Web3 companies are changing how they compensate their employees. Rather than relying solely on traditional equity instruments, some have started issuing employee stock ownership plan (ESOP) tokens. This provides faster liquidity, on-chain transparency, and direct employees’ participation in protocol growth without waiting for an initial public offering (IPO). Leading protocols such as Balancer, dYdX, Aave, and SushiSwap already reward their contributors through carefully designed vesting schedules.
However, token ESOPs introduce additional layers of accounting, compliance, and valuation complexity. As a result, CFOs and accountants must manage volatility, evolving regulatory environments, jurisdiction-specific tax laws, and the measurement of grants under IFRS 2 or ASC 718. This guide provides a complete, updated framework for handling token-based ESOPs from grant to disclosure.
What Are Token-Based ESOPs and How Do They Work?
Token ESOPs are compensation plans in which employees receive digital tokens rather than equity shares. Unlike traditional ESOPs, where vesting of equity or stock options depends solely on the employee’s period of employment, in token ESOPs, vesting can be time-based, performance-based, or smart contract-controlled.
However, a conventional ESOP is typically governed by securities regulations, and its value is measured by the company’s equity. Token ESOPs, on the other hand, may be classified as securities or utility assets depending on the jurisdiction. They are valued using either market prices for listed tokens or fair value models for unlisted tokens.
Tokens used in ESOPs fall into three main categories, including utility, governance, and stablecoins. Utility tokens grant access or usage rights on a platform, while governance tokens grant voting rights within a protocol or DAO. Another less common type of token is the stablecoin, which can be utilized for guaranteed-value compensation. It is, therefore, essential to determine the nature of the token being issued, as this has significant implications for its value and accounting requirements.
Also Read: What Are Social Tokens?
How Token Vesting Works
A common process for a token ESOP would start with a grant, in which a company awards a certain number of tokens to an employee, say 10,000. The grant date determines the fair value, and the vesting schedule would last 2 to 4 years, with monthly vesting increments. Often, a six to twelve-month cliff follows before any tokens are released to employees. After that, tokens would be credited to employee wallets and expensed over the vesting period under IFRS 2 or ASC 718.
In most Web3 teams, smart contracts are employed to facilitate vesting and ensure transparency. However, this raises issues with audit trails, as vesting transactions are performed on-chain without being reflected in accounting records. After defining the vesting mode, the next critical requirement is ensuring the ESOP meets regulatory, tax, and accounting standards across jurisdictions.
Compliance Requirements for Token-Based ESOPs
Token grants can trigger obligations under securities, tax, and employment laws across multiple jurisdictions. Therefore, improper structuring may result in penalties or reclassification of the offering as illegal.
Key compliance considerations include:
1. Securities Laws
A token may be considered a security if it meets the criteria outlined in the U.S. Howey Test. This test determines whether a prospectus is required, whether the ESOP must be registered, and which reporting obligations apply. For instance, a governance token tied to revenue rights may require securities filing.
2. Employment Classification
Web3 companies often work with contractors or DAO contributors. Misclassifying these workers could lead to regulatory fines. Restricted tokens, such as those subject to vesting, lockups, or performance conditions, are treated differently under accounting rules. Special attention is required if the employee is unable to sell the token or if liquidity is limited.
3. Accounting Standards
While IFRS 2 typically measures grant-date fair value at a single point in time, ASC 718 may require remeasurement until vesting. In some cases, IFRS allows volatility adjustments based on market inputs, whereas GAAP imposes stricter rules. Liability classification applies to cash-settled or variable tokens under both standards, with IFRS permitting revaluation and GAAP generally restricting it for equity instruments.
4. Tax Reporting
Compared to traditional ESOPs, token-based ESOP compliance is more complex. Securities filings may not always be needed, particularly for utility tokens. Vesting schedules often combine on-chain smart contracts with legal agreements. Tax reporting depends on the token’s fair value and liquidity. Global treatment is highly jurisdiction-specific. Accounting standards remain IFRS 2 or ASC 718, but token volatility makes reporting more challenging.
Also Read: Coin vs Token: What’s the Difference?
How to Value Token-Based ESOPs Accurately
In token-based ESOPs, valuation is a key challenge due to price volatility. Listed tokens are typically valued using the exchange price at the grant date. If multiple exchanges list the token, IFRS recommends using the principal market price.
For private or DAO tokens without a market, fair value models such as discounted cash flow, option-pricing, or third-party valuation reports are used. These models account for tokenomics, circulating supply, vesting cliffs, and utility or governance rights. Illiquid or locked tokens are rare and subject to discounts due to lack of marketability.
