A Guide On Token Compensation
Overview
Tokens are an emerging form of employee compensation for Web3 companies. Offering instant liquidity, no exercise cost or windows, and real-time compensation scaling with the market, tokens offer several advantages over traditional equity.
However, given this is a new form of compensation, little data exists on how to properly compensate employees with tokens.
We have put together this guide to offer guidance and best practices on how to structure token compensation. We will share some guidelines on token allocation, vesting schedules, and a heuristic to approximate token compensation from traditional equity compensation.
Note: this guide assumes a company does not offer equity (only tokens) and has a fixed supply of tokens.
Token Allocation
While token allocations for the team, investors, and community vary, a standard allocation for the team will be 15–20% of the token supply.
Digging deeper, different types of Web3 companies will have different allocations. For example, DAOs will allocate a lower percentage of tokens to the core team (~15%) vs. DApps (~20%).
See detailed breakdown below from a report on token allocations by Lauren Stephanian and Cooper Turley.
Vesting Schedules
Token vesting schedules can mimic the same 4-year grant, 1-year cliff schedule as equity.
This means that a new hire’s offer will be granted over 4 years, with 25% of the tokens vesting upon his/her first year work anniversary and the rest vesting monthly afterwards.
Approximating Token Equity from Traditional Equity
As a general rule of thumb, you can calculate token compensation by taking what an employee will receive in equity and reducing it by 50%. For example, if an employee will receive 1% in equity, he/she will receive 0.50% in tokens.
On average, an early employee’s equity stake will be reduced by 50% after three rounds of fundraising. See the graphic below from Index Ventures showing dilution on how 1% equity received at the Seed stage becomes 0.48% upon Series C.
As the tokens are initially issued based on a fixed lifetime supply, the 50% dilution must be done at the start.
Zackary Skelly from Dragonfly Capital suggests in a joint post with token management and distribution platform Liquifi that this approach best accounts for market volatility while minimizing token dilution.
Note: this is just one method of determining token compensation. Another way is to multiply the traditional equity percentage by the percentage of tokens allocated to the entire team. For example, if an employee should receive 1% in equity and the team is allocated 25% of the entire token pool, he/she will receive 0.25% (1% * 25%) in tokens.
Conclusion
Token compensation is more of an art than a science. While there is no single way to calculate this, particularly given this is an emerging form of compensating employees, the key is in understanding the trade-offs between different methods and picking the one that is the best fit.
Some considerations include team allocations for the token pool, vesting schedules, and compensation ranges.
Given the dynamic nature of Web3, employees often demand a premium in compensation to other industries — particularly in roles requiring niche skillsets like blockchain development. However, the industry is not immune to economic cycles, and so it’s crucial to be on top of the latest trends around hiring in relation to the broader economy.
In summary, this guide strives to provide some evergreen rules of thumb around token compensation that should be used with the latest data to provide accurate forecasts around compensation.
About Liquifi:
Liquifi helps crypto companies automate their token payments and avoid costly mistakes/dev costs with token vesting and lockups. Liquifi also helps you stay compliant with applicable tax rules, financial reporting requirements, and KYC/AML screening for token distributions.
Projects like Optimism, Balancer, Animoca Brands, Axelar, Metaplex, Gitcoin, Goldfinch, and SuperRare trust Liquifi to handle the security and compliance challenges of token vesting so they can focus on higher priorities (rather than waste time building their own smart contracts, paying for audits, and manually transferring tokens with spreadsheets).
Disclaimer:
Struck Capital Management LLC is registered with the United States Securities and Exchange Commission (“SEC”) as a Registered Investment Adviser (“RIA”). Nothing in this communication should be considered a specific recommendation to buy, sell, or hold a particular security or investment. Past performance of an investment does not guarantee future results. All investments carry risk, including loss of principal.
