Designing token-based compensation is a hard problem, especially given token liquidity and the volatility in crypto markets. To date, the topic has been fraught with murky tax/legal implications, fragmented data, and no well-defined playbook. Moreover, many founders and hiring managers navigate this process using cumbersome spreadsheets and half-baked software that don’t fully tackle the thorny issues.
Our first article in this series covered frameworks for creating an effective hiring and token compensation plan, particularly for companies going through pre-token-launch planning. This article will explain how to benchmark, calculate, and operationalize individual token-based offers for employees once a company’s token goes live.
Tokens are generally offered as one part of an employee’s total compensation. Holistically, a job offer may include salary, tokens for the product/protocol, equity in the company, and/or some type of bonus.
We’ve already outlined why it may only make sense for a company to offer some of these offer elements. This can be highly dependent on the relationship between equity and tokens, as well as the risk profile in their offer. Tokens as compensation come with many unique benefits. As a quick recap, they:
It’s worth noting that not every company should offer tokens as compensation. If yours does, varying types of documents will be used to operationally facilitate, depending on your company’s unique situation. Some commonly employed structures include restricted token awards, token options, or restricted token units.
Regulations around token compensation are ever-changing, and so we recommend consulting your own legal counsel — ideally a tax and compensation attorney with experience around tokens — for the most current information to help guide your decisions. Beyond that preparation, you’ll need the following:
In addition, you’ll also need to consider:
With suitable legal and operational structures in place, and hopefully, a sound general token hiring plan, you can now begin thinking about how to compensate individual employees.
Begin by doing up-front market research on overall compensation ranges. You’ll want to get a sense of what solid total compensation figures look like for each role (i.e., the dollar value of salary + equity). Understanding salary data is critical, and web2 equity band data can also, with some massaging, be used in your token award calculation, depending on what approach you opt to use.
Compensation is a complex subject area with many nuances. We recommend working with a compensation expert who understands the crypto market to nail down initial, rule-of-thumb bands. The talent function within your VC portfolio support team — especially if they’re a crypto-native fund — should be able to help you navigate the complexity.
Some resources and strategies you might consider utilizing include:
‣ Large industry compensation surveys, such as Option Impact or Radford. This is a solid starting point. Venture-backed companies often lean on the talent function within their portfolio support teams for help pulling such data. You can also access these tools yourself by providing your team’s compensation data, which will be anonymized and included in the aggregated datasets. (They tend to ask for a lot of data, so it’s often more accessible and less time-consuming to apply when your team is small.)
These surveys are quite comprehensive, with data spanning an extensive set of roles, levels of experience, geographies, etc. You can slice and dice based on things like a company’s number of employees, the amount of capital raised, funding stage, etc.
Bear in mind, though, that this data is not specific to crypto, which, as a highly competitive industry, generally demands some compensation premium over most other spaces. To accommodate, you might consider using data from the most expensive/competitive geographic job markets (e.g., San Francisco) even if you’re in a less expensive locale, looking at data for a designated skill/experience level that’s perhaps one level higher than where a candidate might typically be, and benchmarking against the higher percentiles of data provided.
Be mindful, too, that highly specialized roles, like Protocol/Blockchain Engineers, can demand even greater outsized pay. Research from Aishvar Radhakrishnan, for example, found that MakerDAO was paying Protocol Engineers a base salary of 280,000 DAI (a popular stablecoin whose value is pegged to that of the US Dollar — so essentially, $280,000) plus 0.1% MKR tokens vested over four years. That was about $1.3M in total comp at the time of writing in June 2021, and markets have generally gotten more competitive since. (Granted, MakerDAO is a well-established project, which carries its own compensation implications.)
Other considerations when planning general bands include whether you intend to do cost-of-living adjustments for remote employees in different geographies (sidenote: more and more companies are eliminating these adjustments, and we believe factoring them in will continue to become more of a competitive disadvantage over time), what your leveling system looks like (if you have one), and your company’s overall philosophy on willingness to negotiate.
With a solid sense of bands and target total compensation figures, you’re now much better prepared to calculate individual token offers.
It’s imperative to note that although tokens are liquid, they’re more volatile compared to traditional public equities. This makes it especially challenging to structure token offers in a way that’s attractive, fair, and predictable.
Regardless of the approach you take to calculating your offers, you’ll want to apply a vesting schedule.
