An employee stock option (ESOP) is a popular method that companies use for rewarding their deserving employees. But following the Web 3.0 trend, several global and Indian crypto companies are also issuing Esops to their employees, but with a slight difference. The Esops issued by them are on the Blockchain and are governed by smart contracts.
MuffinPay ($MFIN) is one such Crypto Fintech Start-up that recently reserved $6 million worth of Blockchain-based Esop for its employees. In addition, many other global crypto companies, including crypto exchanges like Binance (BNB), have their own crypto tokens and have allocated Blockchain-based Esops to their employees in the past.
Hitesh Malviya, founder of itsblockchain.com, India’s oldest cryptocurrency and Blockchain media publication website, says: “Similar to start-ups and companies in the Web 2.0 era, these days, crypto companies and others are issuing Web 3.0 enabled Blockchain-based Esops to their employees. Like Web 2.0 based Esops, these new Web 3.0 Blockchain-based Esops too have a cliff period, wherein it can’t be claimed or sold, and they also follow a vesting period schedule, i.e., the time period between the Esop grant date and vesting date, which varies from company to company.”
So what are these Blockchain-based ESOPs, and what are their features? Read below to find out.
Blockchain-based Esops are issued on the respective crypto company’s Blockchain or any other Blockchain and are governed by Smart Contracts. Smart contracts are pre-determined contracts which will automatically execute on fulfilment of certain stipulated conditions.
“The significant difference between Smart Contract Blockchain-based Esop and that of normal Esop is that they are automated and bound by Smart Contract, which cannot be altered or modified by anyone, including those issuing them,” says Dileep Seinberg, founder and CEO, MuffinPay, a crypto fintech company.
Normally, when a company issues Esops to its employees, they are given at a predetermined rate and with a stipulated time called exercise period. But as the size of a company increases, the vesting of the Esop process gets time-consuming and lengthy.
Blockchain-based Esops aim to solve this problem by automating the entire process.
Adds Seinberg: “As per the vesting schedule for a respective employee as specified by their employer, the Blockchain-based Esop is released automatically. Employees can access their funds, which were allocated in tokens, and since they (Blockchain-based Esops) are automated in nature, no one needs to give special permission, or wait for the signing authority to release the funds.”
Smart Contracts: Since the Esop is created using smart contracts on a Blockchain, the data relating to it can never be altered, hacked or modified even by the issuing company. This is because a Blockchain uses distributed ledger technology (DLT).
Says Edul Patel, CEO and co-founder, Mudrex, a Global Crypto Investing Platform: “Blockchain-based Esops are built on smart contracts. It means that the same process associated with conventional Esops gets replaced with a self-executing automated contract, minus all the hassles, thus simplifying the entire process in a few clicks. Employees can exercise their rights to vest or sell their part of shares within a set downtime period hassle-free, and much more conveniently.”
Less Bureaucracy: Since there is no requirement of seeking permission from the company’s Esop signing authority, employees can access their funds easily. “An employee can access their funds without permission from the signing authority, which is mandatory for the traditional Esop model,” adds Seinberg.
False Obligations: Blockchain-based Esops get executed automatically without any manual intervention. “It overcomes the challenges that few employees face in the start-up. In contrast, on earlier terminations or introduction of the new policy, their Esop is not allocated as per the commitment. Such false obligations will not happen, as they are vested and withdrawn automatically,” Seinberg further says.
In India, the same 30 per cent virtual digital assets (VDA) tax on cryptos will be applicable on these Blockchain-based Esops.
The price value of these Blockchain-based Esops may rise or fall due to market conditions, company fundamentals, or other factors like crypto volatility. So, by the time you sell them and convert them into fiat currency, the value may have dropped significantly.
Also, calculating the fair value of a Blockchain-based Esop may become very difficult, at times. For instance, the calculation of an NFT-based Esop will vary due to the fact that they are a unique token, and hence, different people will value them differently.