For example, a listed utility token such as MATIC can be valued at the grant-date market price. An unlisted governance token from a pre-launch DAO with a four-year vesting schedule requires fair-value modeling that includes DLOM and volatility adjustments. Under IFRS, grant-date fair value is locked in, while GAAP may allow revaluation until vesting if grant-date criteria are not fully met.
Accounting Treatment of Token-Based ESOPs Under IFRS and US GAAP
Expense recognition under IFRS 2 begins at the grant date and is amortized over the vesting period. ASC 718 follows similar rules but has stricter grant-date criteria. Tokens can be classified as equity-settled if they represent ownership or governance rights. They can also be cash-settled if paid in stablecoins or hybrids, which requires split accounting.
While IFRS allows revaluation of liability-classified tokens each reporting period, GAAP generally does not permit revaluation for equity instruments. However, auditors expect detailed token-level disclosures. These include the methodology for determining grant-date fair value, vesting schedules, performance conditions, unvested and forfeited tokens, treasury wallet balances, and token price sources such as CoinGecko and Chainlink oracles.
Reporting and Disclosure Obligations for Crypto ESOPs
When conducting financial audits or preparing reports for investors, companies must disclose token-based ESOPs. One crucial aspect is how the grant date fair value was measured, whether for listed or unlisted tokens. Companies are also required to record token grants, including the number of tokens granted, vesting terms, and any performance or service conditions attached to the grant.
It is also essential to record forfeitures and unvested tokens. This is because forfeitures and unvested tokens also affect the recognized expense. When the treasury currency is different from the reporting currency, appropriate translation techniques are required.
A practical example of a disclosure might read: “The company granted 250,000 governance tokens to employees under a four-year vesting schedule with a one-year cliff. Because the token was not publicly traded at the grant date, fair value was determined using a discounted cash flow model, adjusted for tokenomics and DLOM. The total share-based payment expense recognized for FY 2025 was ₹38,40,000.”
For audit readiness, companies can follow a simple checklist to ensure all reporting elements are covered:
- Document the fair value methodology and assumptions.
- Record the number of tokens granted and issuance dates.
- Detail vesting schedules, cliffs, and any performance conditions.
- Track forfeited or unvested tokens.
- Include treasury wallet balances and applicable currency translations.
- Reference token price sources such as exchanges or price oracles.
Given the complexity of these requirements, many teams rely on automated systems to track and report.
Also Read: What Is a Token in Cryptocurrency?
How KoinX Books Simplifies ESOP Compliance
Managing token ESOPs manually across wallets, chains, and valuation models is challenging. KoinX Books integrates wallet and smart contract data, automatically syncing token treasuries, vesting contracts, and employee distributions.
The platform tracks real-time and historical market prices for IFRS/GAAP reporting. Its dashboard provides a clear view of vesting schedules, grants, cliffs, and token unlocks. Audit-ready reporting templates allow export of grant-date valuations, expense recognition, revaluations (IFRS), and token-specific disclosures. This reduces manual effort and ensures compliance across teams.
Conclusion
Token-based ESOPs are transforming employee ownership in Web3. This approach assists in talent attraction and aligns incentives for the organization. Nevertheless, the level of accounting complexity associated with compliance and reporting is substantial and might require automation. KoinX Books enable the finance team to ensure all aspects of accounting for token-based ESOPs are accurate and transparent while providing time for strategic planning.
Frequently Asked Questions
How Are Token-Based ESOPs Different From Traditional Esops?
Token-based ESOPs use digital tokens instead of equity shares. Vesting, lockups, and cliffs are often implemented through smart contracts, which provide on-chain transparency but require additional accounting and tax compliance.
How Do You Determine The Fair Value Of A Token Grant?
For listed tokens, the market price at the grant or reporting date is used. For unlisted tokens, valuation methods such as discounted cash flow, option-pricing models, or DLOM-adjusted fair value are applied to reflect illiquidity. Documentation of all assumptions is essential for an audit.
Are Token-Based Esops Subject To Tax In Every Jurisdiction?
Generally, yes. Most jurisdictions treat token compensation as taxable employment income at vesting or exercise, though timing and valuation rules differ widely, requiring careful cross-border planning.
Can Private Web3 Startups Issue Token ESOPs Without Being Publicly Listed?
Yes. Many private startups issue token-based ESOPs before token generation or listing, relying on fair-value modeling, robust grant documentation, and periodic revaluation to comply with IFRS/GAAP.
How Does Koinx Books Help In Managing Token-Based Compensation Records?
KoinX Books automates valuation of token grants, tracks vesting and cliff schedules, posts accounting journal entries, generates IFRS/GAAP-compliant disclosures, and provides employee-level reporting, ensuring audit-ready records across entities.