That in mind, here are the most common approaches we see:
This is the simplest approach, and it’s the easiest one to use in calculating a token offer against a total dollar amount that you want to offer a candidate. It’s also the approach that we see most teams currently using.
In practice, you decide on a total compensation number per the total compensation bands that you’ve defined, factor in cash compensation, and then calculate the number of tokens needed to meet the total figure based on the fair-market value (FMV) of the token at the time of the grant or calculation.
One major drawback to this approach is that the cadence at which people join your team, crypto market volatility, and variations in initial offers can lead to compensation inequity/discrepancies and HR debt. Employees with similar levels of experience, performing similar duties, may end up receiving vastly different total dollar amounts over time.
If, for example, an engineer joins in January when your token’s FMV is $1.00, and another engineer joins in March when your token is at $1.70 (this kind of shift can happen within a day in crypto), the first engineer ends up with a lot more tokens.
This approach may make more sense for startups that are mature and have established positive token sentiment, but we believe crypto markets are still currently too volatile to confidently use FMV as a stable baseline.
You determine that you want to offer an employee a token grant worth $450,000. If your token price is $1.25 at the time of grant or calculation, you’re awarding them 360,000 tokens. You can use this calculator to determine how many tokens to grant. If you choose to input your total token supply, it will also let you know what percentage the grant is against your token pool.
This approach is similar to Approach #1, but simply with a different vesting schedule. It has the potential to reduce price volatility risk, minimize dilution, and better align performance and pay. It’s not without significant risk for candidates, however, especially for companies with meaningful potential upside.
In this approach, token grants are calculated using FMV and based on predetermined annual compensation targets (similar to Approach #1), but critically, are reevaluated and issued annually. These grants are awarded without a cliff, and typically, with monthly or quarterly vesting. Here’s an interesting evaluation of how Stripe and Lyft employ this method with their equity (which, notably, has some different considerations than tokens), and what the consequences are for employees. Coinbase uses this approach with its equity, as well.
In summary, the company is not committing to anything beyond a one-year compensation package. Although the expectation is that the same general reward amount will be maintained year over year, there are no guarantees. This provides the company greater control over individual employee token allocations, target total compensation numbers, and the broader employee token pool.
This also means that employees face the risk of receiving lower compensation based on any variable that the company deems appropriate at the time of each annual calculation (e.g., performance, market timing, remaining tokens in the employee pool, etc). Some candidates are likely to balk at the lack of predictability and a guaranteed longer-term grant, as well as needing to trust that the company will repeatedly do right by them over time.
Perhaps more significantly, this approach eliminates much of the asymmetric upside / OTM option nature of the award. Candidates are subject to companies greatly reducing the award if the company decides total compensation has become too high given a skyrocketing token price, instead of being able to reap the potential upside that typically attracts employees to startups to begin with.
While, from a company’s perspective, the ability to reduce rewards in such cases may impact retention (i.e., if strong upside provided by liquid assets leaves their employees wealthy and potentially more comfortable leaving), we’re of the opinion that potential upside is not something that should be taken away from employees lightly. Moreover, if the value of a grant has increased, it can be argued that there are stronger incentives to stay at the company and vest the remaining awards.
Lastly, this approach allows the company to protect themselves against offering token packages they may later deem as overly generous to folks who end up being underperformers.
You determine that you want to offer an employee a token grant equivalent to $125,000 at FMV in their first year. If your token price is $1.00 at the time of grant or calculation, you’re awarding them 125,000 tokens for year one.
The following year, you may decide that given an employee’s extraordinary performance and current market conditions, you want to award them an annual grant of $150,000. If your token price is $1.50 at the time of grant or calculation, you’re awarding them 100,000 tokens for year two. You can use this calculator to determine how many tokens to grant. The calculator will again also let you know what percentage the annual grants are against your token pool.
This approach attempts to create an analog to how traditional startups calculate their equity-based rewards. It’s been discussed within the web3 hiring community, and there are some teams that have rolled out some version of this strategy, but potentially without the depth of consideration we hope to explore here.
