This article offers a detailed guide on the best practices for determining team token allocations, along with vesting and lock-up periods for team members. To create a successful token allocation strategy, consider the following three main aspects: ► The source of a team’s token allocation supply ► The percentage of tokens allocated to the team ► The allocation mechanism
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1. The source of a team’s token allocation supply
First, you need to determine the source of the token supply. Will the team’s token allocation come from the genesis supply or the token emission?
Team token allocation from token emission:
The main downside of this approach is that tokens will already have a price when distributed to team members. Consequently, a taxable event occurs as soon as team members receive tokens. In most jurisdictions, they will owe taxes on a percentage of the token's equivalent fiat price on the transfer date. If tokens are vested or liquidity is limited, this can lead to negative consequences.
This method is not recommended.
Team token allocation from genesis:
If the team token allocation is distributed at genesis, the protocol includes the allocation in its genesis file, minting tokens in the respective wallets at the time of the token generation event. Since tokens likely won't have a price at this stage, they won't trigger a taxable event, as the equivalent fiat amount for the received tokens is zero.
This approach simplifies future documentation as well: X amount of tokens were received in wallet Y on date Z, instead of continuous token payments on each block.
2. The percentage of tokens allocated to the team
Next, you need to define the token allocation percentages. Specify the number of tokens allocated to the team and how they're distributed among individual team members.
- Total team token percentage
- Token allocation percentage for team members/founders
- Token allocation percentage for a team pool reserved for future team members
Total team token percentage: 20% of the genesis supply
Team Member A
Team Member B
Managing the Team Pool
For the team pool, you can either have the foundation hold it or send a portion directly to a wallet controlled by the developer company, simplifying the process of distributing tokens as salaries or bonuses.
Token bonuses for team members
One method involves the foundation including token rewards for team members in their payments to the developer company. The developer company then pays out the bonuses to team members as part of their salary or company options. This usually results in a split between fiat and crypto, as team members will have to pay taxes according to their income.
Paying out token bonuses to team members is easier when done directly by the developer company. So, we recommend allocating a portion of the remaining tokens (e.g., 3%) directly to the developer company.
Note that if the token price increases later, the developer company's net worth could rise significantly based on the token amount and price. Depending on the jurisdiction, the company may have to pay capital gains tax on profits, which can typically be offset by expenses incurred through employee compensation.
3. The Allocation Mechanism
When designing the allocation mechanism for team token allocation, you need to consider four main components:
- Vesting: Determine the vesting start and end dates for your team members. Typical vesting periods range between 4-6 years. By establishing a vesting schedule, you ensure that team members are committed to the project for an extended period.
- Lock-up: Set the lock-up start and end dates, which prevent team members from selling their tokens immediately after receiving them. A common lock-up period is one year after the token generation event. This helps to align the team's interests with the long-term success of the project.
- Enabling staking for locked-up and vested tokens: Decide whether staking will be enabled for team members' tokens. You need to determine whether only vested tokens can be staked or if tokens can be staked during the initial lock-up period. We recommend enabling staking for team members to prevent dilution of their network shares.
- Providing initial liquidity for team members: Consider offering team members a certain percentage of liquidity on their locked and/or vested tokens. For example, you could provide 10% liquidity, allowing team members to access a portion of their tokens' value before the full vesting or lock-up period ends.
By carefully considering these four components, you can create a well-structured team token allocation and vesting strategy. This ensures a successful and fair token distribution plan that aligns the interests of your team members with the long-term success of your project.