The New Era of Compensation: Cryptocurrency & Token Based Awards ft. Michael Beller, Chief Financial Officer @ Aleo
Authored by Brian Warager
The move to decentralize has taken the Tech industry by storm. The World Wide Web has evolved from its early stages in web1 and web2, to now slowly merging into the web3 and blockchain space. In the same vein, currency as we know it is also evolving from traditional fiat currencies backed by major banks, to now including cryptocurrencies such as tokens and coins. Both seek to do the same thing: get rid of the “middleman” and secure ways to share information and legal tender without the use of a central authority.
So what does that mean for companies today?
There has been an emergence of web3 and blockchain companies that are straying away from utilizing traditional currencies to compensate employees and pay for goods and services. Financial compensation and payouts are being restructured to include cryptocurrencies, whether it be pre-existing coins such a Bitcoin and Ethereum, or tokens/coins created by the company itself.
Michael Beller, Chief Financial Officer at Aleo, a leading company and platform for building private blockchain-based applications, gives us his insight on how web3 and blockchain companies are using crypto as part of their business practice. As an industry leader with over 25+ years of experience and an early investor of crypto, Beller has extensive experience both as an investor and an operator in this space dating back to his time as a General Partner at CoVenture, to his current position as one of the founders of Aleo.
How do companies in the crypto, blockchain, and web3 space think about employee compensation?
This is a very complex question and there are a couple of things I want to address. First, when you reference companies in the crypto space, that encompasses a big and broad net. There are companies that are building layer-1 blockchains and have their own native coin, companies that are generating other digital assets like NFTs, and also blockchain companies that are building layer-2 solutions. There is no one-size-fits-all, and each type of crypto company has at least some nuances that differentiate it from the next.
Tokens and equity may provide long term incentive compensation and some tokens may accrue value and some may not, so you have to first look at what kind of token the company has. For example, compensation in a stablecoin is arguably a lot more like cash compensation.
Then you need to evaluate the token-economics — whether the token could grow in value (for example as a function of demand for utility), etc. As another example, many tokens are designed to be exchanged for a service, and thus resemble something like credits for Amazon Web Services, and the price may be variable depending on the demand for that service.
In Aleo’s case, we’re creating a new layer-1 blockchain, so we’ll have our own native coin or token depending on how you use those two terms, basically to generate security for the network and to give developers a tool they can use when building applications. This is a lot like Ethereum, and the token is a lot like AWS credits, where they are used to purchase decentralized cloud services.
The second matter is, what do we do for employees? If there is a fixed value to tokens, it’s fairly simple, at least theoretically, because you can treat it as analogous to cash compensation. But often it’s more complicated. Thankfully we have a lot of precedent to help us think about these things. Take, for example, stock compensation. There are three primary methods to distribute equity: you give employees stock, you give employees an option to buy stock in the future at a predetermined price (stock options), or you give employees a promise that you will give them stock in the future (restricted stock award or RSA). All three are viable options with different tax implications.
All three options can at least theoretically be applied to tokens as well (even as tokens are distinct from equity in myriad ways) and each company needs to evaluate the appropriate structure for their situation. In addition, each company needs to balance if and how they want to distribute both tokens and equity to employees and how each can drive long term retention and performance incentives. Finally, and most importantly, companies need to discuss options with experienced counsel to understand tax implications and to ensure any option they pick is compliant.
In Aleo’s case, are stock and token options a part of compensation packages?
Correct. An important thing to note with Aleo is that there are really two phases to our company’s strategy. Right now we’re in phase one — we’re building our blockchain which, when ready, we will open source as a public utility, where it will be controlled by its network participants (rather than us). One option would be to step back and let the community continue to build on it. Aleo’s strategy is aligned with a second option which is to build independent and more proprietary products and services on top of that mainnet.
In our case, tokens are really for phase one (i.e., those working on building the mainnet) and equity is going to be really important for phase two (i.e., those building services and goods on top of the mainnet).
Another interesting issue that I’m running into is the benchmark for compensation for employees who are working on both phase 1 and phase 2 of our strategy. All of the comp databases and benchmarks have equity as a component of compensation, so if you want to get an apples-to-apples comparison, you have to add the value of the tokens to the value of the stock to really represent what is in your compensation package. Otherwise, what is presented is only part of the valuation.
Going back to your comparison to SaaS businesses, I feel like blockchain has a lot of similarities to open source businesses. Historically, open source companies monetized through services and add-on services on top of that. Now we are seeing blockchain / web3 companies that do not have a business model to make revenue come out to purely monetize themselves based on the value of their coin. Can you talk us through the implications of that and what it means for employees and budgeting?
That model makes sense if the primary mission is to create and sell a public utility to the world of developers or users who would use that public utility — it’s essentially a one-time sale at the time of open sourcing. For other companies, like ours, I think you’re right about the comparison to open source businesses. Our core network components, essentially our blockchain and virtual machine which we call snarkOS and snarkVM, will be open-sourced. We will then build products on top of that to monetize, much like other open source businesses that are at this point pretty well understood by the market.
What about companies that plan on monetizing purely off the value of the token increasing, but don’t plan on monetizing by adding additional services to fund their head count, their capex, and so on?
In that circumstance, the focus is on the value of the network. Many of those companies have a large starting supply and retain a portion of those tokens on their balance sheet, which they either monetize over time or use to drive investment in their network, which in turn increases the value of that network.
Finally, we’ve seen some companies in the crypto space pay out retainers using their own tokens. Do you have any thoughts on paying for services through tokens as a business practice?
Yes, we would consider that at Aleo. Today we pay vendors in five currencies, two fiat and three crypto, which are US dollars, Euros, Bitcoin, Ethereum, and USDC. Our own tokens can be an avenue to explore as well. Of course for any of these there are tax and compliance considerations as well.
In every case, there is potential benefit and risk to both parties, but the bigger part of that question is: how do you want to convert your currency?
For example, let’s say you have a client in Europe who prefers to pay in Euros. You agree to absorb the administrative overhead of receiving Euros, but now you’re left with the business decision — do you want to hold Euros on your balance sheet, or are you going to convert it into US dollars right away?
Tokens and crypto are no different. If someone says, I want to pay you in Bitcoin and that’s all I’m going to offer, now you’re left to decide how you want to convert that Bitcoin into tokens. Maybe there’s some risk so you add a couple of percentage points to your fees, or you’re a big believer in Bitcoin and you want to hold some of that on your balance sheet, or maybe you just want to convert it all into US dollars. All of these considerations will factor into how you ultimately decide to model your conversion.
To put it simply: tokens and crypto are just another form of currency. All of the rules that apply to trading and converting traditional currencies apply to crypto currencies as well.
