INSUBCONTINENT EXCLUSIVE:
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, andstakers (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 internalstakeholder incentives are structured correctly, the project could accrue long-termvalue 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 inevitable that they need to structure their tokens to retain and reward the best employees sustainably
This is as important it 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 ina company upside should they succeed
Often, employees can negotiate between taking a higher cash compor higher options amount, dependingon 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 toconvert them to paper
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 Dropboxtook eleven years from founding to IPO, while Airbnbhas been around ten years and stillhasn''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
To put simply, equity options only prove their valueat theend, 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 United
States 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 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 success, but also have immediate
liquidity.
Additionally, outside the United States , 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 disruptionto a company internal structure and we will share some
examples below of how that 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 Binancepay 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 ashared
incentive structure.
In the case of Neo, the original founding team, in fact, didn''thave 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 toburn 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 whileBinancecontinues to hold the
lead in the exchange space.
China has taken a lead here compared to the United States 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 alsoseems to be particularly powerful incentives for Chinese blockchain companies, more so than their United States
counterparts.Maomao Hu, Partnerat 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,
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 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
With token compensation introduced, this is the first time for many Chinese people to be able to participate in a company 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 tokensis 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, seriousfounders 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 United States
