Restricted Token Unit (RTU): Employee Compensation Beyond Stock Options

Casey Fenton

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September 12, 2023

When it comes to employee equity compensation, stock options are the most common choice. But are you familiar with the term Restricted Token Unit or RTU?

Employee compensation plays a crucial role in attracting and retaining top talent in today's competitive job market. In recent years, a new form of compensation has emerged within the blockchain and cryptocurrency industry—restricted token units (RTUs).

Is RTU for you? Let’s explore the concept of RTUs, how they work, and why they are poised to revolutionize employee remuneration.

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What are Restricted Token Units (RTUs)?

At its core, Restricted Token Units (RTUs) are a form of compensation that provides employees with tokens or digital assets, subject to certain restrictions and vesting schedules. These units, similar to restricted stock units (RSUs), are typically tied to the performance of the company and aim to align the interests of workers with the success of the organization.

How RTUs Work

RTUs differ from other forms of compensation, such as traditional equity options, in several ways. Unlike equity options, which grant the right to buy company stock at a predetermined price, RTUs typically represent actual ownership of tokens or virtual assets.

Furthermore, RTUs often come with specific vesting schedules, similar to the vesting period of RSUs, to incentivize employees to stay with the company for a certain duration.

Technical Aspects of RTUs

To truly understand the transformative nature of Restricted Token Units (RTUs) in employee remuneration, it's important to delve into the technical details that underpin this innovative approach.

RTUs leverage blockchain technology and smart contracts to provide a transparent, secure, and efficient compensation system. Let's explore the key technical aspects of RTUs:

Blockchain Technology and Smart Contracts

One of the key aspects that sets RTUs apart from traditional forms of non-financial remuneration, such as RSUs, is their foundation in blockchain technology and smart or self-executing contracts. 

Blockchain technology provides a decentralized and transparent framework for managing RTUs, similar to RSUs. It is a distributed ledger system that records and verifies transactions across multiple computers, ensuring transparency, immutability, and security.

Smart contracts, which are self-executing contracts with predefined rules and conditions, play a vital role in the implementation and enforcement of RTUs. These contracts are stored on the blockchain and automatically execute actions when specified conditions are met.

Self-executing contracts enable the automation of vesting schedules, restrictions, and the issuance of RTUs to workers, similar to the vesting schedule of RSUs. By eliminating the need for intermediaries, self-executing contracts enhance the efficiency and reliability of the compensation process.

Transparency and Security in Compensation

Transparency and security are crucial considerations when it comes to remuneration, including restricted stock units and RTUs. RTUs address these concerns by leveraging blockchain technology.

The distributed nature of blockchain ensures that all transactions related to RTUs are recorded in a transparent and immutable manner. This transparency provides employees with a clear view of their compensation history, including the issuance, vesting, and transfer of RTUs.

Moreover, the use of blockchain technology enhances the security of RTUs. The decentralized nature of blockchain makes it difficult for unauthorized parties to tamper with or manipulate compensation records, including restricted stock units. The cryptographic algorithms used in blockchain provide robust security, protecting RTUs from unauthorized access or fraudulent activities.

Scalability and Efficiency

Scalability and efficiency are essential factors to consider when implementing a compensation system, including restricted stock units and RTUs. RTUs offer advantages in these areas, thanks to their reliance on blockchain technology. Blockchain networks are designed to handle large-scale transactions and can accommodate a growing number of employees and RTU holders.

Additionally, the use of self-executing contracts streamlines the compensation process, eliminating manual tasks and reducing administrative overhead. Once the conditions specified in the smart contract, including vesting conditions, required performance milestones, and vesting date or dates, are met, the execution of actions, such as the issuance or transfer of RTUs, occurs automatically, saving time and resources.

Furthermore, blockchain-based RTUs facilitate efficient tracking and management of compensation data, just like restricted stock units. The decentralized nature of blockchain eliminates the need for reconciling multiple databases or maintaining separate records.

