Token Compensation Insights: Best Practices and Benchmarks 2023

In 2023, Pulley saw nearly one hundred companies, protocols, and projects issue tokens as part of the fundraising and compensation process on our platform. Sometimes this process was analogous to equity, with plans, valuations, and 83(b) elections; sometimes it took a very different, new, and exciting form altogether.

Unlike equity, tokens have yet to consolidate into a set of readily available and standard best practices (such as SAFEs and ISOs). This leads to extremely high legal costs and an overall low internal token adoption as part of the compensation process.

We’ve compiled an anonymized dataset of our 2023 token issuances to identify and share industry best practices. This dataset includes relatively new projects (prior to a token launch) and mature industry leaders with publicly trading tokens.

Read the report below, or View a PDF of the report.

Visit pulley.com/products/crypto to learn more about how to manage your company's equity and tokens on Pulley, or talk to an expert.

Token Allocations

In general, the variance for investor and team allocations was quite low, with allocations converging between 15-30% for nearly all sampled companies. The single highest allocation we saw was 38%, while the lowest was 14.6%.

On average, nearly 50% of tokens were reserved for contributors and investors (with the rest being reserved for the community, ecosystem grants, etc.).

Given this, we can expect token grants to generally be ~1/2 the size of corresponding equity grants (which are totally allocated for investors and employees).

Token Vesting and Unlocks

Projects on Pulley tend to use a mixture of token vesting and unlocks to control ownership and liquidity timing. We frequently see confusion on the difference between the two concepts, but in general:

• Vesting usually denotes ownership. If an employee is terminated and has unvested tokens, they would not receive any unvested tokens in the future.
• Unlocking usually implies transferability. If an employee is terminated with locked tokens, they would still expect to receive (and unlock) those tokens in the future regardless of employment status.

Token Vesting

All of the companies on Pulley use some form of vesting for employees and contributors, contingent on continued services.

By far the most popular vesting schedule employed was a four-year vesting period with a one-year cliff, used by nearly 85% of all companies in grants. These tokens vest on a monthly cadence.

There are instances of longer and shorter vesting schedules, often due to timing requirements around the token generation event. For instance, a retroactive grant provided for past services may have a condensed vesting period. Other schedules we saw this year include:

• Three-year vesting with a 1-year cliff (used by 23% of companies)
• Six-year with a 1-year cliff (used by 7% of companies)
• One-year vesting with a 1-year cliff (used by 75 of companies)

Token Unlocks

Token unlocks have become standard in addition to vesting for employees & contributors.

• 62% of projects used lockups in combination with vesting.
• The majority of unlocks lasted for at least 1 year, with some up to 3 years.

Just as lockup restrictions are common for recently public stock, many projects lock tokens for a standard period following a token generation event. This may be to protect the token price following launch or prevent insider trading.

92% of all projects on Pulley use lockups with investor token grants. This clause is extremely important, given that most investor tokens are not subject to vesting restrictions. Similar to contributor token unlocks, we saw a wide variety of favored schedules and periods.

• 30% of projects used a 1-year unlock (with a 1-year cliff)
• 23% of projects used a 4-year unlock (with a 1-year cliff)
• 15% of projects used a 3-year unlock (with a 1-year cliff)

Notably, there were often multiple types of unlock schedules within the same company for investors. This is due to companies raising multiple rounds of funding, with each round subject to different terms and conditions.

Distribution Frequency

Depending on how a grant is set up, tokens may be distributed on the date of vest, unlock, or some later settlement date. Projects tend to group grants by date, in order to administer token distributions simultaneously in a predictable cadence.

For example, a company may establish a quarterly settlement schedule, where all vested/unlocked tokens are distributed on the same day to all token holders.

For projects on Pulley we found that:

• 54% distributed tokens on a monthly cadence.
• 31% distributed tokens on a quarterly cadence.
• 8% distributed tokens on a custom or non-linear cadence.

Token Compensation for Contributors

We often field questions about compensation for contributors - given that crypto is still an emerging space, how can we appropriately benchmark and fairly compensate with tokens?

There are two common ways to think about this problem.

First, you can consider token grants as analogous to equity grants, and loosely scale equity benchmarks based on contributor/investor allocations. This often makes sense early on; if a token launch is several years away, token grants do function *similarly to equity grants.

• For example: a company allocates 50% of all tokens for contributors/investors. For a first hire, the median equity grant is 0.96% in 2022 (source). The corresponding token grant would be worth 0.48%

The second way is to use token grants similarly to cash bonuses. This is more relevant when a token is already liquid, or nearing liquidity, as the grant may have a readily available cash value (and significant tax consequences).

Compensation for Early Contributors

Not surprisingly, almost 50% of all ‘first hires’ at projects and protocols on Pulley were developers. Other popular job functions were operations (16%), legal (13%), design & product (9%).

Legal was, by far, the highest compensated position for early contributors, likely due to the regulatory challenges facing the crypto market and new projects.

Other job functions, including engineering and product, tended to range between 0.10% to 0.30% of the total token allocation, depending on the respective team allocation.

Token compensation loosely correlated with hire number in our dataset, with the first hire, on average, being the most highly compensated at 0.36% of the total allocation. Other early employees (hire #2-5) varied between 0.14% and 0.25% of the total token allocation.

Two ways to think about it:

• Loosely scale equity benchmarks based on contributor allocations (early)
• Consider tokens closer to cash compensation, and adjust as a bonus structure (late)

Conclusion

Token compensation is a unique way for web3 companies to reward employees, similar to equity. Pulley has provided insights and benchmarks here as a point of reference, not as advice for your token compensation policy.

You can use Pulley to manage your token compensation similar to how you manage your equity, all in one platform.

Manage tokens and equity from idea to distribution. Visit pulley.com/products/crypto to learn more.