What are Vesting and Cliffs, And Why do they matter?
Beyond Seed Rounds, token sales are perhaps the most common way for blockchain projects to raise more capital to accelerate or build more innovative and ambitious components of the project.
A crowdsale event is a method for blockchain projects to sell their tokens to the wider public. People who want to support a new token can participate in the crowdfund. Each participant earns tokens equal to the amount they contributed at the end of the crowdfunding campaign. Some organizations, however, choose to vest a certain number of tokens.
What are Cliffs?
Cliffs are known as the period of time that must pass before the release of the tokens starts. The duration of the cliffs can vary depending on the purpose of an allocation.
The cliff for tokens awarded to a project's investors and advisers, may be 16 months, while the one for marketing and collaborations could be 3 months. The vesting period begins when the cliff period has ended.
What is Vesting?
When we talk about vesting, we refer to a process by which assets (tokens most of the time) are locked and released slowly over a certain period of time.It's a certain quantity of tokens set aside for the team, partners, advisers, and anyone who contribute to the project's development for a set period of time.
Startups that leverage blockchain technology, for example, can reserve a set quantity of tokens: the team can reserve 15% of coins, for example, which will be gradually distributed once a month/quarter/year during the project process for financial objectives.
Until those assets are unlocked, they cannot be sold, transferred, or transacted. Because this release occurs gradually, it reduces any market shock caused by a significant amount of tokens being unlocked at a single moment in time.
Vesting is typically used to demonstrate that the team is committed to the project and will continue to work on its progress.
This is an example of a vesting schedule: 20% of the vested tokens are released in six months, 50% in one year, and 100% in two years. This structure is advantageous because if a single or many companies owned, say, 20% of all tokens produced from the date of the Token Generation Event (TGE), they could easily cause supply swings that would be damaging to the token ecosystem and price. In layman's words, this provides a clear danger for the provided token's stability.
Why is Vesting essential?
As the token vesting process becomes more complicated and more tokens are put aside for firms, it is critical for projects to properly describe how tokens are distributed to founders, early investors, and other stakeholders. Investors want to know that the project team has enough skin in the game without having too much influence over the token. Details on founder vesting timelines and cliffs should also be provided explicitly.
Why are we telling you all this?
Due to the early years nature of many of the Crypto, NFT, Gaming & Blockchain clients we work with, they choose to reward their employees who join early on and become crucial to the launch of the project. We appreciate that this form of equity bonus is new to some of our valued candidates, so we wanted to share this simple explanation with you.
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