What are Token Appreciation Rights Agreements (TARs)?

Token Appreciation Rights (TARs) agreements are a form of compensation agreement that grants an employee or service provider the right to receive a benefit or payout based on the appreciation of a company's token value over a set period of time. TARs are similar in structure to Stock Appreciation Rights (SARs) in traditional equity-based compensation plans but are adapted for the crypto and blockchain sector where the underlying assets are tokens instead of company shares.‍

Here's a breakdown of how TARs typically work:

1. Grant Date: The company issues TARs to an employee or service provider at no cost. These rights are usually subject to certain conditions, such as vesting schedules.

2. Vesting: Similar to other types of token-based compensation, TARs may come with a vesting schedule. The rights become exercisable according to the predefined vesting criteria, which could include time-based vesting or performance-based milestones.
You can learn more about How do token vesting schedules work?

‍3. Exercise Price: At the time of granting TARs, a base value of the token is established, usually by a third party valuation firm like Teknos or Redwood. This base value is used to calculate the appreciation of the token value over time.

4. Appreciation: The benefit to the holder of TARs comes from the increase in the token's value. If the token's value rises above the base value, the TAR holder is entitled to a payout or benefit equal to the appreciation.

5. Payout: Upon exercise, the holder of TARs receives a payout reflecting the increase in value of the tokens from the base value. The payout can be in any form of tokens, cash, or other forms of compensation, as specified in the TAR agreement.

6. Tax Implications: The compensation received from TARs may have tax implications for the holder, which can vary depending on the jurisdiction and the specific structure of the TARs. Company’s providing TARs to employees have a legal obligation to withhold proper taxes on them. It is critical to get the tax calculations correct in consideration of total income or you could be subject to fines, penalties or sanctions. Failing to pay correct taxes on TARs, like all income, is a criminal offense.

Why and when would I use a TAR?

TARs are typically used when a token distributor does not want to provide a direct interest in the tokens, which could be for legal or practical reasons.

What are the downsides to using a TAR?

When the value of a TAR settles, the value received is ordinary income. If the TAR settles in fiat, which is usually the case, the recipient will not get an asset that may further appreciate and receive capital gains treatment. 

Summary

TARs agreements are a way for crypto companies to align the interests of their employees or service providers with the success of the company's token or project, incentivizing them to contribute to the growth and appreciation of the token's value. This form of compensation can be particularly attractive in the crypto industry, where the potential for significant appreciation of token values exists. However, it's important for both companies and recipients to understand the legal, regulatory, and tax implications of TARs agreements, which can vary significantly across different jurisdictions.
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