Explainer

A Comprehensive Overview of Supplemental Token Compensation and its Tax Implications

Bruno Faviero (CEO)

April 23, 2025

An overview of supplemental token compensation in the US and associate tax considerations

Special thanks to the various crypto lawyers and accountants that gave feedback on various earlier drafts of this post. This article is provided for informational purposes only and is not intended to be construed as legal, financial, or tax advice. Readers should not rely solely on the information presented herein and should consult with their own legal, financial, or tax professionals regarding their specific situations. The author(s) and publisher make no representations or warranties concerning the accuracy or completeness of the information contained in this article. Reliance on any information provided in this article is solely at your own risk. This article may be updated in whole or in part at any time.
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This blog post is not meant to be an alternative to consulting a lawyer or tax expert, but to cover most options that a founder might face and be a conversation starter between a founder and their legal counsel or a launching point for further research and analysis.

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Crypto companies often include tokens in their compensation packages for employees and service providers like contractors and contributors. When structured correctly, token-based compensation can minimize upfront taxes and allow recipients to plan their tax obligations strategically. This is especially advantageous when tokens are issued early, before they gain significant value.

Without proper planning, recipients are generally immediately taxed each time they are received at their fair market value. However, by utilizing specific token award structures, companies and recipients can better control token distribution and timing of taxes. This blog post goes into some of the most common structures used in the United States to provide supplemental token compensation to service providers (employees, contractors, and advisors).
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Summary of Key Token Award Structures:

  • Restricted Token Awards (RTAs): Tokens that have an associated vesting schedule such that unvested tokens are forfeited if the recipient is terminated. By default (without an 83b election), RTAs are taxed at the time of vesting based on the fair market value of the tokens at the time of vesting.
  • Recipients can file an 83(b) election on RTAs to be taxed up-front at the grant date rather than at vesting dates, which is beneficial when token value is low to lock in a low tax bill, and also to avoid unwanted automatic taxation during vesting events (especially if those would otherwise occur before the token might be liquid enough to be able to sell to cover the tax bill). It must be filed by the recipient within 30 days of the grant.
  • Restricted Token Units (RTUs) are rights to receive tokens upon vesting, allowing deferral of tax obligations until tokens are delivered by the company to the recipient. These give a company more control over token delivery and tax withholding timing, and can potentially be structured with double-trigger vesting to defer vesting until certain liquidity thresholds are met.
  • Future Foken Interests (FTIs) are rights granted before the token is minted to receive tokens in the future. This can allow for grants to be made before a token is minted in a way that (some lawyers argue) is compatible with 83(b) elections, which cannot generally be filed on RTUs.
  • Token Options: Rights to purchase tokens at a specific price in the future, giving recipients control over when they incur tax liabilities. Though because of a lack of the nice structures that ISOs provide in the equity world, these are generally not used as often.
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In this post, we'll break down these token award structures and their impact on the timing and amount of tax obligations under U.S. tax laws. We'll focus on the tax considerations for recipients—both employees and independent contractors—and touch on the company's obligations, including tax liabilities and withholding requirements. This blog post is generally about supplemental token compensation (Typically a company distributing their own token in addition to payroll), not about using crypto for payroll.
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When Each Token Award Structure Is Commonly Used:

  • Before Tokens Are Minted: Companies may issue Future Token Interests (FTIs), though this is a novel and less-common legal structure that not every law firm is comfortable with.
  • Before the Token Launches and before any SAFT or Sale Activity: Companies typically use Restricted Token Awards (RTAs), and the stakeholders file an 83(b) Election, to lock in a low tax bill while the token is worth very little. A token valuation needs to be commissioned from a 3rd party firm in order to establish a Fair Market Value (FMV).
  • Before the token launches but after there is SAFT or Sale Activity: At this stage, the FMV of the token might be high enough to make the RTA+83(b) tax bill uncomfortable high for the recipient, and if the token launch isn’t imminent an RTA without an 83(b) could lead to phantom income at the time of vesting. Companies at this point might use RTUs with double-trigger vesting to defer vesting until certain liquidity thresholds are met.
  • Post-Token Launch: RTA+83(b) might no longer be viable because of the high value of the token. RTA without an 83(b) could be too complex for the company to manage as they would have to ensure correct withholding+selling to cover at the time of vesting, which could be different based on employees’ start dates. At this point companies will often use Restricted Token Units (RTUs) to have more control over the timing of delivery and associated tax withholding (Which is typically done in bulk through a payroll provider like Rippling or Deel).

By understanding these structures, both companies and recipients can make informed decisions that optimize tax outcomes and align with their financial goals.
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Token Purchase Agreements

One option not covered in-depth in this blog post is structuring the token grant as a Token Purchase Agreement, which typically will treat the recipient similarly to an investor wherein they purchase the tokens. When utilized for service providers (employees, advisors, etc.) this token purchase agreement will typically also feature a vesting schedule in the form of a repurchase right by the company. This is mostly used internationally in jurisdictions that might not have similar structures to RTAs, RTUs, or 83b, in order to establish a vesting schedule. This is best discussed with your lawyers and tax counsel.


Are you managing these types of grants for your stakeholders?

Let us give you a demo of Magna’s Token Cap Table Management tools that can help automate tracking the details of token grants and vesting, giving recipients a portal to view the details of their grants, 83(b) filing and tracking, PPM data rooms, token valuation report management, and more. We can also automate the distribution of tokens to stakeholders based on custom unlock schedules through our customer-owned smart contracts or integrations with the major institutional custodians. Reach out to bruno@magna.so!


Detour 1: do you need to fully transfer the tokens to a recipient’s custody to satisfy the “transfer of property” requirement of Section 83(b)?

Because Section 83 focuses on beneficial ownership, an 83(b) election can be valid even if the property is held in escrow or by the company, as long as the service provider effectively owns it economically.

Magna facilitates this via our escrow smart contracts that track each recipient’s unlock and vesting schedule, allowing them to claim tokens when they are both unlocked and vested. some versions of our contract put each allocation into its own onchain account, and others deposit all the tokens for a particular class of stakeholder into their own vesting contracts.

But in general, it is  interpreted by many law firms out there that to validly make an 83(b) election, while the service provider must  receive a property interest (not just a promise), physical possession by the recipient is not required as long as the arrangement confers beneficial ownership to the recipient.

For example, an employee can file an 83(b) on restricted shares or tokens that are issued in their name (and for which they assume economic risk), even if the company holds the certificates or tokens in escrow until vesting. I have yet to find a single large white-shoe law firm that has not signed off on this arrangement for many clients. Many top crypto law firms have signed off on these types arrangements for at least some clients wherein the tokens are help by the company whether in a multisig, escrow contract, or other type of company-controlled custody.


