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Ask HN: Any success stories with token-based employee incentives?
32 points by mdo123 5 days ago | hide | past | web | favorite | 37 comments
I’m considering a job at a blockchain startup, which is offering tokens (not yet created or issued) instead of equity. I understand equity, you make money if you get bought out or go public, but I am skeptical of tokens especially now that the crypto-bubble has burst. If the tokens are issued and eventually listed, what are the economics of how or why the price would actually rise? Does anyone have any success stories where this actually worked out for them (with a legit company)? Does anyone know of any good resources on this kind of compensation?

I would humbly suggest that you might not understand equity. Equity is a right to future cashflow that the company will generate (aka dividends), as well as a claim on company assets after all debts are paid off.

If the company builds valuable assets or generates a lot of cash, then equity is valuable. The company might be able to "get bought out or go public" as a result, but if not you still have a claim on future cashflow and company assets. Most companies don't go public but many of those do pay dividends to equity holders.

Anyway my only real advice is to find out how the founders are compensating themselves. That will tell you a lot about where they think value creation and capture will accrue in the long run.

Neither equity nor tokens have much long term value if the company fails; or simply fails to be a unicorn. It's a nice little extra in case things work out against all odds though. If you are founder, you may get a little out of an acquihire, IPO, or other exit but for employees the benefits are usually more modest (if any).

The big question is if they are offering equity to others. Because if they do, you can be sure that that is the asset to own when things go well.

This is actually a problem with equity based blockchain token investments. The premise of a proper token structure is to create some kind of long term value that is tied to the economic success of the company. If you have both tokens and equity, the shareholders will try to maximize their return on investment, typically at the cost of the token value and the ecosystem it is supposed to benefit. There's a conflict of interest there that dooms many tokens before they get off the ground because ultimately their long term value is redirected to the share holders instead of the token holders.

On the other hand, if blockchains are going to eventually produce some unicorns, now would be the time to get involved. IMHO, we need to move beyond the current rather underwhelming state of the art that resembles the early dot com days in many ways. But then, the dot com bubble did produce plenty of successful startups in the end. IMHO it will take probably a decade or so before we'll know for sure whether there are business cases for some form of blockchain company to succeed.

Either way, insist on cash payments combined with something that may or may not be worth the gamble. That way you have something tangible.

> I am skeptical of tokens especially now that the crypto-bubble has burst. If the tokens are issued and eventually listed, what are the economics of how or why the price would actually rise?

On one hand, offering tokens is a great way to avoid the cost of trading stock on an exchange. OTOH startups are so very rarely publicly traded that it's moot. Also, the world of tokens is rife with scams and P&D nonsense. It would be very exceptional to find a token that's legitimate.

> what are the economics of how or why the price would actually rise?

If the company creates value (or even the perception of value), it may indeed rise. Of course, it's critical to determine the relationship between the Real Equity and these tokens. Right now the company has some amount of ownership represented by some kind of paper-trail "tokens." How will this be altered/diluted to issue the tokens? Will the tokens completely convert/supersede the existing equity representation?

It's probably moot, really, since so many tokens are scams.

> Does anyone know of any good resources on this kind of compensation?

You should consider this part of your compensation to be null -- like lottery tickets that are one-in-a-million shots.

A useful thought experiment:

How much more tokens/equity/RSU's would you buy if you were paid in all cash? If you could buy them at a discount, how much would you buy?

If you wouldn't buy thousands of dollars of this token if you were compensated completely in cash, you probably shouldn't take the tokens.

RSUs are different right? Since you can sell them right away. Although they might lose value during your vesting schedule.

Writing this, I now realize that a company doesn't necessarily have to be public to give you RSUs.

Seems you realized this already, but RSUs are only sellable right away if there's a buyer right away. For publicly traded equities this is almost always the case. But plenty of private companies issue RSUs as well. I have some in a few companies currently for which there is no market.

The main value of token compensation is liquidity. People frequently underestimate how long it will take until exit and their equity becoming cash.

Tokens for a good project are liquid immediately on numerous exchanges, and likely will be worth at least something. Don't neglect the time value of money.

There's no such thing as a free lunch, though. In the case of token compensation, it's only liquid if you can easily find another buyer, and the main thing that would be driving the ease of finding a buyer for tokens right now is that there are so many people who are eager to buy literally anything that smells like crypto. So, yeah, it may be easier to dump in the short term, but in return you end up with an additional way for the cash value of your compensation to be driven to zero. Actually, make that three, because thinking about how future SEC activity could impact this sort of thing is the stuff that headaches are made of.

That might not be a consideration at all if the company's chances of long term success isn't a part of your thesis for taking a job there. But why would you take a job at a company that you don't expect to be successful?

