In Web3, we believe in empowering employees and shifting power from companies and investors to builders and creators. As we’ve seen through recent catastrophic events, the people building web3 often face the same power imbalances and centralization of traditional industries leading to unfair treatment of employees. The result is often significant financial losses. In this article we will help you understand the most common issues Web3 employees often face, such as not receiving promised tokens, overpaying taxes, or receiving worthless tokens. In this article, we'll provide tips on identifying and avoiding these issues.
DIDN’T RECEIVE YOUR TOKENS ? 🤔
Failing to receive the tokens you were promised is a brutal experience. Unfortunately, it happens more often than most people think, and is typically avoidable. The legal issues that impact token grants start with the employment contract.
In our experience working with clients, these are the three most common issues:
1 - THE TERMS OF THE CONTRACT ARE UNCLEAR 🤔
Great contracts are clear. They have excellent definitions, and reference all key concepts. Unfortunately, when a contract is unclear, it will be left to interpretation, which is likely to go in favor of the person who can afford the most legal fees.
The following is a list of definitions that should be included in every contract:
The type of token or digital asset that will be included as part of your compensation package, including the token standard, chain, and other technical information to clearly identify the asset.
The classification of the Token Award:
Token Grant
Restricted Token Award
Restricted Token Unit
Future Token Interest
When vesting triggers are a part of the token allocation structure, the contract should identify the trigger with sufficient detail. The following are some examples of triggers:
Token Generation Event (TGE), should describe the event, Initial Dex Offering, NFT launch, etc.
Network Launch Occurs
The Tokens achieve a specific market cap
Specific amount of 24-hour trading volume
Management of Token Allocation in the case of termination or a decision to leave the company. The issue arises when the second trigger isn’t met and an employee wants to leave the company. But has been there for enough time to meet the first trigger? It is important to have a contingency plan in place to ensure there is compensation when there is a delay in the company achieving the second vesting trigger.
2 - THE CONTRACT DOES NOT REFLECT VERBAL PROMISES 🗣️
If it is not in writing, then it didn’t happen. This might seem like common sense, but in reality, it can be very difficult. People often avoid asking for terms in writing because they are concerned that they will lose their offer. As an employee asking for terms in writing is a litmus test for honesty and integrity. If an employer pulled an offer because you asked for all the terms in writing, consider yourself lucky.
Verbal promises are incredibly difficult to enforce, be sure to ask for them in writing.
3 - EMPLOYER THREATENS TO CHANGE CONTRACT TERMS ⚠️
There are several reasons an employer may want to renegotiate a token grant. There could be a down round, lack of investor demand, dead equity, greed, need for additional or unexpected hires, etc. While the reasons might seem logical, it doesn’t mean an employer is entitled to change the contract. It is critical that you know your rights, and that an employer is not entitled to change your contract, withhold your tokens, or fire you if you don’t agree to new terms. DON’T GET BULLIED.
OVERPAYING TAXES 💰
Web3 employees often face predictable tax issues, but unfortunately, many employers do not provide effective tax planning resources or education for their employees. This lack of support is ironic, as employers are often in the best position to understand the impact of company performance on their employees.
To avoid overpaying taxes, consider:
The type of token allocation, and the need for making the appropriate elections or filings to reduce the upfront tax bill. (Learn more about 83b Elections)
Be wary of lock-up terms, and other restrictions that can cause a waiting period that may decrease the token value or available liquidity, causing a large tax bill with no way to sell your tokens.
Consider receiving cash compensation instead of tokens, to avoid an unmanageable tax bill, especially when token vesting or grant value exceeds current market liquidity.
WORTHLESS TOKENS ∅
EMPLOYERS AND INVESTORS CASHED OUT FIRST
Due to a term in the contract or information asymmetry, certain team members were able to cash out prior to a dip in asset price. While illegal, this happens. Be wary of lock-up terms or other restrictions that prevent access to liquidity. Be curious about the terms for other team members or investors.
WHY DO WE HAVE THESE PROBLEMS ? 😩
Research with Web3 employees has shown that there are several common reasons why people struggle to avoid these issues.
First, many people don't know where to turn for advice or support during the hiring or post-hiring process. Unfortunately, the legal system has historically not served employees well and hasn't provided adequate support.
Second, people often believe that legal services are too expensive or won't solve their problems.
Finally, some employees may be afraid to negotiate or raise issues with their employers for fear of losing their jobs. However, it's important to remember that finding great employees is a challenge for most companies, and thoughtful questions shouldn't deter employers from hiring qualified candidates. In fact, if a question stops an employer from hiring, it may raise questions about the employer's transparency and motives.
CONCLUSION ✅
In this article, we have provided tips for identifying and avoiding the most common issues faced by Web3 employees, such as not receiving promised tokens, overpaying taxes, and receiving worthless tokens. To address these issues, it is important to have a clear contract that reflects verbal promises, understand your rights, and have a contingency plan in place. Additionally, employers should provide effective tax planning resources and support their employees. It is also important for employees to seek advice and support, even if they believe that legal services are too expensive or won't solve their problems. By working together and addressing these issues, we can empower employees and shift power from companies and investors to builders and creators, creating a fair and just Web3 ecosystem.
** This piece is sponsored by my family at Rise. Rise is a Web2.5 company that does compliance and payroll solutions for DAOs and crypto organizations. You can use Rise to hire, manage, and pay local or international contractors, while ensuring full compliance. Rise brings a dual payment infrastructure, which enables automated payments and flexible routing between fiat and crypto.
All credit due to the author, Max Burwick of Burwick Law. Max is an attorney with a specialized Web3 and crypto-specific practice that focuses on Web3 employment issues, tax, token management, and corporate compliance. He believes that the role of the lawyer is to empower builders and product leaders through creative and collaborative experiences. Feel free to reach out to him here with any questions!