IRS has good guidance on this:

While nothing in this post is legal advice and some lawyers may have different interpretations, other case law and guidance I’ve found interesting include:

  • Theophilus https://caselaw.findlaw.com/court/us-9th-circuit/1264970.html
    • "A binding contract to acquire stock is not specifically excepted from the scope of § 83 because it is neither an option contract under § 83(e) nor a right “similar to an option” under Treas.Reg. § 1.83-3(a)(4). Thus, we hold that the taxpayer's binding contract to acquire stock consists of property under § 83." Theophilus also explores the concept of a “measurable economic benefit” as being a marker for the transfer of property.
  • Kadillak v. Commissioner (127 T.C. 184 (2006)) https://casetext.com/case/kadillak-v-commr-of-internal-revenue
    • In this Tax Court case, an employee exercised an incentive stock option and received nonvested shares (subject to a one-year post-IPO lockup and company repurchase right if he left). The shares were held in escrow until vesting. He filed an 83(b) election, paid AMT on the spread, then later tried to claim the election was invalid, arguing no transfer occurred since he didn’t have full legal title. The Tax Court disagreed, finding that he had beneficial ownership at exercise – he had all the normal incidents of ownership (stockholder voting rights, rights to any dividends, and the economic risk of the shares) even though the shares were in escrow”.
  • Commissioner v. Banks, 543 U.S. 426, 433 (2005) https://supreme.justia.com/cases/federal/us/543/426/

Our friends at Toku even have a great blog post on this:

"For instance, if a token is held in a multi-sig wallet requiring employer consent to move until vesting, one should ensure the employee is still recognized as the beneficial owner (perhaps via legal agreements) during the interim. As one industry analysis put it, the goal is to avoid a structure where the employee has “no control” in a way that “lacks the ability to confer beneficial ownership to the grant recipient” [toku.com]. Techniques to address this include on-chain vesting contracts that automatically release tokens at vesting (ensuring the tokens were effectively set aside for the employee), or off-chain legal escrow arrangements acknowledging the employee’s ownership subject to forfeiture.

There are some interesting opinions that may go to the contrary. Miller v US (https://casetext.com/case/miller-v-us-192#p1050) which refers to the owner having “rights in the property” which in this case included dividends and voting, or other “normal incidents of owning the shares.” These opinions generally don’t specify the counterfactual (i.e. they obviously acquired a beneficial ownership interest when they had all the rights of ownership… but what if they only had some rights of ownership)? Do these types of rights (voting, dividends) matter for utility tokens, especially when lawyers write extensive legal opinions saying that they are not securities? What are all the “normal incidents of owning tokens"? Perhaps one day a court will provide a more decisive on this topic.


Detour 2: How Is the Token Value Calculated for Tax Purposes?

Understanding the fair market value (FMV) of tokens is crucial because it directly determines the amount of taxable income a recipient must report at the time of grant, vesting, or delivery depending on the structure. Given how this term comes up a lot, we figured it was worth explaining.

Accurately calculating the token's value ensures compliance with tax laws and helps both recipients and companies avoid potential penalties or disputes with tax authorities.


Determining Fair Market Value (FMV)

For Actively Traded Tokens

If the token is actively traded on exchanges, FMV is generally determined by its market price. In practice, it’s common to see companies use a spot price from a large exchange or CoinGecko. For example, if they are delivering tokens for RTUs on a particular day, they might use the CoinGecko Open Price for the token on that day.

Some companies might also use a Time-Weighted Average Price (TWAP) or Volume-Weighted Average Price (VWAP), especially for tokens distributed over time. There’s a LOT of nuance to the above that’s outside of the scope of this blog post for on which tax, finance, and accounting specialists would have strong opinions about.


For Illiquid or Non-Traded Tokens

If the token is not actively traded or is illiquid, companies typically obtain a token valuation report from a qualified valuation firm to establish a Fair Market Value. Factors influencing the valuation can include:

  • Terms of Previous Sales: Prices and conditions of any Simple Agreements for Future Tokens (SAFTs) or private token sales.
  • Lockup and Vesting Restrictions: Restrictions that affect the token's liquidity and transferability.
  • Market Conditions: Broader economic factors and industry trends impacting the token's potential value.
  • Company Developments: Significant events like funding rounds, product launches, or partnerships.
  • Volume and Liquidity: Particularly for thinly traded tokens.

Even if a token is actively trading, a valuation report might still be necessary to account for specific factors like vesting restrictions or limited liquidity that aren't reflected in the market price. It’s not uncommon to see a token with a double-digit millions FDV but <$100k of daily volume; a token valuation would account for that type of scenario.


Importance of Up-to-Date Valuations

Up-to-date valuation reports are essential for:

  • Calculating Taxable Income: Determining the recipient's income at the time of grants, vesting milestones, or settlements.
  • Tax Compliance: Satisfying IRS requirements and being prepared to defend the valuation methodology during an audit.
  • Financial Reporting: Ensuring accurate reporting on financial statements.

Valuation firms often specify that their reports are valid for a limited period, anywhere from weeks to months depending on the firm and the fact pattern. This validity period is important because firms may offer to defend their valuation methodologies if questioned by tax authorities within that timeframe.

Companies should always engage valuation providers who specialize in digital asset valuations. Firms like Redwood Valuation and Teknos Associates and others that focus on tokens and have a long history of providing token valuations will typically use defensible methodologies and provide thorough documentation.

I’ve been told that Redwood generally provides token valuations valid for up to 90 days, while Teknos provides token valuations valid for 30 days (unless the tokens are trading or there is a potential issue for a near-term material event) with the ability to provide a 45-day extension via a comfort letter.

Now back to the main content of the post:


Token award structures and their tax implications

In this section, we’ll discuss each token award structure in detail and its tax implications.


Token Grant or Bonus

A straightforward token payment without special tax treatment; tokens are distributed outright and are immediately taxed.


Overview

When a company delivers tokens to someone without any additional legal arrangements—such as vesting schedules or restrictions—the tokens are treated as a token grant or bonus. Recipients gain immediate ownership and control of the tokens at the time of grant.


Tax Implications for Recipients

  • Ordinary Income Tax: Must report ordinary income equal to the fair market value (FMV) of the tokens at the time of grant, minus any amount paid for them.
  • Employment Taxes:
    • Employees: Token value is subject to payroll ****taxes. Employers must withhold and remit these taxes (Typically handles by payroll software like Rippling or Deel). There may also be additional obligations for state and local taxes.
    • Independent Contractors: Responsible for self-employment taxes; companies generally do not withhold taxes for contractors with some exceptions.
  • Capital Gains Tax on Sale: Any gain or loss upon selling the tokens is subject to capital gains tax. The holding period starts on the grant date, determining short-term or long-term capital gains rates.


