Token Compensation & Tax Compliance with Dominika Stobiecka from Toku

[00:00:00] Dominika: So that's a very big distinction because a lot of projects in crypto are, like labeling themselves as a payroll product where they are actually a payments product.

[00:00:10] Dominika: One of the most important requirements when you are looking for a payroll provider is to ensure that they can deal with crypto. So that means are they able to calculate tax withholding on crypto? 

[00:00:22] Dominika: Are they able to run tax calculations in real time, you know, but If we run tax calculations now by the time I end this sentence tax calculations on tokens might change It's a very different world than if you are running a crypto payroll. 

[00:00:37] Umar: Welcome to The Accountant Quits podcast, where we help accounting and finance professionals learn how to manage a business using crypto. Today's topic is on token compensation and tax compliance. Now you might have heard payroll platforms like Deel, Oyster, or Remote.Com that allow you to have access to a global pool of talent.

[00:00:59] Umar: But the issue with them is that they have been built for fiat and not crypto. Some of the emerging Web3 platforms for payroll allow you to pay the net salary in crypto. But if you're a Web3 team, you'd be struggling on how to do tax withholding for all your token based compensation. 

[00:01:18] Umar: This is where Toku comes in, an all in one crypto native solution to help you manage employment, stablecoins, and native token payroll, and token grant administration for your international team in 100 plus countries.

[00:01:33] Umar: Some of their clients include Protocol Labs, Polygon, Near, Hedera, Worldcoin, Matterlabs, Eigenlayer, and a hundred other crypto projects and foundations. And for this episode today, I have the pleasure to have Dominika Stobiecka, the CEO and Co-Founder at Toku, who will help us to learn token-based compensation and tax compliance.

[00:01:57] Umar: Lastly, if you're new here, I'd really appreciate if you could help us grow this channel by liking this video and subscribing to our channel. 

[00:02:04] Umar: Now enjoy the conversation with Dominika.

[00:02:06] Dominika: Yeah. Thank you for having me a long time listener. First time guest. Very excited!

[00:02:11] Umar: I'm very happy to have you finally. Dom to start. Can you share a little bit about your background, how you became interested with blockchain and the story that led you to Co-Founding Toku?

[00:02:24] Dominika: Yeah, sure! So as probably some people can guess from my name and surname. I'm originally from Poland. So growing up there, you definitely get a unique perspective on economics and finance, especially, given our history. But I also moved a lot throughout my, teenage years.

[00:02:41] Dominika: And then I keep on going. And this always gave me a very unique perspective on how different countries work and, all of the good and all of the bad of moving around a lot. And that also was very helpful in terms of my career. I worked in investment banking and in central banks as well on monetary policy research. So yeah, I had a foot in both private and public sector and also just purely from personal view. I experienced lot of different realities. And that was an eye opener. And during that time as well, I started playing with crypto and, I wasn't alone, a lot of people around me were doing it as well.

[00:03:20] Dominika: And I think that a lot of us still are fascinated by the technology and what it could mean for the future of finance. And, here's the thing, like working in those traditional institutions, and especially for the government made me realize just how much we need a new financial system.

[00:03:36] Dominika: When you're on the inside. You really see all of the inefficiencies, the outdated processes and the barriers that exist, in traditional finance. And crypto is... and I fundamentally believe that is the solution. At the same time, just okay, what how do we get from there to building a company here?

[00:03:54] Dominika: Looking from a lens of of what I've did in my past life me and my Co-Founder knew that there is a regulatory wave that's coming to crypto. It was, and still to some degree is a little bit of a wild west. When you are building something that is going to change the world it's hard to not think that regulators will take notice.

[00:04:13] Dominika: So we knew that we want to build a company that solves the fundamental problems in crypto. And at the same time a company that's positioned to become relevant as those regulatory waves start to hit. And so that brought us to building Toku.

[00:04:30] Umar: Great. I want to start the conversation with the topic of: Should Web3 projects have a token or no token? We often hear that the core tenet of any Web3 project is a token and Web3 is all about ownership. It makes sense for protocols to have tokens in order to meet certain decentralization milestones, distribute governance, and incentivize developers to contribute. So yes, tokens incentivizes good behavior, but I want to ask you which categories of projects should really offer a token and which ones actually should not?

[00:05:05] Dominika: Yeah, that's a great question. And I've been thinking about it a lot, partially because at Toku we extensively work with pre-launch projects and support them throughout the launch and later on. But also just because this is a very big topic and I think a lot of people have opinions and definitely Twitter has. I think that actually a question that is related, but it's more interesting to me is the question of how do we make it easier for any project to launch a token?

