October 11, 2022
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Ucha Vekua

What Are Token Incentive Plans – An In-Depth Guide to Stock Option Alternatives

Growing your startup as a founder can be very challenging. You need to make sure your product works, customers are happy, and, most importantly, the team is motivated to achieve bigger goals. 

In order to motivate them, you give them a chunk of your company shares and start setting up stock option plans for them to make sure every contributor gets a fair share of the overall success.

But, as the team grows, you find this system very ineffective. Lots of company expenses are going into this, and the whole system is not transparent for your team members.

So, what are the solutions to this? What are the alternatives to stock options?

One of the most effective ways to replace stock options is by setting up Token Incentive Plans for your team members. Tokens give more flexibility to you as a founder and more transparency to the company contributors.  

Follow along as we discuss why it is important to search for stock options alternatives, the benefits of company tokens, and what are the ways to set it up for your company. 

Why Do We Need Alternatives to Stock Options?

Stock options are the most widely distributed equity form as part of compensation packages amongst startups. 

When companies expand and hire new team members, they usually offer a combination of cash and stock options. This is how employees get an opportunity to participate in the company's upside and benefit from that success. 

However, the whole stock options system is not very easy to maintain from the company's perspective.  

Let's break this down further. 

If you have a startup and you are looking to expand the team internationally, it can get very complicated to give out stock options to team members that work from another country. 

In that case, your company would have the extra expense when you hire a global talent because you need to open up a new legal entity in every country you hire people from. 

With the growing interest from companies to hire people internationally, it can get very inconvenient and expensive for a growing startup to set up stock options for employees, contractors, and other contributors in every country where their contributors work from.

Token Distribution Is a More Effective Way Than Equity to Incentivize Startup Employees

One of the most effective alternatives to giving out Stock Options to your employees is setting up Token Incentive Plans for contributors and giving out company tokens. 

Similarly to stock options, company tokens also give the owner the right to purchase a number of tokens at a pre-determined price. However, there are many differences between those two terms.

For example, this system allows the contributor to acquire tokens immediately, so they become liquid from the beginning. On the other hand, stock options prove their value in the end. 

Also, the whole system for Token Incentive Programs is built on Blockchain, which gives transparency value to everyone that is involved in the process. 

They are backed by smart contracts. So, from a company's perspective there is 0 time spent on rewards management, no bureaucracy involved in the process, and nothing falls through the cracks.

It is clear that these kinds of alternatives can help company contributors easily claim their rewards from the company's success in a more effective way. 

In nature, there are lots of similarities between equity and tokens. Both of these assets motivate individuals to put more effort into making their company more successful. This is because the company's success means the value of its tokens or equity will go up. 

Let's look more into what opportunities Token Incentive Programs represent. We can see that they actually solve most of the problems associated with Stock Options on a large scale.

Let's see some of the most notable benefits that Token Incentive Programs bring to the companies.

Benefits of Setting up Token Incentive Plans for Your Employees

Setting up Token Incentive Plans for your employees, contractors, and other company contributors comes with many benefits. 

First things first, it has an easy setup. Generally, it takes up to 48 hours to set up the whole legal structure for your company's Token Incentive Program.

Other than that, you as a founder get a chance to:

  • Share equity with remote contributors, regardless of their location
  • Add company contributors to your incentive programme with just a few clicks
  • Global agreements from day 1 – no need to spend months of legal work to create an agreement for a new country
  • Manage all aspects of your incentive programme in one place

The whole system is straightforward and universal. More specifically, once you set it up, you can run multiple transactions, making it easier for companies to cut additional costs and make straightforward payments to contributors when needed. 

From the contributor's point of view, in the case of Token Incentive Plans, they have a clear understanding of what and how many company tokens they own at any given moment.

All in all, Token Incentive Plans help startups save money by cutting out additional operational costs that come with setting up systems for Stock Options in various countries. As a result, startups get more runway and build products with motivated employees on board. 

Stock options vs Token incentive plans

What Does the Future Hold for Token Incentives?

Token incentives are set to disrupt traditional ways of compensating contributors in the near future. According to BCG, tokenization of global illiquid assets is estimated to be a $16 trillion business opportunity by 2030. 

Other than that, we already see changes to employee compensation in different parts of the world. For example, a number of blockchain companies in China have already started distributing tokens as compensation. According to TechCrunch data, companies like Huobi, Binance, and Ontology pay their employees in their own tokens. 

The need from startup founders for an alternative solution to stock options increases month over month in Europe as well. Especially given that big European tech companies don’t have big outcomes when it comes to compensating their early-stage employees with stock. 

On the other hand, company tokens show the promise to be a good alternative for that when it comes to transparency. 

How to Set It Up?

When setting up your incentive plan and choosing between ESOPs and Token Incentive Plans, there are various factors to keep in mind.

You need to think about how much it would cost to set up, what locations your contributors are working from, the size of your team, and how to track the distributed value. 

Cost

The cost of setting up an ESOP differs from country to country. There are many different factors that add up in this case. 

There is a cost to having proper legal and tax advisors. In addition, you need to cover costs associated with administration and resources to administrate ESOPs. 

When it comes to setting up Token Incentive Plans, the system optimises the overall cost for the company. It usually depends on how many contributors you have to the team and how many shares you would like to give them. 

Location & Size of the Team

In addition to operational and administrative costs, you need to think about locations your contributors are working from. Costs for legal and tax advice, as well as setting up the system and paying taxes, will grow in each country your employees reside. It also changes with the number of contributors you have.

On the other hand, with Token Incentive Plans, you can set up your system once and distribute your company value in any country your contributors are working from without having to worry about additional legal implications. 

Tracking the Distributed Company Value

One of the most difficult parts to understand with ESOPs is the administration and tracking of who owns what. The most popular method for this so far has been Excel Spreadsheets with all eligible participants, calculations, and formulas. There are also cap table management softwares available, which come with a certain price. 

In the case of Token Incentive Plans, the solution is much simpler. Once it’s set up and deployed, the system enables the company to make amendments or changes needed in a simple way. 

Generally, companies have the flexibility to choose to use both, Token Incentive plans and Stock Options to distribute company shares to their team members. For example, one model is to set Stock Options for employees and Token Incentive Plans for other contributors to the company. 

Need Help to Set up a Token Incentive Program for Your Team?

We understand that it is important for founders and executives alike to keep the balance between saving costs and having a strong and motivated team in the early stage of building a business. 

Stock options do work in theory, but in practice, they are very ineffective when it comes to distributing company shares internationally and being transparent to contributors. 

Here at Salto X, we enable companies to set up their own company token, manage their incentive plan on a smart contract, and enable liquidity for their contributors. 

We make sure all of the details are taken care of, so you can concentrate on growth and attract talent globally to build the best possible version of your product. 

Interested to hear more? We’d love to jump on a call with you for further discussion.