a16z: The Complete Guide to Token Compensation
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a16z: The Complete Guide to Token Compensation
Tokens are not equity.
Navigating Web3 tides with focused insightsWritten by: Madan Nagaldinne, Craig Naylor, Mehdi Hasan
Translated by: Luffy, Foresight News
Tokens are one of the most powerful tools available to Web3 companies. Tokens can incentivize positive behaviors, align stakeholders, and build decentralized communities. Over the past decade, tokens have also become a way to attract, compensate, and reward talent.
Since most projects develop open-source software—whose value is decoupled from the company leading the project and its equity—it's critical to ensure employees are fairly compensated for their contributions. Many teams include tokens as part of compensation. At the same time, leaders, talent teams, and HR departments at Web3 companies are developing increasingly sophisticated methods of using tokens in compensation packages so they can compete with other firms—and even draw talent from the broader Web2 industry.
Incorporating tokens into compensation comes with unique complexities, challenges, and opportunities. For example, there are many ways to structure compensation, and what works for one company may not suit another. In this article, we’ll explore how to integrate tokens into a broader compensation strategy, then dive into the specifics of token grants—including vesting schedules, lock-up periods, and taxation.
First, tokens are not equity
While many token-based compensation strategies are rooted in traditional Web2 corporate models, it’s essential to clarify: tokens are not equity. They do not represent equity either, and companies should be cautious about drawing such analogies in internal discussions or when explaining to prospective hires.
From an employee’s perspective, receiving tokens is a fundamentally different experience from receiving equity, with distinct risks and rewards. Protocols are autonomous software—not companies. Unlike equity, no board or management team is tasked with maximizing token value.
When allocating tokens, many factors must be considered, with employees being just one piece. (For more on token distribution, click here.) There are numerous legal and regulatory considerations specific to tokens and Web3 that startups must carefully evaluate when defining the strategic role of tokens.
Now, let’s dive into some key principles of token compensation…
A beginner’s guide to building a token compensation strategy
Token compensation is part of a broader compensation strategy whose ultimate goal is to reward work and retain employees without undermining engagement. This involves shifting employees’ focus away from token price and toward long-term building.
This is uncharted territory, especially for talent teams managing token compensation for the first time. The good news is that despite the differences between Web2 and Web3 compensation, HR teams can still learn a lot from successful Web2 models. In fact, if they want to compete with traditional companies for talent—especially in hot fields like artificial intelligence—they must.
We begin with a foundational principle: establishing a clear, transparent, and easily understood compensation philosophy is crucial. Compensation transparency and fairness significantly impact employee engagement, and companies cannot afford missteps here.
Once established, this philosophy guides decisions around hiring, salary levels, pay ranges, long-term incentives (tokens, equity, or both), promotions, raises, professional development, and more.
A strong compensation philosophy typically answers questions such as:
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What is the base salary for a given role?
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What portion of total compensation comes from tokens and equity?
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What is the company’s base-to-total compensation ratio?
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What is the total compensation target set for each position?
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How does the company define market compensation? For example, who are peer companies? Who are the most likely competitors for talent?
Once these questions are answered, companies can move to more granular issues: How often should employees receive tokens? What should be the cash-to-token split?
Balancing cash and token compensation
In traditional compensation structures, base salary helps balance the risk introduced by equity. Token compensation follows a similar logic—it is only one component of an employee’s “total compensation.”
For Web3 companies, total compensation includes:
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Total cash compensation—base salary and performance bonuses—typically paid in fiat currency
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Equity—including non-qualified stock options (NSOs), incentive stock options (ISOs), employee stock purchase plans (ESPPs), etc.
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Token compensation—paid in project tokens, other tokens (e.g., Bitcoin or Ethereum), or stablecoins
A simple rule of thumb is to offer healthy cash compensation that is competitive with peer companies. What percentage of total compensation should be cash versus tokens? Commonly observed breakdowns include:
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Total cash: 75% of market compensation
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Total compensation (total cash + bonuses + equity value): 75%–90% of market compensation. Total cash includes base salary and other cash components like performance bonuses
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Premiums: Some teams may offer premiums to secure specialized talent—for example, protocol or smart contract engineers, or experts in crypto security. These appear as higher base salaries and total compensation.
We often hear: “Should we let employees choose the cash-to-token ratio in their compensation?” While there’s no hard rule, it’s generally better to cap the token portion at a fixed percentage of total compensation rather than allow individual choice.
Finance teams would need to track numerous custom arrangements, and sharp fluctuations in token prices could undermine the company’s overall compensation strategy. A sudden price drop might force employees to renegotiate their packages. Conversely, a surge could make some employees unexpectedly wealthy—far beyond others’ earnings.
Token vesting schedules
Having a fixed percentage of tokens doesn’t mean your token balance stays static.
Tokens themselves can function in various ways depending on when and how they’re distributed. Companies have many options: short-term incentives, long-term incentives, classic mechanisms like vesting and bonuses.
The best model depends on the company’s specific context and philosophy: Is the token publicly traded? What type of tokens does the team issue? Are there restrictions on token transfers?
Below are common token vesting schedules and their pros and cons, to help founders unfamiliar with best practices. Note: these schedules work best for projects with publicly traded tokens that have reserved a pool for ongoing employee incentives.
Founders must balance depleting their token reserves for employee rewards against incentivizing third-party contributors to drive decentralization.
One-year cliff, four-year vesting
In this model, employees receive their first batch of tokens upon joining. After one year, the first quarter vests, and the remainder vests quarterly (or monthly/annually).
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Pros: Rewards sustained contribution to the project.
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Cons: Employees hired in different months of the same year may see vastly different outcomes, especially during volatile markets. Longer timelines may also cause emotional rollercoasters.