Why Companies Choose This Method

  • Simplicity: Minimal legal complexity and administrative effort.
  • Immediate Compensation: Provides recipients with immediate access to tokens.
  • Dollar-Based Awards: Suitable for issuing a specific dollar amount of tokens (e.g., $15,000 worth per quarter), which is challenging with structures (RTAs, RTUs, FTIs) that generally require defining a fixed number of tokens.


Considerations

  • Immediate Tax Liability: Recipients incur taxes at the time of grant, which can be substantial if the token's FMV is high.
  • Liquidity Issues: If tokens are illiquid, recipients may struggle to pay the taxes owed.
  • Lack of Retention Incentives: Without vesting or restrictions that might lock in a low price for future tokens that the recipient could expect to go up in value, there's no mechanism to encourage long-term engagement.
  • Market Volatility: Token value fluctuations may affect compensation value and tax obligations.


Conclusion

Granting tokens outright as a bonus is simple but results in immediate tax obligations for recipients. Companies should consider the financial impact on recipients and whether this method aligns with retention and incentive goals. Consulting with legal and tax professionals can help determine the most appropriate compensation strategy.


Restricted Token Awards (RTAs)

Restricted Token Awards are used to grant tokens with a vesting schedule. Typically that vesting stops when the individual is terminated or leaves, and absent any acceleration in a severance agreement the unvested tokens will be repurchased or forfeited back to the company. RTAs are taxed at the time of vesting, unless an 83(b) election is filed in which case they are taxed at the time of grant (typically once the grant is consummated following a board approval + payment for the tokens by the recipient).

RTAs are particularly advantageous paired with an 83(b) election when the token's fair market value (FMV) is low, allowing recipients to minimize upfront tax liabilities and benefit from future appreciation. Very similar to how founder and early employee equity is granted with a Restricted Stock Award in the web2 world.


Key Features of RTAs

A primary feature of RTAs is the vesting schedule, which defines when recipients earn the right to the tokens. Vesting can be:

  • Time-Based: Tokens vest over a specified period, such as monthly or yearly over several years (most common, almost universal for employees)
  • Performance-Based: Vesting is contingent on achieving specific goals or milestones.

A very common example is a four-year vesting period with a one-year cliff, where no tokens vest during the first year, 25% are vested at the 1-year mark, followed by regular vesting monthly thereafter for another 3 years.

Additionally, RTAs typically come with restrictions on the unvested tokens. Unvested tokens cannot generally be sold, transferred, or pledged and are subject to forfeiture if the recipient leaves the company before vesting. Recipients typically lack voting rights or rights to distributions on unvested tokens, gaining full ownership and associated rights upon vesting, though some companies establish structured for voting or staking with locked tokens.


Tax Implications of RTAs

The tax treatment of RTAs depends significantly on whether the recipient files an 83(b) election.

  • Without an 83(b) Election:
    • Taxable Event at Vesting: Recipients recognize ordinary income equal to the FMV of the tokens at the time they vest, minus any amount paid for the tokens (usually zero).
    • Tax Liability: Based on the recipient's ordinary income tax rate, which could be as high as 37% federally, plus applicable state and local taxes.
    • Challenges: Significant appreciation by the vesting date can result in a substantial tax bill. If tokens are illiquid, recipients may struggle to pay the tax liability—a situation often referred to as a "cash flow issue."
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  • With an 83(b) Election:
    • What Is an 83(b) Election? A tax election allowing recipients to recognize income at the time of grant rather than at vesting. It must be filed with the IRS within 30 days of the grant date.
    • Benefits:
      • Minimized Upfront Taxes: If the token's FMV is low at grant, the initial tax liability is minimal.
      • Capital Gains Treatment: Future appreciation may be taxed at long-term capital gains rates (up to 20% federally) if held for more than one year from the grant date.
      • Holding Period Advantage: Starts the capital gains holding period earlier.
    • Risks:
      • Forfeiture Risk: If vesting conditions aren't met, taxes paid at grant are not recoverable.
      • Token Depreciation: If the token's value decreases after the grant, recipients may have overpaid in taxes.
      • The 83(b) election also cannot, for all intents and purposes, be revoked once made
    • Notes:
      • The 83(b) election has to be made within 30 days of the grant date, and so it is crucial that recipients of token awards be mindful of this milestone. To have increased assurance that the 83(b) was received, it’s common to include a self-addressed stamped envelope with the election alongside a second copy that the IRS can stamp as received and then mail back.
        • The 30-day clock typically starts when the grant is fully consummated (including board approval + payment by the recipient).
      Example:
      • Grant Details: 10,000 tokens granted at $0.01 FMV per token.
      • Without 83(b): Taxes owed at each vesting event based on the token's FMV at that time.
      • With 83(b): Elect to be taxed on $100 at grant (10,000 tokens × $0.01), resulting in minimal tax owed initially. Future appreciation is taxed as capital gains upon sale.


When to Use RTAs and Consider Filing an 83(b) Election

RTAs+83(b) are ideal in scenarios where:

  • Early-Stage Companies: The token's FMV is low, minimizing upfront tax liability.
  • Anticipated Appreciation: There's an expectation of significant increase in token value, allowing recipients to lock in a low tax basis.

RTAs without 83(b)

  • Liquidity Events: Tokens are expected to become liquid around the vesting time, enabling recipients to sell tokens to cover tax liabilities if an 83(b) election is not filed.
  • Note: RTAs without an 83(b) are not very common. Especially due to the complication of automatic withholding and selling to cover at the time of vesting.

Caution should be exercised when:

  • High FMV at Grant: A substantial upfront tax bill may negate the benefits of an 83(b) election.
  • Illiquid Tokens: Lack of liquidity at vesting milestones, if an 83(b) election is not filed, can lead to cash flow problems when taxes are due.


Company Considerations

Companies have several responsibilities and considerations when offering RTAs:

  • Informing Recipients: While companies should inform recipients about the 83(b) election option, they cannot file it on their behalf.
  • Administrative Duties: Companies need to track vesting schedules and handle tax withholding and reporting appropriately. This is a reason many companies will effectively require (technically, very strongly encourage) recipients to file an 83b so they are not on the hook for tracking those tax obligations that get triggered at vesting).
  • Tax Withholding Obligations:
    • For Employees: Must withhold applicable taxes at the taxable event—either at the grant date if an 83(b) election is filed or at the vesting date if not.
    • Facilitating Tax Payments:
      • May need to assist employees in covering tax liabilities through methods such as net settlement (withholding a portion of the tokens), requiring cash payments, or arranging a sell-to-cover transaction where some tokens are sold to cover the tax.

