The opinion editorial below was written by Michael Handelsman for Kelman.Law.
A developer is promised 100,000 tokens, vesting over two years. An advisor is offered a percentage of the token supply for helping the project grow. Both arrangements sound straightforward until the launch is delayed, the supply changes, or someone leaves before receiving their allocation.
Token compensation agreements should explain precisely what the recipient earns, when it must be delivered, and what happens if the project changes course. For companies with U.S. employees or advisors, those terms also need to work alongside employment, securities, and tax requirements.
Define the award and the entity responsible
Start by identifying the legal entity making the promise and the entity issuing or holding the tokens. If a development company employs the team but a separate foundation controls issuance, the documents should establish how the employer will obtain the tokens and who is responsible if delivery fails. Obtain the necessary corporate approvals before making the grant.
The allocation must also be measurable. A promise of “0.5% of the token supply” should specify the relevant supply, the measurement date, and how later minting, burns, or migrations affect the calculation. An award of “$50,000 worth of tokens” needs a valuation date, pricing source, and fallback for an illiquid market.
Describe the rights attached to the award. Recipients should understand whether they receive existing tokens, a contractual right to future tokens, an option, or a cash payment tied to token value. Any equity, governance, or revenue rights should be stated expressly.
Separate vesting from delivery and transferability
Contractual vesting determines when specified service or performance conditions on an award are satisfied. Delivery determines when the tokens must reach the recipient. Transfer restrictions determine when the recipient can sell or otherwise move them. Those events may occur months apart, and tax law may apply its own definition of vesting.
For example, an advisor might earn 25% of an allocation after six months, receive it following a defined token generation event, and remain subject to a further lockup. The agreement should make each step clear and specify whether vested rights survive the advisor’s departure before delivery. Any continuing service condition should be reconciled with the vesting terms and applicable law.
Specify the vesting start date, any cliff, installment schedule, and performance conditions. Milestones should be objectively assessable, with a process for confirming completion and resolving disagreements.
Address delayed launches and changes to the project
“Tokens will be delivered at launch” leaves substantial room for disagreement. Does launch mean deployment of the smart contract, activation of the network, the first public distribution, or an exchange listing?
Define the trigger and the delivery deadline. Address what happens if the project abandons the token, postpones launch indefinitely, changes chains, or issues a replacement asset through another entity. The parties should decide whether those events produce a substitute award, a cash obligation, continued rights, or termination of the award, subject to applicable law.
A compliance-related suspension should have defined grounds, notice requirements, and a process for reassessing delivery. The agreement should also specify which amendments require the recipient’s consent. Our article on undelivered token allocations discusses how these issues can develop into disputes.
Explain what happens when the relationship ends
Termination provisions should separately address unvested awards, vested but undelivered tokens, and tokens already transferred. Define “cause,” any cure opportunity, and whether resignation, termination without cause, death, disability, or a sale of the business changes the outcome.
If the company has a repurchase or clawback right, explain its scope, exercise period, and pricing. Check those provisions against applicable employment and wage laws before relying on them to cancel compensation.
Advisor agreements should also describe the actual services, expected availability, deliverables, confidentiality obligations, and ownership of work product. This makes the connection between the services and the award easier to establish.
Structure employee pay around wage requirements
For covered employees, federal wage regulations generally require minimum wage and overtime payments in cash or a negotiable instrument payable at par, subject to specified exceptions. Companies should not assume a transfer of project tokens satisfies those requirements.
A prudent starting point is to satisfy applicable wage and salary requirements through compliant dollar payroll, with separately documented token incentives. Supplemental awards still require review: federal overtime rules can require bonuses to be included in the regular rate unless an exclusion applies. State and local wage laws may also protect earned token compensation or restrict payment methods, delays, deductions, and forfeitures. Calling an award a bonus does not resolve those questions.
Worker classification matters too. Calling someone an “advisor” or “contractor” does not settle their status. The Department of Labor’s guidance on misclassification explains the consequences of treating an employee as an independent contractor. For an international team, obtain advice on the laws applicable where each person works.
Review securities requirements before making the offer
The securities analysis should address the token and the particular compensation arrangement. Where securities are involved, establish a valid registration or exemption pathway before offering the award.
Rule 701 can cover certain compensatory offerings by eligible nonreporting issuers under written plans or contracts. It has offering limits, disclosure obligations, and recipient requirements. Eligible consultants and advisors must be natural persons providing bona fide services to the issuer or specified related entities. Those services cannot involve capital raising or promoting or maintaining a market for the issuer’s securities.
Rule 701 is available for qualifying issuer transactions; it does not exempt resales by an employer holding another entity’s securities. A separate foundation and development company therefore need careful review of the issuer, corporate relationships, and service arrangements. An advisor’s fundraising or token-promotion role also requires specific analysis.
The SEC explains that securities issued under Rule 701 are restricted securities. Vesting does not make them freely tradable. Applicable state securities laws and federal antifraud requirements remain relevant.
Plan for valuation and taxes before delivery
For an outright payment of unrestricted convertible virtual currency, IRS Notice 2014-21 generally measures compensation income by the currency’s fair market value in U.S. dollars when received. Employee payments generally carry withholding, employment-tax, and Form W-2 obligations. Independent contractors generally recognize service income and may face self-employment tax.
Restricted property requires a separate analysis. Under Section 83, compensation income generally arises once property has been transferred and becomes substantially vested under the tax rules, absent a valid election or other applicable exception. The taxable amount generally reflects fair market value at that time, less any amount paid for the property. A contractual vesting date and the tax recognition date should not be assumed to coincide.
The agreement should explain the valuation method and how applicable withholding will be funded. An employee may face a tax obligation while holding tokens that cannot readily be sold. The company needs an operational plan for payroll deposits and reporting; a clause making the recipient responsible for personal taxes does not discharge the employer’s obligations.
For qualifying transfers of substantially nonvested property, a Section 83(b) election can accelerate compensation income to the transfer date. The IRS instructions generally require filing within 30 days after the property transfer. The election needs individual tax advice: if the property is later forfeited, the compensation income previously included generally cannot be deducted because of that forfeiture. Under the Section 83 regulations, an unfunded, unsecured promise of future tokens is not itself property for this purpose. A trading lockup also does not necessarily postpone taxation.
A promise to deliver tokens in a later tax year may implicate Section 409A’s deferred-compensation rules, unless an exclusion or exemption applies. If Section 409A applies, a token launch or exchange listing is not automatically a permissible payment event. Counsel should review delivery dates and any rights to delay or accelerate payment before the award is granted.
Make the agreement work in practice
Specify wallet-verification procedures, the supported network, responsibility for transaction fees, and the process for failed transfers. Align the written terms with any smart contract controlling vesting or release, and explain how discrepancies will be handled. Include appropriate governing-law and dispute-resolution provisions.
Kelman PLLC assists digital asset businesses with commercial agreements and regulatory questions. If your company is preparing employee or advisor token awards, contact us to discuss the structure. Bring the proposed allocation, token issuance plan, entity structure, and existing employment or consulting documents so the review can address the arrangement as a whole.
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