January 29, 2022
Most early-stage crypto companies would definitely benefit from restricted token units (RTUs). But that’s not all. The great thing about RTUs is that even mid-to-late stage crypto companies can harness its unique traits to their advantage. RTUs have the capacity to address tax and liquidity issues and can help provide clarity on certain legal and regulatory uncertainties. All that is needed is an RTU plan with the right kind of features.
So when is the best time to offer RTUs? The answer could be, well, anytime. With the right modifications and customizations in the contractual provisions of the RTU plans, a crypto company can benefit from the flexibility it offers regardless of whether it's the newest token project on the block or is a more established one with an active trading volume and market. When it comes to token-based awards, flexibility is truly king.
Crypto and blockchain companies are indeed in a unique position to enjoy the motivating and aligning effects of equity compensation without having to face the common problems associated with it (e.g., dilution of shares). But as a form of compensation with equity-like features, there are unavoidable issues that surround token-based awards as with any average equity plan. Liquidity, for example, could be a problem even for crypto companies that have already made their Initial Coin Offering (ICO).
Moreover, mature crypto companies may have a different set of needs and problems compared to early and mid-stage companies. Hence, the right RTU plan should be flexible enough to be able to provide the appropriate solution no matter what stage the company is in.
Here’s how this could be done.
A new crypto company is currently in its early development phase for a particular token or coin project which it is planning to offer to the market soon. Since it has little to no cash to pay for its developers and other employees, it decides to instead offer tokens in exchange for their work.
How will this new crypto company balance the interests and token share of its founders and investors from that of its developers, employees, and other coin holders?
As a form of employee compensation, how will it ensure that the token-based award is actually worth something and not seen as a scam by its developers and workers?
The Upstock/Uptoken solution:
A good RTU plan should be able to balance all these varied interests by clearly laying out or providing information on the token’s maximum cap, the share reserved for each group of stakeholders, and the time and conditions on how they would vest and be paid out.
On the other hand, for it to effectively motivate and encourage workers, the RTU plan should ensure that its developers and other contributors are not prematurely taxed for tokens that practically have no value as there is currently no market for it. An RTU plan with a double trigger vesting mechanism allows this by ensuring that the tokens are only paid out once liquidity is assured. Double trigger vesting in RTUs is more or less the same as that with RSUs.
Moreover, since it is based on the well-understood model of restricted stock units (RSUs), regulation on the matter would become more predictable. For example, the RTU plan can take the conservative position of treating the tokens as securities and avoid the risk of penalties and enforcement action from government authorities.
A crypto company that recently conducted its ICO and now wants to continue expanding and growing its token project. The company plans to do this by improving on the existing digital infrastructure, aiming to list in more crypto exchanges and focusing more on the other aspects of its operations such as sales and marketing. This company is still short on cash but wants to fund its plan for expansion. They decide to enlist top talent and contributors by offering them tokens in exchange for their expertise and services.
While it’s a post-ICO crypto company, the tokens it is offering are not sufficiently liquid since it is relatively new to the market. Simply stated, the tokens are not being bought or sold enough for them to be easily convertible to cash. If they deliver the tokens prematurely, the recipient worker or employee could become subject to tax liability and may not have the personal funds to pay for it.
How should the crypto company in our sample scenario solve the liquidity problem so that it can offer the tokens as a meaningful benefit and incentive?
The Upstock/Uptoken solution:
If there is no active market for the tokens, the RTUs may also be made subject to another non-IPO liquidity event as an additional condition for its vesting aside from the usual time-based trigger. The second trigger, for instance, can be a condition that the token must be able to list in a given number of crypto exchanges or be qualified to list in a more trusted or popular exchange. Another possible measure of liquidity could be the token achieving a certain average daily volume for a given number of days. Once these liquidity milestones are reached, the RTUs could then vest with an assurance to the awardee that the tokens will be easily convertible to cash to pay the taxes due on it.
At the very least, it is an assurance that the award is not a scam and that the tokens will actually be worth something. Note that a lot of people trading a particular token is not just proof of its liquidity; it also constitutes proof of its legitimacy.
A crypto company has already been in business for several years. The company’s tokens enjoy the patronage of a considerable number of people who actively trade their tokens in various crypto exchanges. In other words, the crypto company has no issue with liquidity. To attract and retain top talent, it decides to offer tokens to key people to gain their loyalty and incentivize them to work harder for the company.
A mature crypto company would have already conducted its IPO and liquidity would not be an issue for any of its existing token offerings. So the problem really is more on determining the best way to safely and efficiently provide the tokens as compensation to its workers and employees.
For example, the company can grant them as token options—the token counterpart of stock options—and give their workers the opportunity to buy the tokens at a “discount.” However, if it decides to do so, it will have to deal with regulatory uncertainties such as whether Section 409A is applicable to token options (in the same way that it does with stock options). Moreover, the grantee of a token option still needs to pay for its strike price which could turn out to be a risky bet considering the volatility of the crypto market.
The Upstock/Uptoken solution:
A simple single-trigger RTU plan should do the trick. RTUs are based on the established and well-understood legal framework of RSUs. Thus, a crypto company could avoid or minimize regulatory uncertainties associated with token options by simply adopting a carefully crafted RTU plan.
As to concerns of volatility, a grantee (or recipient) of an RTU plan can rest easy knowing that there is no need to bet their money by paying for the strike price and risk losing it should the market value of the token fall below the strike price. This in turn means that the tokens are always worth something so long as their market price does not fall to zero.
As you might observe, an RTU plan can be a game-changer no matter what stage a crypto company is in. Whether the purpose is to develop a completely new token project or to expand or improve upon an existing one, a good RTU plan can provide you with the necessary leverage to hire, retain, motivate and inspire the key people who will help you achieve your ultimate goal.
Thus, it is extremely important to have an RTU plan that has the right features and specifications given your company’s current situation. That is, the RTU plan must both be responsive to your particular needs and, at the same time, broad and flexible enough to cover and address common scenarios with legal implications.
Upstock’s high-quality RTU plans allow you to do just that. It can be adjusted and customized to fit the needs and requirements of any crypto company no matter what stage it is in. If you want to learn more about how we do it, you can book a demo and read more about it here.