Conclusion

Restricted Token Awards can be a valuable component of a company's compensation strategy, especially when the token's FMV is low and there's potential for significant appreciation. They align recipients' interests with the company's success and offer potential tax advantages through the 83(b) election. However, both companies and recipients must carefully consider the tax implications, administrative responsibilities, and potential risks. Consulting with legal and tax professionals is essential to ensure effective implementation and to maximize the benefits of RTAs.


Quick explainer on Vesting and Unlock Schedules


Vesting Schedules

Vesting schedules define when contributors legally earn the rights to their tokens, usually based on the duration of their service with the company. Individuals do not legally own or have rights to their restricted tokens until they are vested (this is partially why they are referred to as “restricted” tokens). If an employee leaves or is terminated before their tokens are fully vested, the unvested tokens can be repurchased by the company at cost (typically the value at the time of grant).

Companies often structure vesting based on a "service requirement," reflecting how long someone works for the company. A "vesting schedule" is the timeline dictating when tokens will vest, usually starting from the recipient's official start date. A common vesting schedule in the equity world is a four-year vesting period with a one-year cliff—often described as "a one-year cliff followed by monthly vesting over the next three years." This means:

  • One-Year Cliff: No tokens vest during the first year. At the one-year mark, 25% of the total grant vests.
  • Monthly Vesting: The remaining 75% vests evenly over the following 36 months.

If a recipient leaves before the one-year mark, they will have vested nothing.

It's important to note that vesting milestones can lead to taxable events independent of the unlock schedule or the token award structure.


Unlock Schedules

Unlock schedules generally define when tokens become available for recipients to access, transfer, sell, trade, or otherwise are allowed to receive their tokens. While vesting schedules determine when a recipient legally earns the right to receive tokens, unlock schedules dictate when those vested tokens are actually released and become transferable. Though it is very common to use “vesting” and “token vesting” to refer to any kind of distribution, emissions, or unlock schedule.


Unlock and Vesting

Vesting schedules, in the formal sense, are almost typically exclusively used for service providers like employees, contractors, or advisors that are on some sort of Token Incentive Plan like RTAs, RTUs, FTIs, or options.

Unlock Schedules can and often are used for any stakeholders or token recipients - investors, employees, advisors, partners, treasury, foundation, etc.  Of note: Employees can be on both a vesting and unlock schedule. In this case, tokens are typically not made available to them until they are both vested + unlocked. And if someone is terminated, they may have vested tokens that would continue to unlock post-termination. It is very particularly to carefully manage tax obligations when the two are used together.

Another key aspect of unlock schedules is their timing relative to the Token Generation Event (TGE), which is when tokens are created and potentially listed on exchanges. While Vesting most commonly starts on the first day of employement, for recipients who receive token grants before the TGE the unlock schedule will typically begin once the TGE occurs.


Purpose of unlock schedules

Unlock schedules serve several purposes:

  1. Market Stability: By preventing a sudden influx of tokens into the market, unlock schedules help avoid negatively impacting the token's price due to increased supply. Gradually releasing tokens promotes price stability and reduces volatility.
  2. Investor Confidence: Controlled unlocks demonstrate the team's commitment to the project's long-term success. It builds trust among investors and the community by showing that insiders cannot immediately sell large amounts of tokens.
  3. Regulatory Compliance: Unlock schedules may assist the project in complying with securities regulations by controlling the distribution and resale of tokens, which can help avoid being classified as an unregistered public offering.

There are various types of unlock schedules. Linear unlock schedules release tokens evenly over a set period, such as monthly over 12 months after the TGE. Cliff unlock schedules involve a significant portion of tokens unlocking at a specific date after the TGE, followed by gradual unlocking. Tiered unlock schedules release tokens in stages at predetermined intervals or upon reaching certain milestones. Additionally, performance-based unlocks are contingent upon achieving specific project milestones or performance metrics. Unlock schedules can also take many other shapes: exponential, hourly, daily, etc.

As an example, suppose an employee has a vested grant of 10,000 tokens with an unlock schedule stipulating that no tokens are accessible for the first 12 months after the TGE. After this initial lockup period, tokens unlock at a rate of 25% every year over following next 3 years. This means:

  • At TGE + 12 Months: 25% unlocks (2,500 tokens).
  • At TGE + 24 Months: An additional 25% unlocks (2,500 tokens).
  • At TGE + 36 Months: Another 25% unlocks (2,500 tokens).
  • At TGE + 48 Months: The remaining 25% unlocks (2,500 tokens).

Unlock events may or may not constitute taxable events, depending on the token award structure and prior taxation at vesting. If recipients were taxed upon vesting (e.g., through an 83(b) election), the unlock perhaps may not trigger additional income tax. However, any appreciation in token value between vesting and unlock could result in capital gains tax upon sale. Conversely, if the taxable event is deferred until tokens are both vested and delivered (common with Restricted Token Units), recipients recognize ordinary income equal to the fair market value of the tokens at the time of delivery. (Though one notable limitation on RTUs is that vested tokens must be delivered before 2.5 months into the year following the year in which they vest, more on that later).

Managing unlock schedules alongside vesting schedules can be complex due to multiple timelines and variable conditions. Tools like Magna's token vesting management platform assist in automating distributions, ensuring tokens are delivered according to the correct schedules, providing up-to-date information on vesting and unlock statuses, and helping maintain adherence to contractual terms and regulatory requirements.


Restricted Token Units

Restricted Token Units (RTUs) are a common form of token-based compensation used by companies for several strategic reasons. RTUs represent a promise to deliver tokens to recipients at a future date upon the fulfillment of certain vesting conditions. They offer distinct advantages over other forms of token compensation, particularly in terms of control over the settlement schedule and management of tax withholding obligations.

RTUs are taxable at the time of delivery (or settlement, as it is typically referred to). This typically makes it much easier for companies to do bulk tax withholding via their payroll provider when paying out all RTU employees monthly or quarterly. Tools like Magna integrate with payroll providers to make sure that stakeholders receive the right amount of post-tax tokens.


RTU Benefits:

  • Flexible Timing of Token Delivery:
    • RTUs allow companies to decouple the vesting of token rights from the actual delivery of tokens. This means that even after the RTUs have vested (i.e., the employee has earned the right to receive the tokens), the company can choose when to settle the RTUs by delivering the tokens.
  • Deferring vesting until liquidity thresholds are met**:**
    • For tokens that are illiquid or have limited trading options, time-based vesting could result in unwanted tax liabilities that the recipient cannot sell tokens to cover. For such cases, RTUs can be structured with double-trigger vesting conditions such that tokens are not fully vested until the time requirement and a separate liquidity requirement are both met (more on Double Trigger vesting below).
    • This is analogous to RSUs for equity in Web2 companies, where they are typically not fully vested until an IPO or liquidity event.
  • Easier Tax Withholding Compliance:
    • Companies are required to withhold taxes on compensation delivered to employees. RTUs allow companies to plan and execute withholding obligations efficiently by scheduling settlements at times when they can facilitate the withholding process, and withhold for all recipients at once. Typically, this is done via a payroll or EOR tool such as Rippling or Deel by running an off-cycle payroll for the gross amount that is going to be delivered to each individual, and using a tool like Magna that can ingest that information.
    • More of the company’s tax obligations above.
  • Avoiding "Phantom Income":
    • As discussed above, RTUs help prevent situations where employees have a tax liability on vested tokens (ordinary income) but have not actually received the tokens (or the tokens are illiquid), resulting in "phantom income."
    • By controlling the settlement, companies ensure that employees receive the tokens (and they or the recipient potentially can sell them) at the time the tax is due.