Although this approach takes the most preparation, it’s also the only one that, in the authors’ opinion, accounts for market volatility and mitigates employee pay inequity, while minimizing unnecessary token dilution and preserving an employee’s asymmetric upside. Again, crypto can be very volatile. Just two months prior to publishing this article, we saw a 47% drawdown in the markets over the course of a month:
Using a market-based approach to calculate offers during this time would have created wildly different packages. For that reason, we prefer this method; it’s more tangible, predictable, and fair. To use this method, overall, you take the same bands you’d use for equity and adjust them to account for token-specific nuance — namely, a lack of dilution in a fixed-token-supply scenario, as well as a potential premium for immediate liquidity. As your product matures, you can reduce the bands over time, similarly to what equity-based startups do with new rounds of fundraising (more on why below).
Given that you’re not calculating the token award based on a constantly moving FMV — instead, you’re giving a fixed amount of tokens, within a defined band, based on overall supply — this approach can minimize compensation inequities.
Note that the instructions below do not factor in inflation. If you do not have a fixed token supply, you can still use this method, but you may consider offering additional tokens periodically and/or based on performance.
First, you should decide whether you want to apply these bands to the total token pool or a smaller, specific employee allocation pool. Which you choose depends on how much flexibility you’d like to have. Applying these bands against your total token supply guarantees a fixed amount of tokens with no natural dilution (again, assuming your token has a fixed supply, overall). Alternatively, applying them to the employee allocation — which is subject to change up until the token launch — offers the company the ability to adjust the employee token allocation at its discretion.
Since fixed-supply tokens do not naturally incur dilution and have other benefits compared to equity that may warrant a premium (such as earlier liquidity), you can then consider adjusting your ranges accordingly. The chart below, which illustrates typical equity dilution incurred by a startup over time, shows that an employee may end up with only half the percentage of ownership they initially had by the time a company reaches Series C:
Principally, we recommend looking at what expected dilution would be if you were to raise three rounds of traditional funding and reducing your bands accordingly.
Data shows that three rounds of fundraising typically equates to roughly 50% equity dilution. If you apply this dilution amount up front, any “net hypothetical dilution” incurred by an employee after the analogous, hypothetical third round of funding effectively becomes a freebie, and they still get to enjoy the aforementioned liquidity benefits.
Slimming your bands by 50%, though, may give you a total dollar value on your offer that immediately feels off given current FMV. It’s important to remember that this approach strives to eliminate market volatility as a factor in your calculations and requires a long-term perspective. You can consider slimming your bands by less, and you should play with the calculator below to determine what percentage you want to use. You can also use the calculator to experiment with what total compensation will look like at different token prices.
Just as with a traditional equity-based startup, you should also evolve your bands over time, as your company matures and protocol/project is in a more steady state.Traditional startup equity bands are most commonly reduced with new fundraising rounds (when dilution occurs and the risk of joining the company decreases). Token-based companies can recalculate their bands at meaningful milestones that are roughly analogous to new fundraising rounds — such as major product, team size, and/or revenue milestones. This can prevent you from over-rewarding employees. If milestones are difficult to predict, you can consider revisiting the min/max of your bands annually.
Through research, you may determine that an appropriate traditional equity band for engineers at your company’s stage is 0.5–1%, and then apply a 50% reduction to that range, leaving you with a token range of 0.25–0.5%.
Depending on a candidate’s seniority, interview performance, etc, you award them tokens representing an appropriate stake in the employee token pool. In the above illustration, you’re granting 25 basis points of the token supply, which equates to 500,000 tokens.
You can use this calculator to determine your token band based on the traditional equity band you’ve researched, as well as the number of tokens to grant an employee given how many basis points you’d like to award.
The approaches above aren’t the only ones, but they’re the most common.
We’ve seen some teams begin to experiment with a strict milestone-based approach, whereby tokens vest with specific predefined product or business achievements. While this incentivizes employees to perform, it also creates unpredictability around if/when tokens will actually vest and requires high conviction in what you’re building. Early-stage startups often see changes to their roadmaps.
Some teams are also experimenting with offering token awards using the market-value based approach, but calculated using time-weighted average price (TWAP) or volume-weighted average price (VWAP) over a 7 or 30 day window. The goal here is to provide offers that are less impacted by volatility and market timing.
We’ve even seen some teams begin to explore giving candidates the option to receive some percentage of their overall token compensation as pegged to the dollar value calculated by TWAP/VWAP, with some other percentage based on a fixed number of tokens — fully at their discretion.
