Replicating a Stock Option Agreement with Pods and Sablier
An easy way to align incentives and goals between DAOs and contributors
TLDR
- It is possible to replicate stock options in DeFi by using Pods Finance's Option Factory and vesting through Sablier Finance.
- Creating compensation packages that involve stock options as bonuses can help align incentives between the DAO and contributors.
What is a Stock Option Agreement?
The distribution of employee stock options (ESO) is a widespread practice in the traditional market, where contributors receive call options rather than shares of the stock directly. Receiving ESOs means that the employees have the right to buy the company’s stock at a predetermined price (aka strike price) for a finite period. This practice usually works as an incentive to employees to increase performance and motivation by giving them pieces of ownership of the company.
The main advantage of ESOs to employees is that if the stock’s price goes above the strike price, they will be able to buy it at a discount, allowing them to sell it right away or to hodl the asset as part of their portfolio.
Stock options usually have physical settlement, which implies that the employee will fully pay for the options exercised at the strike price and, in return, will receive the company’s stocks. Regarding the exercise type, they can be European or American — if it's European, these contracts usually have a more extended exercise window than 24 hours.
Most of the time, Stock Option Agreements come with two important additional clauses: the cliff and the vesting period.
- The cliff refers to the period required for the employee to stay in the company to earn the right over the stock options. It can be seen as a protection for the current shareholders.
- The vesting period refers to the period the employee will be able to fully access all the stock options that are part of the equity compensation plan.
It’s very common to hear “four years vesting with a one-year cliff.” It basically means that the employee will have the right over the stock options after the one-year cliff period. Some companies can opt for distributing some options once the cliff period is reached or only starting the vesting after the cliff.
How to replicate the Stock Option Agreement in DeFi?
Replicating this practice in DeFi can be helpful for DAOs that want to distribute stock options on their own tokens to contributors to align incentives between the DAO and the receivers. When stock options are distributed as a bonus to the contributors, it incentivizes them to keep buidling and remain in the ecosystem in the long run.
In case the option ends ITM, contributors have access to the token at a discount, and the DAO's treasury gets diversified, and if it ends OTM, the tokens get back to the DAOs treasury.
What are the advantages of implementing stock options compensation?
Let's think about the example where Spod DAO decides to create a compensation package. This package says that contributors will receive, on top of the salary, call options on $SPOD that expire in the next 6 months (which, for the DeFi space, we know it’s quite a long-term commitment) with a strike price of 75% lower than the current spot price. Let's see what the benefits for both DAO and contributors are:
- If the option ends ITM, contributors have access to the token at a 75% discount;
- DAO’s treasury gets diversified;
- If the option ends OTM, the tokens return to the DAOs treasury, reducing dumping effects;
- The options are not taxable until they expire and are exercised;
- A cliff can be seen as a protection for the current shareholders as tokens will be distributed only to genuinely engaged contributors with the DAO's activities and goals.
The Step-by-Step to Recreate a Stock Option Agreement
To recreate a DeFi version of a stock option agreement, we need two main components:
- An option factory: https://factory.pods.finance/
- Sablier, a streaming protocol: https://sablier.finance/
The first step is to create your options series and mint the supply of options. Considering that you need to create call options in this case, please keep in mind that you will need to lock in the DAO’s tokens as collateral.
We have written the blogpost below showing the step-by-step of creating your own options series using our Option Factory:
The second step is to create the stream on Sablier for the vesting of the options to the contributors.
a. After creating your option series, please get in touch with us on our discord to add your option token address to Sablier's whitelist of valid streamable tokens.
b. Go to https://sablier.finance/ and connect the wallet that holds the option tokens you created on the first step.
c. Click on "Stream Money" to start creating your stream.
d. Search your option token that is going to be streamed:
e. Add the number of option tokens that should be streamed in total to the contributor:
f. Add the address of the contributor — in Sablier's V1, you will need to create one stream per contributor
g. Add the vesting period. Please keep in mind that by the end of the stream, the contributor will have vested the total amount inputted in step e.
h. Click on "Create Stream" and done! ✅
With Sablier v1 you’ll be able to replicate a linear vesting schedule, with no actual cliff for the moment.
Your DeFi version of Stock Options is now ready to use 🔥
About Pods
Pods is a decentralized non-custodial options protocol. Users can create options and trade them through an Options AMM on the Ethereum Blockchain. Pods is the easiest way to hedge crypto in DeFi.
We invite you to take the first step in your new mission: start testing the app on app.pods.finance
Join the Pods community
app | website | documentation | blog | twitter | youtube | telegram | discord
