Token Pay Agreements Require More Than a Vesting Schedule

Crypto companies promising tokens to employees and advisors need agreements that address delayed launches, changing allocations and departures, according to a commentary by Michael Handelsman for Kelman Law published by Bitcoin.com News. The opinion article examines compensation arrangements rather than announcing a new rule or enforcement action.

Handelsman argues that agreements should identify the entity responsible for providing tokens and precisely define the award. Where an employer and token issuer are separate entities, the documents should explain responsibility for delivery. Percentage-based allocations also need a defined supply measurement rather than an open-ended promise.

The commentary distinguishes earning an award from receiving tokens and being allowed to sell them. Those stages can occur at different times, leaving a departing worker with vested rights but no delivered assets. Agreements should therefore address launch delays and the treatment of earned but undelivered compensation.

For U.S. employees, wage-payment rules present a separate issue from contractual entitlement. Federal regulations generally require prescribed minimum wages and overtime compensation to be paid in cash or a negotiable instrument payable at par, subject to applicable exceptions. A project's token promise should not be assumed to discharge those obligations.

The Department of Labor also explains that workers covered by both federal and state minimum-wage laws are entitled to the higher applicable minimum. That makes the worker's location relevant alongside the award agreement. A token incentive cannot be evaluated solely by reference to the project's preferred compensation structure.

Securities requirements create another distinct compliance question when an award involves securities. The Securities and Exchange Commission describes Rule 701 as an exemption covering certain compensatory sales to employees, consultants and advisors. It is not available to companies subject to Exchange Act reporting requirements, and its availability should not be confused with a blanket exemption for token compensation.

The SEC further explains that Rule 701 has limits and disclosure requirements. Securities issued under the rule remain restricted and cannot necessarily be freely traded without registration or another exemption. Consequently, completing a service-based vesting schedule does not, by itself, establish that a recipient can immediately sell an award.

Tax treatment introduces a further distinction between receiving compensation and converting it into cash. Under IRS Notice 2014-21, a taxpayer receiving convertible virtual currency for services generally includes its U.S.-dollar fair market value in income when received. The notice also explains that virtual currency paid as employee wages is subject to federal income-tax withholding and employment taxes and must be reported on Form W-2.

The same IRS notice treats payments to independent contractors as potentially subject to self-employment tax and applicable information-reporting requirements. These obligations mean that the payment asset does not remove ordinary compensation reporting responsibilities. The notice's treatment of received currency should not be taken as resolving every arrangement involving restricted awards or promises of future tokens.

Handelsman's closing recommendation is to review the proposed allocation, issuance plan, entity structure and existing service documents together before proceeding. The practical next step is to reconcile the compensation agreement with delivery mechanics and applicable legal obligations, rather than treating the vesting schedule as the complete arrangement.