Web3 job seekers must read: Paradigm partners explain Token incentives

The talent market has seen a major shift for Web3 companies over the past few months. Great talent from Web2 technologies, traditional finance, and big law firms have poured into the field, but often they don’t have a good grasp of the compensation structures common to crypto firms.

Suppose you are one of these people, and you get a job offer that pays with tokens. Before you sign (or don’t) an onboarding contract, it’s important to understand what you’re getting in order to evaluate it against a more “standard” compensation package.

One of the great benefits of joining a Web3 startup is that in many cases the compensation comes with tokens, sometimes combined with traditional equity. Let’s be clear: Tokens are not inherently traditional equity, but they may have some rough similarities. Like equity, tokens can appreciate substantially, and they tend to be liquid earlier than standard equity. Token entitlements also add more incentive alignment by allowing employees to directly participate and contribute to the protocol they are building.

As a potential employee, you should consider that tokens differ from traditional equity (eg, options or RSUs) with a few similarities:

1. Like obtaining equity incentives, obtaining Token incentives also has a price – the value of Tokens is related to the scale of the network. If you want to keep Tokens from depreciating, you must promote the growth of the scale of the network, and you have to work hard for this.

2. The company should try to make the token incentives as little as possible to affect employee tax payment. Specifically, employees do not have to report substantial income for tokens or token rights that are not yet in circulation (which would be your out-of-pocket tax liability).

3. Most companies will allocate Tokens to employees from the reserved Token pool according to the relative share capital held by each person, so Token incentives can usually be regarded as equity incentives.

Token value: before or after issuance

A key point to remember about Token incentives is whether the incentives are before or after the Token is issued. Token incentives before issuance are usually similar to the option structure of early private company stock. The value of Token before issuance is very low at the time of minting, and its value mainly depends on some uncertain issuance activities in the future. As with stock options, there is no tax burden on receiving unlisted tokens – but they may incur taxes when used, just as you would be taxed when exercising NSOs (non-restricted stock options).

The incentives after Token issuance are different, and some of its attributes are reminiscent of restricted stock units (RSUs). Tokens are in a liquid market (although they may be limited by distribution cycles and lock-ups), and recipients are taxed immediately upon receipt of tokens. If your tokens are still in the distribution cycle, you should consider filing an 83(b) Election to minimize the tax impact of the tokens in the distribution cycle. Otherwise, based on the market price at the time, these tokens are the income you want to report.

allocation cycle

Most token incentives are in the distribution cycle from the first day of your employment, similar to the distribution cycle of traditional equity. If you do not maintain employee status throughout the distribution periodic table, you will lose a portion of the token incentive. Again, you have to work on it.

Token incentives usually also have a separate lock-up to prevent you from transferring your tokens in the distribution cycle for a certain period of time. For example, you might get a post-issuance token, but not sell it for a year after the network launches. Lockups usually have exemption clauses that allow you to stake or vote tokens before the lockup period expires.

Although related, the distribution cycle and lock-up are not the same, because the distribution cycle implies the risk of confiscation, the purpose is to align employee incentives with the long-term growth of the network, and lock-up is only a transfer restriction, more focused to prevent dumping.

pay tax

Finally, as with all incentives, you should consult an attorney or tax advisor, especially if your token incentive involves mechanisms not commonly found in traditional equity incentives (e.g. trading windows, lock-up periods conditioned on the company reaching certain milestones) or option to convert equity into Token).

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/web3-job-seekers-must-read-paradigm-partners-explain-token-incentives/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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