
a
key
strategy
for
crypto
companies
to
attract,
compensate,
and
retain
talent,
according
to
a16z
crypto.
This
comprehensive
approach
includes
structuring
token
grants,
managing
vesting
schedules,
and
navigating
tax
implications.

Tokens
Are
Not
Equity

While
many
compensation
strategies
for
tokens
borrow
from
traditional
equity
models,
it’s
crucial
to
understand
that
tokens
are
not
equity.
Unlike
equity,
tokens
are
not
managed
by
a
board
or
executive
team
focused
on
maximizing
their
value.
This
distinction
is
vital
for
internal
discussions
and
when
explaining
compensation
packages
to
potential
employees.

Tokens
introduce
unique
complexities
and
opportunities
compared
to
traditional
compensation
models.
They
require
careful
consideration
of
factors
such
as
vesting
schedules,
lockups,
and
regulatory
compliance.

Structuring
Token
Compensation

Incorporating
tokens
into
a
compensation
package
involves
balancing
several
elements
to
reward
employees
without
creating
distractions.
A
transparent
and
well-defined
compensation
philosophy
is
essential.
This
philosophy
should
guide
decisions
on
base
salaries,
token
grants,
and
other
incentives.

A
typical
compensation
package
might
include:

• 
  Base
  salary
  and
  performance
  bonuses,
  usually
  paid
  in
  fiat
  currencies
• 
  Equity,
  including
  stock
  options
  and
  employee
  stock
  purchase
  plans
• 
  Token
  compensation,
  which
  can
  include
  project
  tokens,
  Bitcoin
  (BTC),
  Ethereum
  (ETH),
  and
  stablecoins

Companies
generally
aim
to
offer
competitive
total
cash
compensation,
often
targeting
the
75th
percentile
of
the
market,
with
total
compensation
(including
tokens
and
equity)
reaching
up
to
the
90th
percentile.

Vesting
Schedules

Choosing
the
right
vesting
schedule
is
critical.
Common
models
include:

Four-year
Vest
with
a
One-year
Cliff

Employees
receive
a
batch
of
tokens
upon
hiring,
with
the
first
quarter
vesting
after
one
year
and
the
rest
vesting
monthly
or
quarterly.

• 
  Pro:
  Rewards
  employees
  for
  their
  contributions
  over
  time.
• 
  Con:
  Can
  create
  emotional
  volatility
  due
  to
  long
  timeframes.

Annual
Grants

Tokens
are
granted
annually,
reducing
exposure
to
volatile
token
prices.

• 
  Pro:
  Provides
  predictable
  compensation.
• 
  Con:
  May
  reduce
  competitive
  edge
  compared
  to
  longer-term
  plans.

Backloaded
Four-year
Vest

Increases
the
size
of
the
vest
over
time,
encouraging
longer
employee
retention.

• 
  Pro:
  Retains
  institutional
  knowledge.
• 
  Con:
  Smaller
  short-term
  benefits
  can
  make
  recruitment
  challenging.

Tax
Considerations

Token
grants
can
be
structured
in
several
ways,
each
with
different
tax
implications:

• 
  Restricted
  Token
  Awards
  (RTAs)
• 
  Token
  Purchase
  Agreements
  (TPAs)
• 
  Restricted
  Token
  Units
  (RTUs)

RTAs
and
TPAs
are
typically
offered
before
a
token
is
publicly
launched,
while
RTUs
are
used
post-launch.
Each
has
unique
tax
implications,
so
consulting
with
legal
and
tax
advisors
is
crucial.

Operational
Considerations

Managing
token
compensation
can
be
complex,
but
tools
from
companies
like
Toku
and
Pulley
can
simplify
administration.
These
tools
help
manage
wallets,
track
vesting
schedules,
and
ensure
compliance
with
legal
requirements.

Ultimately,
a
well-designed
token
compensation
strategy
can
attract
and
retain
top
talent,
ensuring
that
employees
are
rewarded
fairly
and
motivated
to
contribute
to
the
company’s
success.

For
more
detailed
insights,
refer
to
the
original
article
by

a16z
crypto.

Image
source:
Shutterstock