All relevant information, including RTU ownership, vesting schedules, exercise dates, and transaction history, is stored on the blockchain, providing a single source of truth that is accessible to authorized parties, similar to restricted stock units.

Comparison of RTUs with Other Types of Non-Financial remuneration

When it comes to non-financial remuneration, companies have traditionally relied on various models such as equity options, restricted stock units (RSUs), and restricted stock options (RSOs). However, within the blockchain and cryptocurrency industry, a new form of compensation has emerged that offers unique advantages—Restricted Token Units (RTUs).

Here’s how RTUs compare to other common equity remuneration types:

Stock options

Stock options grant workers the right to purchase company stock at a predetermined price, known as the exercise price. However, stock options do not provide direct ownership of the underlying shares until exercised. Employees may face tax implications when exercising stock options and selling the acquired shares, typically being asked to pay tax on the difference between the exercise price and the fair market value of the shares at that time. The taxation occurs at ordinary income rates.

Restricted Stock Units (RSUs)

RSUs are grants of company stock that vest over a specific period, known as the vesting period. RSUs provide immediate ownership of the shares upon vesting. However, RSUs are typically subject to certain restrictions, such as transferability restrictions and forfeiture provisions, until they are fully vested. Employees may face ordinary income tax obligations upon the vesting of RSUs, based on the fair market value of the shares at that time.

RSOs (Restricted Stock Options)

RSOs are a hybrid of stock options and RSUs. RSOs grant workers the right to purchase company stock at a predetermined price. However, like RSUs, RSOs provide immediate ownership of the underlying shares upon exercise. The exercise of RSOs may trigger ordinary income tax obligations for employees, based on the fair market value of the shares at the time of exercise.

Advantages of RTUs vs. Other Equity Remuneration Types

RTUs offer distinct advantages over other forms of equity remuneration. Unlike equity options and RSOs, RTUs provide employees with direct ownership of tokens or virtual assets. This ownership allows workers to directly benefit from the success and value appreciation of the tokens. Additionally, RTUs can offer increased liquidity compared to traditional equity, allowing employees to convert their RTUs into cash more easily.

As the blockchain and cryptocurrency industry continues to grow, RTUs align perfectly with the innovative and decentralized nature of this sector. Employees can participate in the success of the company's blockchain projects and tokens, fostering a stronger sense of ownership and motivation.

RTUs operate within a decentralized framework, leveraging blockchain technology and smart contracts. This ensures transparency and efficiency in the compensation process, reducing the potential for disputes or errors.

From a company's perspective, RTUs are beneficial for incentivizing employees because they do not cost extra. RTUs can increase employee retention, as well.

By granting RTUs, companies can align employee interests with the success of the company, as the value of the RTUs is tied to the performance of the company. This can motivate employees to contribute to the company's growth and success. Additionally, RTUs can serve as a tool for attracting and retaining talent in the competitive blockchain and cryptocurrency industry.

From a tax perspective, it's important to note that workers who receive RTUs may be subject to ordinary income tax when the RTUs vest, based on the fair market value of the tokens or virtual assets at that time, similar to restricted stock units. The Internal Revenue Code and guidance from the Internal Revenue Service (IRS) govern the taxation of RTUs. Companies must carefully navigate the tax implications and ensure compliance with applicable regulations.

Potential Disadvantages of RTUs

However, RTUs also have some potential disadvantages to consider. Valuing RTUs can be more challenging compared to traditional equity compensation. The volatile nature of cryptocurrency markets and the need to account for the vesting schedule and restrictions add complexity to the valuation process.

The regulatory landscape surrounding cryptocurrencies and token-based compensation is still evolving. Employers must navigate legal and regulatory considerations to ensure compliance with securities and tax regulations.

The receipt and subsequent sale of RTUs may trigger taxable events for employees. Employers should provide comprehensive guidance to workers to navigate the complexities of tax obligations associated with RTUs.

