Tokenized stock options

1. ESOP agreements via smart contracts: A smart contract, like any other physical contract, lays forth the terms and conditions of an agreement. However, unlike a physical contract, the rules of a smart contract are implemented as code on a blockchain such as Ethereum/ any other proprietary blockchain. Smart contract maintains issuance records, book keeping, keeps track of the cliff and vesting periods of the employees, handles conversions of stock options into shares in the event of and an IPO/ ICO.
2. Smart contract algorithm: From the start to end of the employment the smart contract keeps a check on token distribution to the employees, each event of the employee like start of employment, promotions, vesting, abrupt exits are hard coded in the smart contract, the states the smart contracts will be in are explained below:

• Waiting for signatures: In this state, the employee agrees to terms & conditions of employment by signing the contract.
• Start of employment: in this state, the employee starts & remains employed, this states marks the start of his/ her vesting schedule.
• Option exercised: In this state, the employee exercised his/ her options, the exercised tokens will be credited to employee wallet.
• Employment terminated: This state marks the end of employment, the employees vested tokens are credited as per the agreements in case of fair exit of employee , if the employee leaves the company abruptly then the tokens are credited back to company wallet.
1. Selection of Blockchain: The choice of blockchain where underlying asset/ equity tokens are offered will have a significant impact from a technical point of view. The blockchain infrastructure must have security tokenization features and also extent support to custodians, secondary exchanges, compliance etc., and must have security features like token burn, whitelist inclusion, able to restrict fraudulent transactions and transfers above a certain limit.
2. Selection of Token standards: For the purpose of equity tokenization, different token standards in the market can be used for issuing/ generating a token. The token standards consist of list of rules regarding total token supply, how these tokens can be transferred and how their transactions are approved, these set of rules lay the foundations to ensure compatibility between the security tokens and the smart contract that issues them. The most widespread token standard used is ERC-20, which is compatible with Ethereum Blockchain.
3. D-App/ ESOP Manager: is the front-end application on a decentralized network that allows the user (company admin) to view and manage distribution of stock options. Analogues to a web application, the D-App is a user interface to the underlying logics in the smart contracts with additional features like allocation of tokens with security key, authorization, manage issuance and records of the token holders etc.,

1. Assessment of underlying security: The outcome helps the start-ups to gauge how many tokens in terms of value they can issue.
2. Approval of security prospectus: Approvals from financial authorities is required by start-ups before issuing security tokens on secondary markets.
3. Whitepaper publication: Helps investors/ token purchasers understand what the start-up is developing and how it will progress in future.
4. Building a tokenization ecosystem: Involves several parties who generate, issue, manage, store and aid in trading of security tokens.

The security token ecosystem is decentralized network which is technically superior, multi layered and complex in nature, tokenization ecosystem involves many parties such as security token issuance providers, exchanges, custodians, legal, compliance etc., adopting end to end solutions starting from token issuance to token distribution for the successful security token offerings

1. Token issuance platform: Security token issuance platforms provides technological framework and infrastructure to enables companies/ individuals to launch security tokens backed by their assets, they make burdensome process of launching security tokens effortless and accessible to the companies who wants to issue their tokenized securities on the secondary markets.
2. Exchanges: These trading platforms can serve as both primary and secondary markets for investors/ traders that enables buy/ sell of security tokens, enhance liquidity, enable access to capital and bridge the gap between buyers/ sellers. The exchange must be compliant with the regulatory frame work and must obtain permits/ licenses from the financial authorities of the operating jurisdictions.
3. Custodians: Custodians are the third-party service providers who help investors to hold their crypto securities/ assets. Custodians provide technological and user-friendly safekeeping platform with which an investor can just log-in to their portal to keep track of his/ her credit and debit balances the platforms are developed based on encrypted algorithms and are only accessible with the security keys/ hardware ledgers, the security measures are necessary to protect the clients against theft and loss.
4. Legal: When a company is involved with securities issuance to investors legal becomes the crucial aspect for any company, in case of security token offering legal firms aid the start-ups to stay complaint with the security laws of respective jurisdictions from the inception they study the overall business goals, help in creating legal documentation, establish legal entity, token issuance consulting, ongoing legal advice, review of any documents to be published, ensure protection of company against any depositions etc.,
5. Compliance providers: Compliance providers are usually integrated within the issuance platforms, or if they are an independent company, they provide APIs to integrate seamlessly with some of the issuance platforms, the main functions of compliance providers include: Know your customer checks (KYC), Anti money laundering (AML), Cap table management, verification of asset transfers and maintaining a whitelist of investors etc.,