GCR

Token structuring and tokeneconomics are among of the most important considerations when designing a blockchain. When thinking about how best to distribute these tokens, founders often think about how the tokens will impact external stakeholders such as their investors, the community, and stakers (people that can mine or validate block transactions according to how many coins he or she holds). But token economies are also bringing disruption to organizations internally, especially when it comes to HR and compensation.

If the tokens are structured properly for a blockchain, external stakeholders will be directly aligned with the goal of the project. Those incentives can encourage participation on the blockchain platform and/or drive token demand with community-building and marketing. Similarly, if internal stakeholder incentives are structured correctly, the project could accrue long-term value by motivating employees to work towards the same goal, while reducing adversarial behavior and also bad actors.

For any blockchain company to succeed long-term and scale, it’s inevitable that they need to structure their tokens to retain and reward the best employees sustainably. This is as important if not more important than incentivizing external token holders.

How does an employee look at tokens vs equity? 

Currently, equity in the form of stock options is widely distributed as part of compensation packages amongst startups. When employees join a company, they are usually offered a combination of cash and stock options. The options become a way for the employees to meaningfully participate in a company’s upside should they succeed. Often, employees can negotiate between taking a higher cash comp or higher options amount, depending on their risk appetite.

There are many ways tokens and equity are similar. For one, both assets motivate individuals to align their goals with that of a company’s. If the company becomes more successful, the value of its tokens and equity should theoretically go up. Nonetheless, one of the downsides of stock options is that they usually require a liquidity event for an employee to convert them to paper money. Historically, that was when a company went public and the employee could convert their options into stocks and then sell them in the public markets.

However, in the last decade, with the increasing amount of private capital and subsequent larger private fundraising rounds, companies are taking way longer to IPO. Companies such as Dropbox took eleven years from founding to IPO, while Airbnb has been around ten years and still hasn’t gone public. As a result, private companies started doing option buybacks to provide liquidity for their employees. Simultaneously, this phenomenon has caused the secondary market to thrive in Silicon Valley.

Token liquidity changes the game

One of the largest differences between tokens and equity is that tokens are immediately liquid, assuming that they have already been listed on an exchange. To put simply, equity options only prove their value at the end, whereas tokens have certainty values from the beginning.

Now in cryptocurrency and blockchain companies, employees could get paid in tokens in lieu of equity or cash, primarily outside of the U.S. Many tokens have a liquidity advantage over equity. For example, it can be immediately sold upon reception, assuming that the token has been listed on an exchange and there is enough trading volume.

This is also one of the reasons why exchanges are so important for the cryptocurrency space because 1) it’s one of the easier ways to gauge the value of a company given that the industry has yet to figure out a proper valuation methodology, and 2) it provides immediate liquidity for employees who have been burned by the hopes a billion dollar company not coming to fruition and all the options going to zero.

For an employee looking for a job in a technology-based company, consider two companies that are exactly the same, with the same team quality and same targeted industry, but one company has a token incentive structure instead of an equity incentive structure, and the token is already traded on an exchange. Why would the employee ever want equity? With tokens, you’d still share the upside in the company’s success, but also have immediate liquidity.

Additionally, outside the U.S., often employees can also get paid in tokens or stable coins in lieu of cash to take advantage of tax benefits given the lack of regulatory sophistication. That may change very soon, however. Token structure, therefore, is a disruption to a company’s internal structure and we will share some examples below of how that’s already affecting a number of Chinese crypto companies.

Token incentives will disrupt traditional ways of compensating employees

These changes to employee compensation have already become popular in places like China, where a number of Chinese blockchain companies have started on the foundation of distributing tokens as compensation. Companies like Ontology, NEO,  Huobi, and Binance pay  their employees in their own tokens. Many of these teams operate worldwide but they are able to manage hundreds of people, often with just a handful of HR staff, through a shared incentive structure.

In the case of NEO, the original founding team, in fact, didn’t have anyone with a computer science background. When they were looking for developers, they would pay tokens to people to do development work for them. For Ontology, it was even more extreme. The founding team initially set up the Ontology Foundation. They didn’t want to hire people, so instead, they listed out a list of things that needed to be developed and paid tokens to all the developers who contributed.

Binance, similarly, paid their employees in tokens. They would then use their quarterly profits to burn tokens, which subsequently boosted the value of the remaining tokens. It is possible that partially due to these effective token incentives, Ontology has been the best performing token this year while Binance continues to hold the lead in the exchange space.

China has taken a lead here compared to the U.S. partially because of regulatory uncertainties, but there are examples in America as well of these changing compensation norms. In the early days of cryptocurrency when it was (even more) wild west, Consensys got started by compensating their employees in tokens until their first legal hire came along. That story is similar to Coinbase,  where initially a number of first employees were given the choice of being paid in coins and/or cash.

Token compensation also seems to be particularly powerful incentives for Chinese blockchain companies, more so than their U.S. counterparts. Maomao Hu, Partner at Eigen Capital and CTO of Calculus Network, talks about the psyche of the young generation of Chinese developers: “Being Chinese, Chinese engineers, especially the young ones, have a hunger that you only see in some parts of Silicon Valley, and that’s like everyone. They are just doing 80 hours 100 hour weeks because they hate being poor and they hate not having an opportunity and they don’t have other ways to get an opportunity, and that’s like everyone.”

It may also be that because there have been fewer technology cycles in China, and the rise of the largest technology companies happened only in the last decade, equity compensation remains a relatively new concept to local citizens. With token compensation introduced, this is the first time for many Chinese people to be able to participate in a company’s upside so directly.

Despite their growing popularity, these incentive schemes are still early and experimental, and there are unforeseen risks associated with token issuance as compensation. In particular, the appeal of short-term, quick gains from tokens is ever more attractive. If wrongly incentivized, people could end up spending time hyping up their tokens instead of building product, allowing employees to cash out quickly without producing.

As a result, serious founders of new token-based companies should be aware of such short-sightedness when designing employee token incentives. They can potentially introduce long-term token vesting schedules, and also hire people who care about driving long-term value. For CEOs, this is going to be an increasingly important role they will have to take in the token economy. I’m certain though that the next set of large unicorns will be coming from tech companies with great token incentives structures, in or outside of the U.S.