Mar 24, 2022 | Dan McCarthy
Over the past few months, there’s been a meaningful shift in the talent marketplace toward Web3 companies. Highly capable people from Web2 tech, traditional finance, and big law firms are flooding into the space, but they often don’t fully understand the compensation structures that crypto companies usually employ.
Let’s say you’re one of these people, and you’ve got a job offer with a token component attached. (Congratulations!) Before you sign (or don’t), it’s critical to understand what you’re getting in order to value it appropriately against a more “standard” compensation package.
A large part of the upside in joining a Web3 startup is that, in many instances, your compensation includes tokens, sometimes in combination with traditional equity. Let’s be clear: tokens are not inherently traditional equity by another name, but they can have some rough similarities. Like equity, tokens can appreciate in value significantly, and they often become liquid much sooner than standard equity. Token rights may also allow employees to participate and contribute to the protocols they are building directly, adding even more incentive alignment.
As a potential employee, you should think about tokens as distinct from traditional equity rights (e.g., options or RSUs) but with several similarities:
A critical feature of token compensation to keep in mind is whether the token grant is pre-launch or post-launch. A pre-launch token grant would typically be structured similar to how options are structured for early-stage private company stock. Pre-launch tokens are worth very little when they’re minted, and their value is largely contingent upon some as-yet-uncertain future launch event. Like stock options, there’s also no tax burden to you upon receipt of pre-launch token grants - but they will likely incur taxes upon exercise in the way that you’d be taxed on the exercise of an NSO (non-qualified stock option).
A post-launch token grant is different; it has a few attributes reminiscent of a Restricted Stock Unit (RSU). The tokens exist within a liquid market (although they may be subject to vesting and lock-ups), and the recipient is taxed immediately upon receipt. If your post-launch token grant is subject to vesting, you should consider filing an 83b election to minimize the tax impact of your tokens vesting. Otherwise, you will have reportable income as the tokens vest, based on the then-current fair market value.
Most token grants will begin vesting starting on your initial date of employment, analogous to traditional equity grants’ vesting schedules. This means you will stand to forfeit a portion of the token grant if you don’t remain a service provider for the entire vesting schedule. Again, you’ve got to earn it!
Token grants will also typically have a separate lock-up that will prevent you from transferring any of your vested tokens for a period of time. For example, you might get token rights to a post-launch token, but you’ll be prohibited from selling them for a year after the network launch. It’s common for the lock-up to have exemptions to allow you to stake or vote your tokens prior to the expiration of the lock-up period.
While related, vesting and lockup are not the same, as vesting implies a risk of forfeiture and is intended to align incentives towards long-term growth, while a lock-up is only a transfer restriction and focused more on preventing selling pressure.
Finally, as with all compensation matters, you should consult an attorney or tax advisor, especially if your token grant involves mechanics that are uncommon in traditional equity grants (e.g., trading windows, lock-up periods that are contingent upon the company reaching a particular milestone, or the option to convert equity to tokens).
If you're looking for a new role in crypto/Web3, we'd love to help you find it: talent.paradigm.xyz
Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. This post reflects the current opinions of the authors and is not made on behalf of Paradigm or its affiliates and does not necessarily reflect the opinions of Paradigm, its affiliates or individuals associated with Paradigm. The opinions reflected herein are subject to change without being updated.