Annual awards
Given large swings in token prices over time, some teams find multi-year distributions impractical. Instead, they prefer annual awards. Each year, employees receive tokens priced at current market rates. Talent teams often incorporate performance metrics after the first distribution.
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Pros: Reduces employees’ exposure to token volatility, making compensation more predictable and less distracting.
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Cons: Lower potential for token appreciation compared to a four-year plan, possibly reducing appeal to top talent.
Graduated four-year vesting
This model aims to sustain motivation by increasing rewards over time—starting small (e.g., 10%) and reaching 100% after four years. It usually includes a one-year cliff, with few companies vesting tokens in the first year.
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Pros: Graduated rewards encourage longer tenure.
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Cons: Smaller early benefits may make recruitment harder. Only a few Web3 companies currently use this, but adoption may grow as the industry matures.
For any vesting schedule, mitigating token price volatility is key. Using methods like a 90-day moving average for pricing and allocation can help. Companies should also ask advisors to review variations of vesting plans they’ve seen to manage market swings.
Lastly, remember that many tokens—especially upcoming launches—require planning for lock-up periods. Token lock-ups (restrictions on circulation post-launch) help ensure long-term success and align stakeholder incentives; click here for more on lock-ups.
Lock-up periods
Founders should ensure “insiders” (employees, investors, advisors, partners, etc.) share identical lock-up terms. If some groups can sell earlier than others, it may breed distrust, violate securities laws, and harm the protocol.
For U.S. employees, companies should plan for at least a one-year lock-up (for legal reasons explained here). Three to four years may better serve long-term success, as longer lock-ups reduce downward price pressure and signal confidence in the protocol’s viability.
For candidates from Web2, education may be needed—long vesting and lock-up periods can feel burdensome. But if lock-ups apply equally to all pre-launch token holders, candidates should view them positively, as signs that founders prioritize protocol stability and believe in real utility.
Practically, lock-ups can be managed via smart contracts and administered by token management providers. Once tokens vest and lock-up ends, employees can transfer them to their wallets. Encoding allocations into smart contracts builds trust with employees.
Token award frameworks: RTA, TPA, and RTU
Currently, U.S.-based Web3 companies primarily use three models for structuring token awards. All are inspired by equity awards—the most common asset-based compensation template—but again, tokens are not equity:
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Restricted Token Awards (RTA): Similar to stock options offered to pre-IPO employees in traditional firms.
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Token Purchase Agreements (TPA): An alternative structure for pre-launch token grants with different tax implications (see below).
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Restricted Token Units (RTU): Analogous to Restricted Stock Units (RSUs). RTUs are used once the token has launched and is trading.
RTAs and TPAs are two ways companies compensate employees hired after token creation but before public launch. Both are often compared to stock options in traditional pre-IPO firms.
Both RTAs and TPAs can follow the vesting schedules outlined earlier and typically come with:
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A lock-up period during which tokens cannot be sold or transferred;
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Forfeiture rights allowing the company to reclaim tokens before vesting.
The main difference between RTA and TPA lies in taxation, so founders should consult legal counsel when choosing. Tax timing is a key factor, depending on the type of token award granted.
RTA
An RTA allows U.S. recipients to file an “83(b) election” with the IRS, recognizing income at the fair market value on the grant date. This can benefit employees, especially if token value is expected to rise. Filing 83(b) also avoids potential tax liability on vested tokens that cannot yet be sold. Note: The 83(b) form must be submitted to the IRS within 30 days of token grant.
TPAs are similar to RTAs—they can be granted before public token release and also allow filing an “83(b) election.” But unlike RTAs, TPAs require employees to purchase tokens at a set price (the “exercise price”). Employees naturally prefer RTAs, but TPAs offer tax advantages. Unlike RTAs and RTUs—which are taxed as ordinary income—TPAs create no immediate tax obligation. Taxation is deferred until the employee exercises the option or sells the tokens. Upon exercise, only the appreciation above the exercise price is recognized as income.
RTU
RTUs are typically issued to employees who join after token launch, mirroring RSUs offered by large corporations.
RTUs are granted upon hire and subject to one of the vesting schedules above. Once vested, employees can usually transfer tokens to their preferred wallet—unless a lock-up applies. Tokens are taxed as income at their fair market value upon vesting, so some companies withhold a portion of each employee’s award to cover tax obligations.
While this discussion focuses on token recipients, companies must also consider their withholding obligations for taxes payable in cash.
Note: None of the above constitutes tax advice. We aim only to outline current strategies used by Web3 companies. We strongly recommend Web3 talent, legal, and tax teams collaborate closely to determine the optimal approach for their company and strategy. If liquidity is a primary driver, other strategies—such as secondary offerings—can provide employees with liquidity as the company raises additional capital.
Operational guide: Managing token compensation
This sounds complex, but the good news is that more companies are building products and tools to make token awards operationally manageable. Typically, startups use a custodial wallet (from Coinbase, Anchorage, BitGo, etc.) paired with a token management system (from Toku, Pulley, etc.) to handle administration.
Employees access their wallets through the token management system to receive tokens and monitor their asset status.
Conclusion
Web3 companies are still evolving. By adopting well-tested, mature compensation strategies, they can meet the challenge of attracting top talent.
The core principle is ensuring tokens are part of a thoughtfully designed compensation strategy—one that is transparent, fair, and motivating. Such a strategy not only attracts and retains top talent in the short term but ensures contributors are properly rewarded for their work.
While companies can adopt alternatives—like offering secondary token sales when raising new capital—token compensation remains an attractive tool for Web3 companies seeking to level the playing field.
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