Despite these challenges, RTUs offer a unique and promising approach to employee compensation within the blockchain and cryptocurrency industry. Their direct ownership, alignment with industry trends, and the transparency provided by blockchain technology make RTUs an attractive option for companies and employees alike.

Real-World Examples of RTUs in Action

Numerous companies have embraced RTUs and achieved notable success in aligning employee benefits with company performance. One such example is Chainlink, a decentralized oracle network, which utilizes RTUs to reward employees based on the success of the protocol. By directly tying remuneration to the value and adoption of their technology, Chainlink motivates its employees to contribute to the growth and success of the platform. Chainlink's RTU plan grants employees tokens that represent ownership in the protocol, giving them a stake in the project's success. This incentivizes employees to actively participate in the development, adoption, and overall success of Chainlink.

Another company that has implemented RTUs is ConsenSys, a prominent Ethereum-based organization. ConsenSys utilizes RTUs to incentivize and reward employees who contribute to the development and adoption of Ethereum-based decentralized applications (dApps). By aligning employee compensation with the success of the dApps built on the Ethereum platform, ConsenSys encourages innovation and fosters a collaborative and motivated workforce. The RTU plan at ConsenSys provides employees with tokens that represent ownership in the dApps they contribute to, allowing them to directly benefit from the growth and adoption of these applications.

These real-world examples demonstrate the effectiveness of RTUs in driving employee engagement, fostering a sense of ownership, and aligning incentives with company goals. By offering RTUs, these companies have created a unique compensation model that directly connects employee success with the success of the underlying blockchain technology.

Conclusion

Restricted Token Units (RTUs) represent a transformative approach to employee remuneration within the blockchain and cryptocurrency industry. By providing employees with ownership of tokens or digital assets subject to restrictions and vesting schedules, RTUs align the interests of employees with the long-term success of the business. Employees gain a sense of ownership and are directly incentivized to contribute to the growth and success of the projects they work on.

With advantages such as increased liquidity, stronger employee commitment, and direct connection to company performance, RTUs offer a compelling alternative to traditional equity and stock options. Through the decentralized nature of RTUs and the application of smart contracts, the compensation process becomes transparent, secure, and efficient.

However, implementing RTUs does come with challenges and risks, including legal and regulatory considerations, tax implications, and the need for robust risk management strategies. Employers must navigate these complexities to ensure compliance and provide clarity to employees regarding the value and associated risks of RTUs.

As we look to the future, it becomes evident that RTUs have the potential to disrupt the world of remuneration. Their unique ability to align incentives, foster employee ownership, and provide tangible value and rewards based on company performance positions RTUs as a powerful tool for attracting, retaining, and motivating top talent within the blockchain and cryptocurrency industry.

Employers are encouraged to explore RTUs as a new compensation model, taking into account the specific needs and circumstances of their organization. By embracing RTUs, companies can harness the benefits of decentralized technology, enhance employee engagement, and unlock the full potential of their workforce in the fast-evolving world of blockchain and cryptocurrency.

In conclusion, beyond traditional equity options, RTUs pave the way for a new era of employee compensation—one that embraces the decentralized nature of blockchain technology and empowers employees to directly benefit from the success they contribute to. RTUs provide employees with ownership, aligning their interests with the company's success, and fostering a motivated and engaged workforce.

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ABOUT THE AUTHOR

Casey Fenton

Founder, Upstock & Couchsurfing, AI and Equity Innovator

Casey Fenton, the founder of Upstock & Couchsurfing and an AI and equity innovator, has revolutionized how we perceive and implement equity in the workplace. His foresight in creating platforms that not only connect people but also align their interests towards communal and corporate prosperity has established him as a pivotal figure in technology and community building. Casey speaks worldwide on topics including ownership mindset, worker equity, With Upstock and Couchsurfing, he has demonstrated an unparalleled expertise in harnessing technology for the betterment of community interaction and organizational benefits.

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