Double Trigger Vesting and deferring

One major benefit of RTUs are that they allow the recipient to defer vesting (and therefore tax obligations) until the underlying tokens are liquid through "double trigger vesting”, wherein the restricted token units are not considered vested until two conditions are met:

  1. A service-based trigger (time-based vesting, usually from the first day of employment); and
  2. A second trigger, typically a liquidity milestone.

The Braintrust Future Token Interest has a good example of a multiple triggers being used https://www.usebraintrust.com/referral-fti. In this structure, the token interests are not considered vested until all of these conditions are true:

  1. TGE occurs
  2. Network launch occurs
  3. Tokens achieve a market cap >$220M
  4. 24-hour volume on major exchanges > 17% of market cap
  5. All of these above before 10 years.

Double-trigger structures can be complex and may face scrutiny from tax authorities. Some limitations include that the second trigger must happen within a predetermined window and there must be a significant risk that, at the time the award was made, that the liquidity trigger might not happen. [Baker McKenzie], though this is a much more complex and nuanced topic and its specifics are outside the scope of this post.

Once the RTUs are fully vested, the company will deliver the corresponding number of tokens to the recipient, which is known as the settlement of the RTU. The recipient is taxed on the fair market value of the vested tokens at the time of settlement / delivery as ordinary income.

Typically, the tokens are delivered on some regular cadence (monthly or quarterly). They cannot be delivered later than 2.5 months after the start of the next calendar year in which they vest, otherwise they are considered deferred compensation and subject to additional constraints, restrictions, and penalties. (For example: If RTUs vest sometime in 2024, they must be delivered before March 15 2025).

RTUs can also be settled in cash based on their value at the time of vesting, though for crypto companies it is common to deliver the tokens, with a portion of the tokens withheld for taxes (more on this withholding flow later in the post).


What counts as delivery or settlement?

Projects will directly directly transfer tokens to recipients’ wallets, but some projects may make the tokens available via a claim portal whereby they can be withdrawn by the recipient anytime thereafter. Speak with your lawyer or tax professional about which of these you should consider as the taxable event.


What if someone quits before the liquidity trigger?

Depending on how the award is structured, if a contributor is terminated after they meet the service requirement but before the liquidity trigger, they may still be eligible for vesting at the liquidity trigger.


Avoid double taxes on RTUs on subsequent sales

When RTUs are delivered, recipients will owe taxes on the FMV of the tokens at that time minus the cost basis (which is usually zero if the RTUs were awarded at no cost to the recipient). When tokens are subsequently sold, the taxable gain or loss from that sale should be based on the change in value from the value at the time of original delivery.

Some tax calculation services or exchanges may incorrectly report the cost basis on subsequent sales of tokens that were awarded via RTUs as zero (a common issue with equity RSU grants), so it’s worth making sure you are correctly recording your cost basis for tokens sold do you don’t pay double tax on those tokens.


Future Token Interests

The Future Token Interest is a new type of instrument that’s becoming used for crypto companies that don’t yet have a live token but want to allow their service providers to vesting rights to future tokens in a way that allows them to file an 83(b) election.

I don’t want to go too deep into FTIs because they are used by few law firms and there is not a lot of content out there on them, but key elements of FTIs often include:

  • Issuance pre-token-mint: The tokens are typically not minted yet. Instead, what’s issued is a claim (interest) on future tokens.
  • Vesting Requirements: can be double-trigger such that they are not fully vested until both a service condition and a liquidity condition are met (see more about double trigger in the FAQs).
  • An Expiration Date (usually up to 10 years)
  • An up-front purchase requirement
  • An optional 83(b) election (though opinions differ strongly among law firms over whether an 83b can be filed on FTIs).

FTIs are a fairly novel instrument. They are are not used by most law firms in the space (though the handful of firms that do use it employ it quite extensively). Most law firms will suggest that projects mint tokens before issuing either RTAs or RTUs instead.

And while some law firms argue that FTIs can be structured to potentially allow for an 83(b) election, this area is contentious and carries risks. Since FTIs represent a right to future tokens that may not yet exist, the IRS may challenge whether FTIs are property, and whether an 83(b) election is valid in this context.

If you are interested in reading more, we contributed to a piece written by Carol Wang specifically on the taxation of Future Token Contracts https://www.taxnotes.com/tax-notes-federal/cryptocurrency/token-compensation-taxation-contracts-future-tokens/2025/03/10/7rbdy


Token Options:

Usually used to provide flexibility on when taxes are owed. But Token Options are unlikely to provide exercise flexibility under some interpretations of the tax code.

The last type of award we’ll discuss is the Token Option. An option is the right but not the obligation to buy the underlying asset at a specific price. Options can provide a recipient some control over exactly when they can exercise the option, which affects when they owe taxes.

This section is primarily focused on options in the US, and does not discuss options internally (Where I’ve been told they can be perhaps structured and implemented in a useful way).

Options have a few key parameters:

  • The number of tokens you can purchase
  • Strike price: The amount that has to be paid to exercise the option. The strike price has to be set to at least the FMV of the token at the time of grant to avoid penalties or early tax obligations (110% of FMV for >10% shareholders), but can be set below the FMV in certain scenarios.
  • Vesting schedule: Options can only be exercised once they’re vested. by paying the strike price multiplied by the # of tokens they wish to exercise the option on.
    • Early Exercise: An early-exercise provision could allow for a recipient to exercise before the options are fully vested (i.e., when the strike price and FMV are low). They would pay the exercise price to receive vesting tokens in return, and they would be eligible to then file an 83b on the still-vesting tokens.

In crypto, token options are taxed as NSOs - Nonstatutory Stock Options. This means options are taxed immediately at the time of exercise as ordinary income on the spread, the difference between FMV of the token at the time of exercise and the strike price. This differs from ISOs (Which are very popular in equity compensation), which allow for tax-free exercise under certain conditions.


