How do token vesting schedules work?

Compensation is a key piece in motivating your team to achieve your company’s objectives. There is a lot of variability in how companies create incentives to align their employees’ financial goals with the company’s success.

Crypto Compensation Trends

In the history of fiat, equity and token compensation, equity-based compensation emerged in the 1950s as an alternative to cash incentives, offering employees a stake in the company's success through instruments like Restricted Stock Units (RSU). This approach fostered ownership and loyalty while aligning employee interests with organizational goals.

Similarly in the crypto space, token-based compensation has emerged as a key way for companies to similarly incentivize employees. This is facilitated through different types of token compensation structures, such as Restricted Token Units (RTUs), Restricted Token Agreements (RTAs), and many others.

For token grants such as RTUs, how you set your vesting schedules will heavily impact incentive alignment with your employees.

Using RTUs for Crypto Compensation

Usually, token compensation is done through token grants which are vested and can have lock up periods, and they vest and unlock after specific periods of time. RTUs have become a common choice for token compensation due to their unique features, including:

• Flexibility: RTUs can be tailored to meet the specific needs and goals of both startups and employees, offering versatility in designing compensation packages.
• Vesting commitment: Tokens can only be fully-owned without risk of loss by the employee when the tokens ‘vest’.
• Upside Potential: Employees will often be granted tokens as part of their overall compensation, but those tokens can possibly appreciate significantly by the time the grant has fully vested.
• Fractional Ownership: RTUs enable employees to hold a fractional share of the platform they are building themselves, aligning their interests with the long-term success of the project.

How RTUs work can be summarized in 2 broad steps:

• Token grants are designed and executed: The company will decide on the vesting structure of their token grants, and distribute it amongst their contributors. Tokens granted in this way through a vesting structure may be further locked up for a time, even beyond the vesting period.
• Tokens release through vesting: As milestones are reached in a predetermined vesting schedule (i.e. second year with the company), a specific amount of tokens will vest and be fully-transferred to contributors.

Although a lot more goes into token vesting than the above two steps, it is useful to keep these broad categories in mind when thinking about how token vesting works. We can encourage any company thinking of token grants to be familiar with our guide on the common types of crypto compensation structures.

In this article, we will discuss how vesting for RTU-based token compensation works and what vesting schedule could be ideal for you.

How does token vesting work?

Vesting refers to the moment when full ownership and control over previously restricted tokens is transferred over to the grant recipient with no further risk of forfeiture.

When a token vests, it means that any restrictions or conditions placed on that token are lifted, and the individual or entity holding the asset can now exercise full control, including the ability to sell, transfer, or use it as they see fit, assuming no further lock up period applies.

This vesting occurs on a predetermined “vesting schedule”. Vesting schedules ensure that employees cannot exercise their tokens immediately upon receipt. Instead, they follow a predetermined timeline before the grantee receives full ownership. 

This schedule can be linear, meaning a fixed portion of tokens is released at regular intervals, or it can be front-loaded or back-loaded, depending on the project's goals and strategy.

Vesting schedules are advantageous for companies as they:

• Promote Long-Term Commitment: By preventing immediate access to token benefits, vesting encourages employees to stay committed to the company's goals and objectives.
• Align Interests: Employees are more inclined to work towards the company's success when they have a vested interest in its growth.
• Minimize Risk: Vesting protects the company from losing investments in new hires who may leave shortly after joining.

Token vesting complexities

When tokens vest, the employee will now expect to receive these tokens from you, and you or your employee will be expected by your local tax authority to file the correct forms or withhold the correct amount of taxes.

How you schedule your token vesting across your workforce can strongly impact your HR/payroll workflow, as multiple vests across many days will require multiple off-cycle payrolls to be conducted.

Moreover, depending on the utility of your tokens and the structure of your token compensation plan, your escrow arrangement can play an important role in ensuring your employees qualify for the 83(b) election or that they receive tokens they should receive from an airdrop.

You can learn more on the complexities through our articles on token distribution and tracking, and our legal-focused article around structuring and streamlining token agreements.

Different types of token vesting schedules

Let’s say that you onboard a promising employee, and grant her an RTU of 12,000 of your project’s tokens. 

As an employer you can make the vesting schedule of your RTU in a few different ways. Let’s explore them:

Time-based Vesting

This approach involves a predefined timeline, often with a 1-year cliff and subsequent vesting over a 4-year period. During the one-year cliff period, no token grants are issued to employees in order to protect the company's digital assets from short-term employees.