Tokens are up to 7x better than stock options. Here’s why.
Use this spreadsheet to calculate how much your stock options or tokens incentives are worth
If you are offered a job with token incentives, is it better than stock-based equity? If you are a founder, which should you choose for your team, and by extension yourself as well? If you are joining a DAO that compensates in part using DAO tokens, how do you compare that to stock options?
I’ve developed this model to quantify the likelihood and value of payouts for tokens versus stock options. More on this below.
This analysis applies equally to founders, employees, or other team members — like contributors to a DAO. Web3 projects typically issue the same tokens to all team members. This is equivalent to Web2 startups granting common shares — not preferred shares — to founders and employees.
The Analysis
Here are the main drivers of why tokens are up to 7x better than stock options, all else equal.
Founders have two perspectives when considering this analysis — as issuers and receivers of tokens. Fortunately, the conclusion is consistent: Tokens are generally better from both perspectives.
1. Stock options’ explosive path to riches is now usually a pop and fizzle
Stock options are now worth up to 10 times less than they were during the dot-com era. See my separate article 12 reasons why your stock options could be worthless. It uses my same model to quantify the expected payoff from employee stock options using market data and realistic assumptions, then compares it to what stock options were like 20 years ago.
Key insights from that article
- When the template contract for stock options was widely adopted 25 years ago, startups only took 3–4 years to IPO. Now they take 9–12 years, or more. Each additional year increases risk of failure.
- Instead of an early IPO, startups now do endless rounds of private fundraising, but each round dilutes existing shareholders and employees
- Getting acquired usually doesn’t result in a life-changing payout to employees due to the increasingly preferential terms universally adopted by early investors using SAFE contracts.
The conclusion is stock options have lost 90% of their value since that era. Download the model and input your own assumptions to generate your own conclusion.
2. Tokens reach liquidity 3–5x faster than options
With traditional tech startups, the probability of payout drops dramatically over time, so early liquidity is key.
Web3 projects are different. Web3 projects issue tokens for utility purposes. Ethereum’s token is both a cryptocurrency and a way to pay fees for using the chain. Uniswap’s token enables them to reward liquidity providers. Investment DAOs issue governance tokens as a means of organizational decision making.
Since tokens are needed for utility, there is a low likelihood of token launches being delayed to 9–12 years like IPOs. Web3 projects usually issue tokens within 3 years of founding, with some doing so in the first six months.
3. Tokens are usually grants, not options
To be of any value, stock options require exercising the option to purchase common stock using the team member’s own money. This creates all sorts of issues.
- An option trap occurs when the options expire before the liquidity event. Most stock options have a 10 year expiration, but with IPOs taking longer than that, employees face a dilemma of 1) buying the option and paying taxes in order to keep the chance to cash in on the payout, 2) letting the options expire and losing the entire 10 year effort.
- Even if the startup IPOs, employees can’t sell until after any lockup expires, usually 6 months later. By then, the price could drop below the strike price and any taxes paid.
Token grants are cleaner.
- No exercise price
- No option expiration
- No risk of an investor gaining a liquidation preference
4. Tokens can have zero dilution risk
Stock options are diluted with each funding round. This dilution can surpass 60% by the time of a liquidity event.
Tokens can be structured with a maximum token supply, which is the maximum amount of tokens that will ever exist in the lifetime of the cryptocurrency.
Bitcoin has a max supply of 21M, which is one of the main arguments Bitcoin Maximalists see future value in it. Binance’s BNB has a max supply of 200M. XRP’s max is 100B. Cardano’s is 45B. Litecoin’s is 84M. Polygon’s is 10B. Of the top 10 tokens excluding stablecoins, six have a max supply set.
Of the top 1000 tokens on Coinmarketcap, 66% have set a max token supply. If you remove tokens that cannot set a max supply — like stablecoins, then this is even higher.
Setting the max supply contributes to deflationary pressures. Some even call tokens that have a fixed max supply deflationary tokens. I wouldn’t go that far. But setting a max certainly helps. And we do recommend it for Web3 projects. See my separate article on inflationary vs deflationary tokens: The Merge flips ETH from being inflationary to deflationary. Here’s why that matters.
5. We are ingrained with the fallacy of immediacy
Tokens fulfill the need for immediacy. Just like Homer Simpson can’t wait 8 seconds for his meatloaf, we love to see tokens in our crypto wallet more than a signed PDF contract in a drawer.
Conclusion
This analysis doesn’t imply that joining or starting a Web3 project is better than a Web2 one. It assumes all else is equal. In both cases, joining a mid-stage startup with a marquee VC can best improve your chances of a lottery-caliber win.
But in the current market, tokens do have the potential to be many times more valuable than stock options. Of course, the multiple depends on the structure of the tokens or stock options you are facing.
If you’re considering joining a Web3 project, you should ask the right questions. To help you out, my next article will analyze the questions to ask an employer about token vesting and answers you’d ideally like to hear.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial, or accounting advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction.