Expiration Date:

If options are not exercised by this date, they expire. That date is set by the company (with some legal limitations on the upper bound) and is usually 7-10 years from the date of grant so long as you continue work for the company; if you are terminated or quit, the expiration date could remain the same or shorten to as short as 30-90 days after the termination of service.


Application of Section 409A to Token Options

Since tokens do not qualify as "service recipient stock" [Cooley, Baker] under Section 409A, Token Options are generally considered to be subject to Section 409A unless an exception applies. To avoid adverse tax consequences, Token Options must either comply with Section 409A's requirements or fit within an exception. Though, to be clear, there is no official IRS guidance on the treatment of token options.


Short-Term Deferral Exception

For the short-term deferral exception to apply:

  • The option must be exercised, and the tokens delivered, within 2.5 months after the end of the employee's taxable year in which the option vests (i.e., when the substantial risk of forfeiture lapses).
  • Simply structuring options to be exercisable by a certain date is insufficient; the key is the actual exercise and delivery of tokens within this period.


Independent Contractor Exemption:

For the Independent Contractor Exemption to apply, they must be options granted to a service provider that:

  • Is “not providing management services
  • Is not an employee
  • Is not related by blood or ownership to the issuer
  • Does not receive greater than 70% of their income from any one client.” [Baker] [Tax code]


Fixed Permissible Payment Events

If the short-term deferral exception cannot be met, Token Options must provide for exercise and delivery of tokens only upon permissible payment events under Section 409A, such as:

  • A specified time or fixed schedule
    • This “can be as broad as a calendar year but which cannot span calendar years” [Baker].
  • Separation from service
  • Disability or death
  • Change in control of the company
  • Unforeseeable emergency


Recommendation

Companies should carefully consider whether to issue discounted Token Options and consult with tax professionals to ensure compliance with Section 409A.


Can options be issued with a strike price below FMV?

Issuing options with a strike price below FMV (discounted options) introduces additional complexities under Section 409A:

  • Such options are considered deferred compensation and must strictly comply with Section 409A rules.
  • Failure to comply can result in significant penalties, including immediate taxation upon vesting, an additional 20% tax, and interest charges.

Firstly, what is considered the fair market value? Startups will often commission a 3rd party Token Valuation firm to determine the Fair Market Value of a token, particularly during the early phase of the token’s lifecycle (after it is minted but before it is officially “launched” and begins trading). A token valuation during this period may show that the token is worth very little.

This valuation can be affected by token sales or SAFTs, actions that create more data points for regulators to use when determining the token’s fair market value.

For a token with a liquid market, the default FMV might be considered the price on an exchange. But even here, a token valuation from a token valuation firm may take into account lockups, vesting, liquidity, and other factors to arrive at a valuation different than the price that you might see quoted on an exchange.

Options issued with a strike price below FMV are generally considered nonqualified deferred compensation under Section 409A. In that case, unless they are exempt from 409A per the above exemptions, they have the limitations stated earlier (fixed permissible payment events).

And how low could you go on the strike price relative to the fair market value? In a blog post by Mike Baker, he references precedent for an exercise price of as low as 25% of FMV, though also contemplates as low as 10% as being potentially defensible. If the price is too low, the IRS could characterize it as a Restricted Award and make the taxes due at vesting. Again, consult your lawyer here.


Recap:

  • Before a token is minted, companies can issue FTIs (Future Token Interests). FTIs can be tax-favorable before the token launch because, based on how certain law firms structure them, they may be eligible for an 83(b) election.
  • For existing tokens, when the token price is low, companies often issue Restricted Token Awards (often with an 83b election) to allow recipients to establish a low cost-basis for the tokens, pay a low up-front tax bill and enjoy the appreciation tax-free until sale. If an 83(b) is not filed, recipients may face tax bills at vesting milestones and have trouble covering the tax liabilities if the tokens are not liquid enough to sell.
  • As the token price increases (perhaps making an 83b too expensive to file) and the tokens are illiquid, companies can use Restricted Token Units to defer vesting until a liquidity event or liquidity threshold is met.
  • Token Options can give the recipient more control over the timing of taxes and when they exercise. But 409A limitations could mean the option can only be exercised on a specific calendar year, which might not be the best fit if the timeline to TGE or liquidity is uncertain.
  • Once the token is live and sufficiently liquid (such that there aren’t concerns about being able to sell to cover a tax liability), companies have a lot of flexibility. They can issue a standard Token Grant, a Restricted Token Awards (taxed at vesting without an 83b or at grant with an 83b), RTUs (if they want a double trigger vest), or Token Options.


FAQs

What is the difference between a vesting schedule and an unlock, release, or distribution schedule?

Usually, “Vesting” is used in the context of token awards like Restricted Token Awards, Restricted Token Units, or Token Options. To have vested these tokens (or units, or options) means to have earned the legal right to own them. Vesting milestones are usually defined in  a vesting schedule, such that a service provider earns tokens over the time that they work for the company. But vesting can also be based on other factors like individual work performance or the asset’s price. Some companies use the term vesting loosely to mean a general schedule or timeline on which tokens are distributed.

An unlock, release, or distribution schedule, on the other hand, refers to the timeline for when a new token will become available for holders to access or trade (they can be airdropped directly, or unlocked via a claim portal or smart contract). This may be related to a vesting schedule if the cryptocurrency or digital asset is being distributed to employees or other stakeholders as part of their compensation package, but it can also refer to the general timeline of releasing of a token to other stakeholders like community members, to foundation wallets, for staking rewards, etc.

The key parameters are often the length of initial unlock (to influence who gets liquidity first), the length of the overall unlock schedule, and the frequency of unlocks. Teams might put certain stakeholders on longer unlock schedules to incentivize longer-term involvements, or delay the initial unlock to reduce sell pressure. The optimal design of unlocks is outside of the scope of this post, though there’s a great post by Lauren Stephanian from Pantera on the impact of unlock schedules on sell pressure: https://twitter.com/lstephanian/status/1552670602539851777


Company tax obligations for employees and contractors

A company’s tax obligations differ based on whether the token recipients are employees or contractors, and whether they are in the US or abroad.


International Employees

  • U.S. Citizens and Residents Working Abroad
    • U.S. Withholding:
      • Employers may need to withhold U.S. income taxes unless the employee claims exemption (e.g., qualifying for the foreign earned income exclusion).
      • FICA Taxes: Generally required unless the employee works in a country with a totalization agreement that exempts them.
    • Foreign Tax Obligations:
      • Employers may have to comply with foreign payroll taxes, social security contributions, and other statutory obligations.
      • May need to register as an employer in the foreign country (unless employing through an EOR).
    • Compliance with Local Labor Laws:
      • Must adhere to local employment regulations, including contracts, working hours, benefits, and termination procedures.
  • Non-U.S. Citizens Working Abroad for U.S. Companies
    • U.S. Withholding:
      • Generally, no U.S. withholding required if all services are performed outside the U.S.
    • Foreign Tax Obligations:
      • Must comply with the employment laws of the country where services are performed.
      • May involve withholding local income taxes and social security contributions (something that is typically handled by an EOR).
  • Non-U.S. Citizens Working in the U.S.
    • U.S. Withholding:
      • Employers must withhold federal income taxes, FICA taxes, and applicable state and local taxes.
      • Tax Treaties:
        • May allow for reduced withholding; employees must provide Form 8233.
    • Immigration Compliance:
      • Ensure employees have proper work authorization (e.g., H-1B, L-1 visas).