Most blockchain startups fizzle. The likelihood of these tokens ever becoming valuable is very small. Moreover, even if they do amount to something, you'd need to examine how your compensation is worded - are you getting "X tokens" or "$X value of tokens"? If it's the former, why does "X" mean anything? The unit value of each token may mean that X is worth pennies. If it's "$X value of tokens", when/how is X calculated?

This is the equivalent of saying, "I have a great idea for a startup. I can't pay you or code, but if we make it big, you'll be rich!"

To be honest all of that sounds terrible. Getting a job that compensates me with actual money and using that to buy lottery tickets seems more fruitful.

I almost fully agree. The tricky part is getting access to the lottery tickets you want though.

For most people, the only way to buy equity (lottery tickets) in a private company is to work at one and negotiate for equity compensation.

Tokens are somewhat different I suppose if they are actually listed and tradable right away. That solves the access problem.

But besides access there are also often price discounts granted to employees for both tokens and equity forms of lottery tickets.

So I guess I would say it's not always the right thing to optimize for, but in general working at a company you really believe in can get you access to some very rare lottery tickets.

you are comparing lottary tickets to the equity of the company you are working for..really? ummm is your bias towards the blockchain so severe?


I'm assuming you're getting cash compensation too, but consider carefully the comparison.

If you can’t answer these questions without outside counsel, please avoid the scheme being peddled to you.

If you're asking here, you probably don't have enough knowledge to understand if their token has a chance of returning a profit.

As other commenters say, most ICO nowadays are scams and risky business as well when it comes to regulations.

I would be very very very careful here.

But then, the chances that they get some value VS the chances that some other startup's equity gets some value might be higher.

where did you see ICO? tokens for employees are not the same as public offerings

there is no private/public tokens concept in Ethereum. You can have a pre-sale, a locking period, etc. but eventually what you're doing is creating a sub-cryptocurrency and giving some of the token/coin you're creating to people. After that your contract defines a time where transactions are allowed, or you can create a switch, but I see 0 reasons to keep the switch OFF.

I am an Ethereum developer thank you. I did not talk about private tokens I said the offering is not public. The company can distribute the tokens to their employees as a liquid equity and promise they will redeem them for a certain equity or % of revenue. That's not an ICO

Ethereum is a 'success story', but its not 2015 anymore. I think you'd mad to take tokens as a form of compensation. Why not get a normal job and buy some crypto if you want to gamble?

> [...] which is offering tokens instead of equity

compensation != equity

I would consider it like stock-options, in other words a few lottery tickets.

You might get lucky and they might have some value in the future, but most likely they'll never be worth anything.

Get the job if you think it's going to be interesting and if you're happy with the cash compensation, not for the lottery tickets you're getting.

Cash is king. Anything else you should consider a heavily discounted lottery ticket.

Not really. Some loyalty programs could give you tax free value e.g. booking a hotel with points. A company can negotiate a better price for a given service, since it will be bought in bulk.

Points like that are frequently devalued thru worse conversion rates or increased barriers to using the points.

As with tokens, loyalty programs have a long history of devaluing points without warning.

As noted, the best case scenario is that they may, eventually, be worth something. More likely, they'll not be.

View it as a perk, like receiving a free lottery ticket, but don't allow that to factor into your "real" compensation.

if the company is worth something the tokens will be too

... because of the company's intrinsic value (assets, etc.)? As in, the tokens would have value based on the company's value, not based on their own utility value in enabling a service or based on trade value in a marketplace?

That would make them uncomfortably close to a security, which is categorically not a good thing unless handled very carefully.

well if the company is distributing tokens it means that it has something to back them up. It can be perks or it can be equity itself. Here in Europe it's possible to tokenize equity. Being a security is not a problem if there is no offering to the public.

Something to consider is that most VC’s that are investing in this space are now doing so for equity. The risk of tokens being unregistered securities is very high.

Most investors today see tokens as a bonus, but invest in equity.

Many people advise that shares or options in a startup should be valued at rounded down to zero.

While I don’t agree with them necessarily, I’d certainly value crypto-tokens at zero. Or maybe a nickel...

Are they giving tokens _instead_ of equity? Insist in getting equity, that's a third of the point of joining a startup. Sure, add crypto-tokens to the mix. But tokens instead of equity… pardon?

What use is equity if the company never goes public or never gets acquired?

Tokens can on the other hand have value even if none the above happens, and you get a liquid market much earlier. If the monetary policy of the token is reasonable, and the market cap shoots up for one reason or another in the future, you'd make a big buck.

But would you make any money on your equity of the market cap of the token would go up? Not necessarily.

Even if it was listed, the most likely outcome would be for the token to lose value. Offering unlisted tokens as some sort of payment just feels wrong to me.

Ask yourself this: does the offer sound more like a legitimate business proposition, or more like a plotline from the Silicon Valley TV series?

Only accept this if your landlord lets you use the coins to pay rent.

think of tokens are liquid equity. it's up to the founders to make good on the tokens but that can be written down in notary contracts.

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