It may seem easier to simply give cash if you’re pegging token compensation to a fixed dollar amount, and then granting whatever amount of tokens is necessary to hit that amount. Defaults, though, are psychologically powerful; employees who are true believers in your product/protocol may be inclined to hold and benefit from the upside, whereas they might not go out and spend their cash on your token of their own accord. Paying via tokens also allows founders to avoid contributing to sell pressure on their total tokens and draining their cash reserves in the early days.
That said, giving an employee complete control over what percentage of their offer is token-based will undoubtedly create wide variance in compensation across your token cap table. This prompts a philosophical question: Is such inevitable disparity fair if you’re up front with all employees that they decide what percentage of their offer is going to be subject to market volatility?
We don’t want to boil the ocean with this article, but we’ve also given thought to how frontloading your vesting schedule — with a few additional considerations — can emulate dilution when applied to the Token Percentage approach; how teams might consider calculating a FMV for their token that’s detached from what the market is actually doing; and a bit more. If you’re interested in exploring those considerations, we’d welcome a DM.
The market is still early in experimenting with these more advanced methods. Be aware that complex offer structures can be confusing for candidates. Many will be new to token compensation and may not feel comfortable making such a decision, even if they want to join your company at the time of receiving the offer. Decision fatigue is a thing.
These approaches may also make overall token allocations more difficult to manage and introduce significant logistical overhead. We generally recommend striving for a balance of compensation equitability, transparency, and ease of operationalizing and delivering your offers.
Regardless of which method you choose, sticking with one approach can help you better manage compensation equality and candidate transparency. Note that each approach has its own benefits and downsides, and could influence the candidates you attract to your company.
Also, always remain mindful of the psychological effect of volatility on employees. While startups don’t generally have 80% drawdowns in their equity value, it happens often with tokens, and it can be a bit of a shocker when someone’s initial package was worth $400,000 at time of offer but suddenly becomes worth $100,000 with a market swing.
This can be mitigated, to some degree, by offering candidates multiple options based on a sliding scale — e.g., allowing them to choose between higher stability (more cash, less tokens) or higher variance (less cash, more tokens). You can consider defining a trade-off ratio, potentially with a min/max, at your discretion. This is different from offering an employee full control over their offer composition; rather, you’re offering options within a controlled range.
At the time of offer, you can also create a calculator for candidates that allows them to input hypothetical token price points and forecast what their total compensation might look like over time. (Be mindful that if you do not have a fixed-supply token, you may need to factor in inflation.) This can go a long way in painting a picture of success.
Depending on your business model, you may also consider offering tokens and equity for a more risk-adjusted offer profile. Alternatively, you can consider offering equity alongside a variable token-based bonus package potentially tied to performance, but many candidates may be dissatisfied if you use variable bonuses entirely in lieu of guaranteed, regularly vesting tokens.
There are things you can do post-offer agreement, as well. Our first post in this series discusses the possibility (and risks) of “truing up” candidates with additional tokens if the token value drops materially and sustainably, and it becomes necessary for retention. Give that article a read if that’s something you’re considering.
Yet another way to mitigate the psychological impact of volatility is to ensure that you’re hiring values-aligned employees. You might consider the ability to take a faithful macroscopic view of the market — and weather its downturns — as something you want to screen and optimize for in your interviews. (Even if your employees truly believe markets will rebound, though, it still doesn’t counteract reduced liquidity in bear markets.)
Lastly, benchmarking and offer-stage calculation aren’t the only tools you should be employing to deliver an effective token offer. The questions you ask, your narrative, and how you manage expectations are critical. This begins at the very first touchpoint with a candidate. Working with a skilled talent partner who understands crypto on how to best position your company, compensation philosophy, and offer at all stages of the recruiting process can be just as helpful as the calculation methods you employ.
Know any other effective calculation methods? We’d love to hear about them! Feel free to DM us on Twitter (@zorkary + @robindavidji + @3maxtorres).
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This post was co-authored by Zack Skelly, Head of Talent at Dragonfly Capital; Robin Ji, Co-founder of LiquiFi; and Max Torres, incoming COO at AngelBlock. Please keep in mind that this is based on our experiences and observations in the space, and it does not constitute legal advice. As you’re creating a token compensation strategy, you should consult your own legal counsel on how best to structure your compensation and comply with tax codes, but these considerations may give you some ideas on what to consider. Many thanks to Haseeb Qureshi, Tom Schmidt, Tasche Che, Kevin Li, and Lindsay Lin for their 👀 and input on this article.