International Contractors

  • Services Performed Outside the U.S.
    • U.S. Withholding:
      • Generally, no withholding required.
    • Documentation:
      • Obtain Form W-8BEN or W-8BEN-E to certify foreign status.
    • Foreign Tax Compliance:
      • Be aware of local tax laws; may be required to withhold taxes under foreign regulations.
  • Services Performed in the U.S.
    • U.S. Withholding:
      • May need to withhold 30% on U.S.-source income.
      • Tax Treaties:
        • Can reduce or eliminate withholding; contractor must provide appropriate forms.
    • Reporting:
      • File Form 1042 and 1042-S for payments and withholding to foreign persons.

International employment and tax laws are complex and vary by country. Always seek professional guidance and work with legal and tax professionals experienced in the relevant jurisdictions.

To simplify compliance, some companies use EOR services (such as Deel or Toku) to handle international employment logistics.

Depending on the structure of the token award, taxes may also need to be withheld upon vesting (such as with RTAs without an 83b election), or at the time of settlement (such as with RTUs). It’s essential to legal or tax professionals regarding this, as failing to withhold these taxes may result in significant penalties.


Calculating the withholding amounts

Companies often use their payroll providers to determine the exact percent of taxes to withhold for each taxable event. The company’s withholding might not cover a contributor’s full tax liability (especially if the withholding is only at the supplemental rate while an employee’s marginal tax rate might be 37%). Token recipients should also consider the different local, state, and federal taxes that might apply to them. In this case, the recipient is responsible for paying the remainder.

The company’s withholding obligation is based on the Fair Market Value at the time of ordinary income recognition (in most cases on the grant or vesting date, except in the case of RTUs where it is on the settlement date). To satisfy their tax withholding obligations, the company needs to withhold the dollar value of the withholding amount from the employee. They can do this by:

  • Requiring employees to send the cash value of the tax obligation to the company immediately (uncommon).
  • Deducting the withholding value from other cash compensation paid to the employee
  • Withholding a number of tokens from the employee’s distribution equivalent to the dollar value of withholding obligation (Most common).


Determining the number of tokens to withhold

When withholding tokens from the recipient, companies will need to calculate the number of tokens that equals the value of the withholding obligation. For this, companies can use the price of the token at a particular time on the day of the taxable event or use a trailing average price over a number of days, weeks, or months (consult with a tax specialist).


Paying the withholding amount to tax authorities

In the latter case, where the company withholds a certain percentage of tokens, the company can then pay the tax authorities directly either:

  • With balance sheet cash (and keep the withheld tokens in their treasury) OR
  • Sell the withheld tokens to convert into cash to pay the IRS (but making sure that they’re remitting to the IRS the original dollar value of the withholding obligation, since the token value may decrease between the time of the income recognition and sale of the tokens).


Practical Challenges of Tax Withholding and Remittance

When withholding taxes on token-based compensation, companies may face several practical challenges:

  • Token Value Fluctuations: The volatile nature of cryptocurrency prices means that the value of withheld tokens can change significantly between the time of withholding and remittance to tax authorities.
  • Timely Conversion: To ensure sufficient funds to cover tax liabilities, companies may need to convert withheld tokens to fiat currency promptly.
  • Administrative Burden: Managing the conversion process and complying with reporting requirements adds complexity.


What are the restrictions on options subject to Section 409A?

As mentioned earlier, many legal professionals believe that Token Options have to comply with Section 409 due to the lack of clear guidance indicating otherwise. If an option is deemed to be subject to 409A, the below requirements need to be met to avoid penalties and early taxes (from RSM):

  • A fixed exercise price greater than or equal to the FMV of the underlying token at the time of grant
  • The NSO must not be exercisable for at least six months after the date of grant (unless an exception applies)
  • The NSO must not be subject to any acceleration of vesting or exercisability, unless certain exceptions apply
  • The NSO must not be transferable, except in certain limited circumstances


What rates are token awards taxed at?

Token awards are initially taxed as ordinary income based on a taxable income approximately equal to the FMV of the tokens minus the cost basis, or the amount paid to purchase tokens. The exact tax owed is based on your tax bracket (Determined by your taxable income in a given year) and tax rates set by local, state, and federal jurisdictions. The current highest US federal tax rate is 37%. Of note, the employer will report all token compensation and amounts withheld (in terms of USD), in addition to base cash compensation, on employee W2s and contractors’ 1099 at year-end.

Subsequent sales of these tokens are taxed as capital gains. Capital Gains can be short-term if the asset is held for less than a year before being sold or long-term if they’ve been held for one year or longer before being sold. Whether they are short-term or long-term impacts the tax rate and what write-offs an individual can make; current tax rates are up to 37% for short-term gains and up to 20% for long-term gains depending on your tax bracket.

Proceeds from subsequent sales are adjusted for value that had already been taxed. If you received $10 in a token award initially, you’ll owe ordinary income on $10 of proceeds and your new cost basis becomes $10. A subsequent sale of the tokens for $18 would result in $8 of capital gains (FMV of $18 minus the updated cost basis of $10).

Exchanges and tax services may at times incorrectly report the cost basis of subsequent sales, and so individuals need to make sure that they are correctly reporting the cost basis for their assets at every sale. The exact value of the proceeds or cost basis can depend on other factors such as fees associated with the sale. You should consult a tax specialist or accountant when calculating the taxes owed on any transaction.


How do taxes vary by location?

Individuals subject to US taxes will have to pay US Federal taxes in addition to any taxes levied by the city or state they live in. Some individuals may choose to live in states that have no state income or capital gains taxes (such as Florida or Texas). US Citizens can still be taxes on income sourced in the US even if they live abroad.


Securities Exemptions for token grants

This article in the Harvard Law Forum outlines some limitations to consider with granting tokens to service providers, which we summarize below.

Token plans are typically designed to comply with US securities laws as a mitigating and conservative measure. In case that the token is ever deemed a security, then at least the issuance or trading of such tokens would not have been a violation of securities registration requirements under such regulations as Rule 701, Reg D, and Rule 144.

