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Danielle Varela

 Founder & CEO 

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Blockchain-based synthetic Equity: From action to impact for executive incentive programs


At first glance, they don't have much in common. And yet, the new alliance between blockchain technology and synthetic stocks looks promising. Blockchain is revolutionizing the dynamics of many industries and fields including total compensation - Finding, hiring and retaining the best employees is an ongoing and often daunting task for owners of closely held businesses. Consider a synthetic stock club.


A synthetic stock club is a way to incentivize and reward key employees based on their performance without diluting the ownership of the company. It does not require the transfer of actual equity, so the actual ownership does not change, but management and key employees can still benefit from the company's excellent performance.


Blockchain gives these programs a chance to experience meaningful improvements that benefit all stakeholders. The mechanics of the technology are not the issue here, but what matters is what it can deliver. Giving qualified employees the opportunity to receive some or all of their salary in the form of synthetic stock bonuses is an interesting proposition with great potential.


In a nutshell, the specificities of the company’s mission, on the one hand, and the specificities of the incentive compensation, on the other hand, are perfectly aligned. In this article from our Blockchain series, we'll explore the exciting world of synthetic assets. This brings us back to my first love: Finance.


Why Blockchain?


Blockchain is defined as a "trust protocol" that eliminates the need for third-party verification to confirm the stakeholders involved in a transaction and validate the execution of the value exchanged. Its implementation has the potential to radically change the field of human resources, both for companies and their employees. In other words, the critical question that should be answered for successful deployment is not "how" but rather "what needs to be done." It is clear that when this technology is deployed properly, it will bring significant benefits.


Tokenization, on the other hand, refers to a set of technological and legal procedures for transferring ownership rights of assets onto a blockchain. The main difference between traditional products and Web3 technology solutions is that they often offer more possibilities and are more accessible. This is especially true for synthetic assets, also known as Synths.


Tokenized stocks are securities that look like the common stock you buy on an exchange or in an IPO. The only difference is that these securities come in the form of digital tokens and can be purchased through a crypto-currency platform. These tokens are usually the result of the manufacturing process involving a recognized financial institution and a custodian responsible for purchasing the corresponding shares, which will be held in reserve. The value of the token corresponds to the value of the shares stored in reserve. The tokens are then listed on a crypto-currency exchange.

A synthetic stock t is simply a tokenized derivative that mimics the value of another stock.


The power of synthetic crypto assets becomes more and more apparent the closer you look. Consider the possibility that anything - not just assets like stocks - could be represented by a synthetic asset token and, as a result, entered into the blockchain.

Tokenizing business elements such as performance and innovation is a new way for companies to achieve their goals. It involves transferring business values to a digital format, in the form of tokens. These tokens then represent a value within the organization, with optimal transparency and audibility. This makes ''Synthetic Equity'' unique on the chain. The distribution of tokens can then be done according to the position held by each employee to ensure a fair distribution of incentives.


Is the concept of synthetic equity new?


Not really. Synthetic equity refers to a set of strategies and instruments frequently used to provide employees with the financial benefits of stock ownership without the real shares and their ownership changing hands. Understanding the concept of synthetic equity involves examining how real equity works and using the necessary tools in this toolkit. Synthetic equity (that is) is equity that works, talks and looks like real equity, but is not.


Since there are many types of stock-based compensation, you may wonder why an employer would choose phantom stock over other stock-based compensation options. What all these options have in common is that they reward employees for their loyalty and hard work. As with other types of compensation, phantom stock is an excellent solution for those seeking a more advanced reward system that goes beyond the traditional salary/bonus structure and shares the economic value of the stock, but not the stock itself.


Benefits of Synthetic Shares


Synthetic shares are a way for a company to find, reward and retain valuable people. They do not involve any debt, since the significant participants do not acquire shares as do the full shareholders. They generally have limited rights, as they do not have voting rights or the right to profits. The programs also offer flexibility in the timing of vesting and will not dilute the total percentage of beneficial owners when an award is made. In addition, they are not subject to shareholder agreements or buy-sell provisions.


Synthetic stock option plans offer companies a variety of advantages and disadvantages that require careful consideration. Companies need to consider several aspects, including the valuation method used, the rules for vesting options, how to deal with liquidity issues, what conditions must be met to be eligible and what governance rights are granted. These are all decisions that greatly influence the final synthetic stock plan.


However, the usual fluctuations in the company's shares can create a variable liability, which can be problematic for the company's balance sheet. In addition, the company must inform all participants in its plan on an annual basis, and frequently calls upon an independent evaluator to perform a point-in-time assessment of the plan's content.


Conclusion


Long-term executive compensation is often expressed as a 10-25% share of the overall value of the company, making it one of the largest investments ever made by a business owner. New solutions have been developed that reflect the best elements of using equity as an incentive without the potential downside from a business perspective. The use of blockchain technology offers a more astute solution that allows for a simplified and pragmatic design, execution of LTIPs.


These plans provide a technology-enhanced version of long-term incentives, which are considered the cornerstone of executive compensation. Companies often evaluate the fairness of total compensation, but good planning requires meeting and exceeding business requirements, and this is where synthetic equity can excel.


It is then, in the execution of these action plans, that we make a real impact - our lives change and so do our companies. And as Simon Sinek said, “Genius is in the idea. Impact, however, comes from action.”



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