Paradigm: How should Web3 elites understand the value of tokens in the salary structure?

Author: Dan McCarthy, Paradigm

Compiled by: Amber

Nowadays, the trend of talent flocking to companies focused on the Web3 space is evident. High-quality talent from traditional internet giants, traditional financial institutions, and top law firms is entering this emerging field, but they often do not fully understand the compensation structures typically adopted by cryptocurrency companies, especially lacking an accurate understanding of the value of "tokens" in their salaries.

Assuming you are one of these individuals and you have received an offer "from Web3," it is crucial to understand what kind of compensation you will receive before deciding whether to accept the job, so that you can compare it with more "standard" compensation packages.

A significant part of the benefits of joining a Web3 startup is that, in many cases, your salary will include a substantial proportion of tokens, and sometimes a portion of traditional equity incentives as well. It is important to clarify that tokens are not essentially a substitute for traditional equity, but there are some similarities between the two. Like equity, tokens can appreciate significantly, but tokens are often easier to "liquidate," as they generally receive liquidity support earlier than traditional equity. Token rights may also allow employees to directly participate in and contribute to the protocols they are building, which serves as an implicit incentive for employee engagement.

Like equity incentive grants, token incentive grants also come at a cost— their purpose is to align the incentives of the recipients with the growth of the network, and their value is uncertain. You must work to make them more valuable. Most companies allocate tokens from a reserved token pool to employees based on the relative amount of equity each person holds, so token grants are usually directly tied to equity grants.

Of course, companies should handle the token distribution mechanism more appropriately to minimize tax impacts. In other words, employees should not report income for tokens or token rights that have not yet been circulated, as this would require you to pay taxes out of pocket.

A Very Important Point: The "Timing" of Token Incentives

One very important aspect of token incentives is to clarify whether the distribution of tokens occurs before or after the public offering of the tokens.

Token distribution before the public offering is actually similar to the granting of stock options in startups, where the unissued tokens have a low value at the time of minting, and their value mainly depends on some uncertain future expectations. Like stock options, receiving token grants before the public offering does not incur a tax burden; however, there may be tax implications when exercising them in the future, just as you would be taxed when exercising NSOs (Non-Qualified Stock Options).

In contrast, token incentives that have already been publicly issued are entirely different. In this case, the tokens have characteristics similar to RSUs (Restricted Stock Units), as these tokens exist in a liquid market (although they may be subject to lock-up restrictions), and the recipient will be taxed immediately upon receipt. If you receive token assets that are still under a lock-up period, you should consider filing an 83(b) Election to minimize the tax impact on the unrealized income portion; otherwise, you will be taxed based on the fair market value of the tokens at that time.

Vesting Period and Unlocking Rules

Most token incentives will gradually vest starting from your employment date, similar to the phased unlocking design in traditional equity incentives. This means that if you leave the team early, it is equivalent to forfeiting a portion of the agreed-upon token incentives.

The team's token incentives often also set a lock-up period to prevent you from selling a large amount of tokens in a short time. For example, you may receive corresponding rewards after the token issuance, but this portion of tokens will be locked and cannot be sold for one year after the network launch. Of course, generally speaking, the lock-up period will also have corresponding exemption clauses, which will not affect your ability to stake these tokens for additional earnings or participate in governance voting during the lock-up period.

While related, vesting and locking are not the same, as gradual vesting means that the unissued tokens do not belong to you, while locking only temporarily restricts the buying and selling of tokens that already belong to you, primarily to alleviate selling pressure in the market.

Taxes

Finally, like all components of compensation, you can consult a lawyer or tax advisor to understand the various mechanisms involved in token incentives, especially when the company's promised token incentive plan involves some uncommon mechanisms, such as "lock-up periods conditioned on the company reaching certain milestones" or "equity conversion token rights," you should seek professional assistance.