The below limitations do not necessarily apply if the project does not consider the token as a security and if the project is not worried about the token being considered a security. Some projects take increased measures to make their tokens as distant as possible from being considered a security including such measures to decentralize the governance (such as by forming a DAO). But even then, some projects may still try to stay within the safe harbor exemptions outlined below in the event that the token ever does become deemed a security in the future.


Issuing tokens under Rule 701 (and limitations on offshore entities)

Rule 701 is a safe harbor that provides an exemption from having to register securities when issuing company-issued tokens to service providers. Rule 701 is subject to volume limitations.

There are several requirements that need to be met for assets issued under Rule 701:

  • The service provider must be a “natural person” (though this could include a consultant operating through a wholly-owned LLC or personal corporation).
  • The services cannot be connected with a capital raise (token sale, ICO, etc.)
  • Consultants or advisors must be providing services to the issuer.
    • ⚠️ This is a problem if an operating company or “Labs” entity is issuing tokens granted to it by a foundation. The rule 701 exemption may not apply (See next paragraph).


Rule 701 Volume Limitations and Applicability

To rely on the Rule 701 exemption, the aggregate amount of securities (including token-based awards) sold in reliance on the exemption during any consecutive 12-month period must not exceed the greatest of:

  • $1 million
  • 15% of the total assets of the issuer, measured at the issuer's most recent balance sheet date
  • 15% of the outstanding amount of the class of securities being offered, also measured at the issuer's most recent balance sheet date

It's important to note that these thresholds are maximum limits, not conditions to be met. The company must ensure that the total amount of securities sold does not surpass the greatest of these three thresholds within any 12-month period.


Applicability to Consultants and Advisors

Rule 701 is limited to offers and sales to natural persons, such as employees, directors, officers, and certain consultants and advisors. While consultants operating through wholly-owned entities might receive token grants, such grants may not qualify under Rule 701 if the recipient is not a natural person. Therefore, companies should ensure that token grants under Rule 701 are made directly to individuals rather than to entities.


Potential issue of Rule 701 applicability for offshore/separate entities

Typically, a project forms a  US-based operating company that manages and compensates employees, contractors or other service providers that is separate and at arms-length from an offshore entity that is the one actually minting or issuing the tokens (usually based in a tax- and token-friendly jurisdiction like BVI, Panama, Gibraltar, Singapore, Dubai, or Cayman).

In this case, Rule 701 may not apply as an exemption because the service providers are not working for the token-issuing entity. If Rule 701 is not available, some companies may utilize other exemptions such as Regulation D (See below). Other exemptions include, per Mike Baker from Baker Tax Law, “sophisticated purchasers (which I’m told should be limited to 6 folks), or those purchasing tokens after receiving a private placement memorandum (which I’m told should be limited to 35 folks).”


Reg S

Some companies will choose to use Regulation S as the exemption for non-US contributors. Regulation S provides an exemption from U.S. securities registration requirements for offers and sales made outside the United States, though it does not exempt companies from complying with securities laws in the jurisdictions where the recipients reside.

Companies must still ensure compliance with local securities regulations in each country where they grant tokens to foreign service providers.


Reg D

Some firms will rely on Regulation D instead of Rule 701 for grants to accredited consultants, advisors or certain directors and executive officers, or up to 35 non-accredited individuals. Regulation D has its own disclosure requirements outside of the scope of this post, but some lawyers will put together a “light” set of disclosures to satisfy the disclosure requirements associated with Reg D. If using a Reg D exemptions, holders should be mindful of holding period restrictions.


Integration Doctrine Risks

The SEC's integration doctrine may treat multiple offerings as a single offering if they are part of a single plan of financing.


Holding Period and Transfer Restrictions / Mandatory minimum lockups

Rule 144 provides an exemption and permits the public resale of restricted or control securities without registration if a number of conditions are met. To comply with Rule 144, token awards will usually include a 1-year lockup period prior to any sale or transfer (or 6 months if the tokens are registered, though most aren’t). [Cooley]

These Bloomberg articles contains a comprehensive overview of the restrictions surrounding secondary sales: “Many market participants do not seem to realize the lock-up period may actually start with the initial issuance of the SAFT, and that therefore one potential advantage of the SAFT is that it permits the issuer to raise money before conducting an ICO while effectively shortening the post-ICO lock-up period.” As with everything, discuss with your attorney!


Resales of tokens

Rule 144 allows for an exemption to registration for securities sold on public markets under certain conditions. There are significant restrictions for affiliates (company directors and senior management), including volume limitations, but for non-affiliates generally the securities need only to be held for at least one year (or six months if the issuer is subject to reporting requirements). Rule 144A allows for generally unrestricted resales by affiliates to Qualified Institutional Buyers.

Under Section 4(a)(7), an accredited investor may resell securities to other accredited investors, if there is no general solicitation, certain company information to the seller, and certain other conditions.


Written Plan or Agreement

Rule 701 requires issuers to have a written plan or agreement outlining the award structure and agreement. A smart contract alone may not suffice. Companies should share the written company-wide plan as well as each individual agreement with individual recipients.

Can you just take an existing Stock Plan and replace “Stock” with “Token”? From the Harvard article: “While issuers may be tempted to draft token incentive plans by simply replacing ‘stock’ with ‘token’ in precedential equity incentive plans, care should be taken in drafting a token incentive plan—for example, provisions related to lock-ups, changes in control, recapitalizations and post-settlement transfer restrictions either do not apply or have to be significantly altered for application in the context of tokens.”


Wrap up

We wrote this summary in an attempt to aggregate all of the different nuances associated with granting tokens to service providers. Companies should consult lawyers and tax professionals early when considering the best option for them. We’re happy to help introduce companies to different lawyers or token valuation firms!

If you’re a company that needs help automating token distributions to employees, investors, or contributors, Magna can automate these distributions on any custom unlock schedule of your design.

Please note that the information provided in this blog post is for informational purposes only and should not be taken as legal or financial advice. We (Magna) and the author (Bruno) are not lawyers, and the information in this post does not constitute legal or financial advice.

This blog post does not take into account nor does it provide any tax, legal or investment advice or opinion regarding the specific investment objectives or financial situation of any person. Magna Digital, Inc. (“Magna”) and its agents, advisors, directors, officers, employees and shareholders make no representation or warranties, expressed or implied, as to the accuracy of such information and Magna expressly disclaims any and all liability that may be based on such information or errors or omissions thereof.

Magna reserves the right to amend or replace the information contained herein, in part or entirely, at any time, and undertakes no obligation to provide you with access to the amended information or to notify you hereof.

You should always consult a qualified financial advisor or lawyer for advice on your specific situation. The information in this post may not be up-to-date, and we make no representations or warranties as to the accuracy of the information provided. Use of this information is at your own risk.

Articles used to do research for this post:

Relevant RSU articles:

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