The crypto world in recent years has been adapting and evolving in the face of increasing governmental scrutiny and regulation. As this trend continues, more actors and participants in the crypto space are looking for more legal stability and certainty in what they do.
As an HR and legal matter, the preferred approach in crypto compensation and benefits has been to use traditional compensation plans and rewards as a starting point and benchmark. This is why you might have heard about companies exploring token-based awards like restricted token units (RTUs).
Companies, especially those working in the crypto space, have been rethinking how they can do compensation and benefits differently. Crypto compensation is a subject that’s not talked about enough. This is understandable, as there are legitimate concerns about the volatility and risks inherent in virtual currencies and digital assets.
Your HR and legal department are usually risk-averse and don’t want to deal with matters that come with a lot of asterisks and uncertainty. If you want to know more about how it works, we have got you covered.
Here are the answers to some of your most common questions about RTUs and token-based awards. But before we dive deeper, we need to discuss the basics first.
Token-based compensation is compensation paid in the form of tokens or cryptocurrency. It has become more popular in recent years as crypto became more and more mainstream.
The advantage of token-based compensation is it provides recipients the ability to leverage other Decentralized Finance (DeFi) protocols. This generates additional returns as the recipients of token compensation can lend, borrow, stake and/or provide liquidity using the awarded tokens.
Similar to equity compensation, token compensation is often provided to incentivize key employees. Thus, it can be conditioned on an employee's performance or contributions to a company.
Moreover, as it is generally treated as employee compensation, it may be subject to taxation as ordinary income.
A token award is additional compensation that is typically given in addition to an employee's regular salary and benefits. They are usually offered by blockchain or crypto companies to early employees to entice them to join and work on the project.
Token awards, however, can also be provided to advisors in exchange for them providing the company with strategic advice, networks and key connections.
As to its vesting mechanics, it is similar to an equity award and may also have cliffs and vesting schedules. However, unlike equity, tokens do not provide employees with any ownership interest in the company.
In essence, RTUs is a type of token award that represents a company’s promise to pay a worker or employee blockchain-based coins or tokens once certain vesting conditions are met.
RTUs are like restricted stock units (RSUs). But instead of stocks, what‘s awarded are tokens instead.
Each RTU represents a token that the company is contractually obligated to pay out once the vesting condition for the token award agreement is met. The condition can be anything, but the more common ones are time-based such as the employee staying with the company for a given number of months or years. The condition can also be based on an employee’s performance or a mix of both.
For example, an RTU plan might grant 10,000 RTUs to an employee which will fully vest on his 6th year with the company. When the employee reaches his 6th year with the company, he/she is legally entitled to demand the settlement of RTUs into tokens.
Alternatively, the RTU plan could also provide that 50% of the tokens will vest in the employee's 1st year (called a “cliff”) while the rest of the RTUs would vest at a uniform rate of 10% of the total amount for the next 5 years. As you might observe, there are lots of unique and creative ways to customize an RTU plan to fit a company’s needs.
This is particularly good for companies that are still building out their product and want to stabilize the value of their coin or token. Currently, crypto projects are doing something similar by locking tokens in smart contracts for set periods of time or until certain conditions are met. RTUs fulfill the same function as deferred compensation plans which is something that regulators are more familiar with.
Like most token awards, RTUs can also have a vesting period.
The vesting period in a token award is when tokens are proportionately paid out in accordance with the vesting schedule. For example, a “linear” monthly vesting period over the course of 2 years means that 1/24th of the total amount of the tokens would vest per month. The purpose of imposing a vesting period in a token award is to encourage the awardee to stay longer with the company.
For example, an employee whose vesting period for restricted tokens is five years can only exercise the tokens after the set timeframe. Vesting periods can also act as deferred compensation, allowing employees to obtain long-term benefits.
Crypto vesting is the process of releasing tokens to early investors and team members over a period of time. This is done to protect the token price and promote long-term investment in the crypto project. Investors and team members will not be able to “dump” or sell their tokens immediately. They have to hold onto the tokens for a certain period before they can cash out.
Crypto vesting typically lasts for 1-2 years and is often accompanied by a “lock-up period” and a vesting period (as discussed above).
During the lock-up period, no tokens are paid out to investors and team members. However, once the lock-up period ends, the vesting period begins and the tokens are paid out in installments over time.
If you want to learn more about token-based compensation and how it can be used to better incentivize workers and employees, let’s talk!
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