Deal Breaker: Acceptable Compensation Scheme
Addressing one of the biggest PIP-38 flaws, this post lays out a reasonable compensation scheme for Michael. It’s transparent, predictable, eliminates arbitrariness and vagueness, the numbers need not be exorbitant, and it aligns his financial interests with those of the Foundation and the DAO.
Outstanding Problems with PIP-38
I’ve been discussing PIP-38 with several members of the DAO who are not satisfied with the latest version of the proposal. While we align with the spirit of PIP-38 - moving fast and creating value for token holders - we suggest creating a situation where Michael has the autonomy to live and die by his performance while not jeopardizing the future of the project if his gamble were to fail. Further, we seek to maintain decentralization, thus minimizing centralization and regulatory risks.
We would like to see the following bullets addressed with simple and agreeable mechanisms:
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Compensation needs to be laid out in advance and transparent.
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Financial alignment can and should be achieved with Michael.
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The DAO shouldn’t be eliminated, but instead be equipped to provide appropriate oversight and continue to function except where doing so conflicts with the mechanisms needed to achieve the goals of PIP-38.
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A group of trusted individuals should be appointed to provide day-to-day oversight of PIP-38.
The focus of this post is compensation and alignment (points 1-2). Since Michael is preparing a revised proposal that includes adding two more directors for oversight, we will delay our discussion of points 3-4 till after we have reviewed the revised PIP.
Final Proposal Version Must Await Further Feedback
The imminent new version of PIP-38 should be subject to review, feedback, and discussion. We strongly urge Michael to hold off finalizing his proposal and any amendments to the Constitution and Articles of Association to take account of potential revisions based on this post and anticipated community input on his revised proposal. In other words, the revised PIP should NOT be a final version. (It would make sense, therefore, to publish it as a pre-proposal.)
Compensation & Alignment
PIP-38 lacks significant detail regarding the amount and usage of funds. This is particularly concerning as this is a massive deviation from the DAO’s track record with approved proposals.
Win-Lose
One of the major concerns with the compensation is that the outcome of PIP-38 can be win-lose for token holders and members of the Pocket DAO while Michael has only upside. As he had early liquidity, he has been able to cash out of some of his POKT position (as is his right). However, this means that POKT could still be a huge success for him personally even if PIP-38 crashes and burns the entire protocol and token. Further, Michael still has tens of millions of liquid tokens (as he reported on a community call) which he could dump as the price increases (even if it never reaches the PIP-38 targets), creating a win out of a loss.
Proposed Solutions
PIP-38 is ambitious in its goals and the Foundation could require extra funds to achieve them. We propose an alternative compensation structure where Michael receives massive upside for his work, but at the same time financially aligns himself with the project today and for the duration of PIP-38.
A Lockup
We suggest that Michael self-report all tokens in his possession/ownership to the DAO and “lock his POKT” with staking providers until PIP-38 is completed, he steps down, or is removed as Foundation director. This minimizes the risk of Michael using economics to pump his own bags or use the public for exit liquidity.
An Option
Instead of the currently proposed compensation mechanism, we suggest accomplishing this by offering Michael a “threshold” option. The option would be based on a contract (drawn up by PNF lawyers) between the Foundation and Michael and would provide that Michael pay PNF a premium for the right to buy tokens cheaply if the POKT price rises above the targets. Thus, Michael would pay up front for the right to buy POKT at a highly profitable rate when he achieves given milestones - a win-win for Michael and the project!
To illustrate, let’s say that the premium for the option is $1M in exchange for the option to buy 50M tokens at a price of $0.10. The right to purchase is determined by thresholds set out in the contract. Using the example of thresholds established by PIP-38 - $0.5, $1.00, and $3.00 - the right to buy would be divided evenly across those thresholds (33.3% at $0.5, 33.3% at $1.00, 33.3% at $3.00). In this example, at the first milestone Michael would effectively receive 16.5M POKT - worth $8.25M - at a price of $1.65M (plus the cost of the original premium). The lower the strike price stipulated by the option, the greater his profit. The strike price is an opportunity for PNF/DAO to refill its coffers that will inevitably be depleted in the process of PIP-38. Thus, the strike price should be a reasonable middle ground where PNF is able to receive some cash for the tokens but where Michael still has amazing upside. The suggested strike price of $0.1 seems to meet those criteria.
This mechanism has the effect of granting Michael a huge win at each threshold and simultaneously capitalizing PNF, creating a win-win (POKT price is up, the Foundation is capitalized), or a lose-lose scenario (POKT price doesn’t appreciate, though the Foundation/DAO loss might be mitigated if anything is left of the premium).
Contract small print:
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To exercise the POKT purchase option, the 30-day TWAP (time-weighted average price) must be at or above each price-target threshold.
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In the event that Michael is unable to achieve all the POKT price targets, the tokens minted to pay for Michael’s POKT would be repurposed and the Foundation would retain any remaining fiat paid for the option.
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The option would be non-transferable and non-assignable to other parties (he can’t sell or gift it).
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If Michael were to sell POKT during the lockup, he would immediately lose the right to exercise further threshold options and he’d be liable to a cash penalty for breach of contract.
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The exercise period of the option would lapse two years from the date the contract takes effect (or other agreed time period), or when Michael ceases to be a director of the Foundation, whichever comes first. In the event that a threshold is met, Michael would have the right to exercise the corresponding buy option for the life of the contract (unmet thresholds would be forfeit).
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Exercise of options must wait till 60 days from the passage of this proposal to avoid a situation where there aren’t enough tokens to cover the option.
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If the PIP-38 inflation scheme generates for the DAO less than the number of tokens in the option, then the option contract is null and void. The rationale is the DAO should not have to be “out of pocket” for the plan if Michael fails to create the tokens necessary to see it through (which appears to be one of the primary motivations of the inflation increase according to the modelling we’ve reviewed).
Other option-style mechanisms could work, and we are not opposed to those, but what we seek is alignment between the Foundation, POKT, and Michael.