In the world of crypto, everything is possible: getting paid way more than in other industries… or getting scammed way more than in other industries. In this article, I will explain you how to evaluate properly your crypto / token bonus so that you end up in the first category. For that, I will explain 6 typical traps to avoid.
From ICOs to tokens
In 2017 / 2018, a lot of blockchain companies raised a ton of money through ICOs. In these ICOs, companies received real money, or Ether, or Bitcoin, and in exchange issued tokens (Ethereum ERC20 tokens to be precise) to investors.
Not all ERC20 tokens were issued to investors, and many companies kept a large chunk as a strategic fund to finance their future development. Some companies also included Ether / Bitcoin as part of their strategic fund.
It’s very tempting for blockchain companies to use their strategic fund to lure in developers with big token bonuses. After all, it usually wasn’t too hard to raise this money (contrary to traditional VC financing), and there is plenty of it.
Trap 1: ERC20 tokens DO NOT represent ownership
A lot of people think that during an ICO, the ERC20 tokens issued represent ownership of the company. They don’t. They usually don’t even have any sort of voting right. They are just virtual assets that some people agreed that they somehow represent the financial success of the company. That’s it. So don’t think that with your ERC20 tokens you will have some sort of recourse against your employer if you realized that the tokens are worthless and that as a share owner your are entitled to something. You don’t own any part of the company.
Trap 2: ERC20 tokens are very illiquid
The liquidity of a financial asset measures how easy it is to sell or buy the asset. In a liquid market like the New York stock exchange, it’s easy to buy apple shares. Even if you want to buy a lot, there are always a lot of sellers who should be able to be the counterparty of your trade. In an illiquid market, it’s difficult to find counterparties: if you want to sell, they aren’t many buyers, and vice-versa.
ERC20 tokens are notoriously illiquid. Very few are listed on big exchanges like Coinbase. Instead most are listed on so-called “decentralized exchanges” that are entirely based on Ethereum smart contracts. These exchanges are much more basic than centralized exchanges (like Coinbase) and have much less liquidity. For the less liquid ERC20 token, liquidity can be as low as a few thousand dollars of trade a day.
Why does it matter? Well, if the liquidity is low, it will take a long time to sell all your tokens, and there are more chances that you make the market move in the wrong direction. For example, if you place a sell order for 10k USD worth of tokens, with a daily liquidity of 1000 USD, you will wipe out all the buyers right away, and the price will plunge.
Instead, you need to place small orders every day (100-200 USD) for a longgg time. And at some point, you will liquidate your whole position. But this poses another problem: maybe that in the meantime the price of the token and of Ethereum will decrease, as a result of a general bear market (not because of you this time).
As you can see, liquidity matters a lot, and you should definetly compare the amount of your crypto bonus to the liquidity of the market. For this, you don’t need to go study all the exchanges that trade the token, but you only need to have a look at the exchanges that are the most liquid for the tokens, and see what has been the daily trading volume recently.
Trap 3: Token valuation is done with past prices
Token bonuses are denominated in USD equivalent. For example a company will tell you that your bonus is 20k USD, paid in token equivalent. The words “token equivalent” are important here. That means that you will receive for 20k USD worth of tokens.
But how do we calculate the number of tokens to pay you? For that, we need to use 2 rates, at a certain date in the past (the valuation date):
- USD/ETH rate
- ETH/Token rate
If the valuation date is not stipulated clearly, this is dangerous because it leaves room to interpretation. And you can be sure that your company will choose the worst possible interpretation.
For example, if the valuation date were not agreed clearly, and that the price of ETH and of the token went down a lot after the ICO, your company can decide that the valuation date is just after the ICO. In this case, the USD value of your token bonus will melt as fast as an ice cream on a sand dune in the sahara.
Instead, you should agree beforehand on the valuation date. Preferrably, you want the valuation date to be the same as the payment date of your bonus.
Trap 4: Low-ball your cash salary because of the crypto bonus
Some companies will try to low-ball your cash remuneration because of the crypto bonus. This is actually tricky, because if you answer straight away that you don’t value much the crypto part, some companies can interpret this as a negative signal because you don’t believe enough in the project.
My advice is to say: “Thanks for the bonus, I appreciate it. But it doesn’t influence my cash salary expectation”. And if they ask you to justify it, just don’t do it. This way, they can’t blame you for anything, and you don’t cave in on your salary expectation.
Trap 5: 100pct of remuneration is in token / crypto
Some companies go as far as offering a package with NO cash salary, entirely in crypto. That is quite extreme. The “good” companies that do it usually offer it as an option, and offers stronger crypto assets like bitcoin or ether. In this case the valuation of the crypto assets is done on the day of the salary transfer. And it’s up to you to sell your crypto right away, or not.
Personally, I would not accept such a deal because there is a significant risk of important financial losses in case of large adverse market movements the day you are paid. And also it is also a huge temptation to not sell your crypto assets, keep them hoping that they will increase in value, which is exactly the same financially than receiving your salary in cash and re-investing EVERYTHING on the stock market. Pure madness.
Oh yeah, and last thing, if the crypto asset they offer in the case of a full payment in crypto is their ERC20 token, I would totally answer no.
Trap 6: There is a vesting period
Some companies will pay you a crypto bonus, but you will not have the right to sell it before a certain date. Or even in some cases you will only get the bonus if you stay employed until a certain date. In other words, if they fire you before, you loose your bonus. This is actually quite usual for normal equity compensation in non-blockchain companies.
If there is a vesting period, this decreases the valuation of the bonus: a bonus of 10k USD with a vesting clause is not really worth 10k USD. It’s MAYBE worth 10k USD. Or 0.
That’s it for this guide on how to evaluate properly a crypto / token bonus if you are a blockchain developers. In any case, just remember to not get too excited about the bonus and still ask for a good cash salary. This way, you won’t be disappointed.Career advice
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