[00:05:34] Dominika: And for it to be less of a risk and less of a time suck because I believe that the market will determine which projects should have a token and which tokens have, token market fit and which don't. I don't think that there is an easy way of categorizing those. I think that at the end of the day I want to see more projects building cool stuff with tokens.

[00:05:58] Dominika: And I think that right now there's a lot of different things that make it difficult leading to, only select group of projects launching a token. And then, this being a risky and long term project that sucks up a lot of resources and also time. So yeah, I think that I want to see amazing projects popping up left and right and everyone launching a token and then letting the market and real users determine which of those tokens make sense and don't. I think that right now we are still in a process where for projects that are launching a token, it's essentially building a car from scratch every time. And instead, what I would like to see is. Projects being able to get a car and a driver and ask the questions.

[00:06:42] Dominika: Where do you want to go? And I think that there is still a little bit of work to be done from regulatory standpoint, from collaborations between different parties, lawyers, 

[00:06:53] Dominika: token grant administrations like Toku, accountants, market makers. In order to build essentially like a platform to make it easier for everyone.

[00:07:03] Dominika: And yeah, I think that will get us to a point where there will be a lot more innovation from product perspective and, again I think that there's a lot of cool stuff that can be built, but just there are still the barriers, the red tape. And when I see our clients, I just see the really tremendous amount of effort and distractions that come with launching a token.

[00:07:24] Dominika: So yeah, I think that's a much bigger and much more urgent question to be solved.

[00:07:30] Umar: Having the right mix of crypto and fiat allocation and of course having the right tools to administer them. It's an important question for Web3 teams to ask themselves from the get go to ensure they have a motivated team down the line. So in terms of compensation trends from Web3 companies. What are some of the maybe benchmarks between cash and tokens in total compensation?

[00:07:55] Umar: And, maybe a follow up to that would be should employees be given the freedom to choose the allocation between tokens and cash for their compensation?

[00:08:06] Dominika: Yeah, I think that there's no one size fits all solutions still. We are definitely seeing some trends emerge. And I think that if I really had to give an answer, it would be that most companies are leaning somewhere around a 60:40 split or 70:30 split of cash to tokens. But, we are talking about projects that are hiring full-time employees that are contributing full-time and like in a sort of traditional employment sense.

[00:08:34] Dominika: So those are the folks that would be brought from tech companies or who previously worked for startups. And of course, if we took a look at the DAOs, we would see a different model and more partial project based work as well. So just focusing specifically at the, companies hiring a full-time employee, they tend to compete for this talent that would otherwise go to a startup. And so we are seeing sort of similar metrics there as well.

[00:08:59] Dominika: But of course, the earlier the project, the bigger that token allocation. And then one of the biggest consideration is also when it comes to the base salary. So purely the month to month or bi-weekly salary that people are getting. We see that portion being slightly, you know, sort of up for some flexibility with some of our clients, or some of our employees that are working for our clients, looking to have some split between fiat and stablecoins.

[00:09:29] Dominika: And then a native token would come as a, long term incentive award with some vesting and lockup component. And so from our standpoint, we are enabling both fiat and stablecoin payroll with the caveat that in some jurisdictions you have minimum wage requirements that have to be met in fiat. But otherwise, everything else is up for that employee and employer discussion. And we are very excited to make it possible for anyone to have that flexibility. But yeah, that's a little bit of trends at a high level. 

[00:10:01] Umar: Okay, so good point you bring forward about the minimum wage requirements in fiat. Because I could have, like a young degen coming and saying: "Hey I just want to get paid in crypto." Because maybe there's an upcoming bull market and prices is gonna soar perhaps. And the problem is like further down the line is they could end up with quite a disproportionate package as compared to like the other employees. And maybe that could demoralize others. So it's a good point that you bring forward.

[00:10:29] Dominika: Yeah. And then, to react to your comment obviously there is a lot more flexibility that you have in terms of structuring compensation package for a contractor versus full-time employee. With contractors, you have much more flexibility in terms of doing it in a way that meets their expectations.

[00:10:47] Dominika: But at the same time, contractors have this more sort of temporary relationship to a company. So, we see some contractors getting long term incentive awards in a native token, but otherwise, probably for a majority of those people, they would see their fiat or stablecoins as a way of getting compensated.

[00:11:07] Dominika: And to your point about this bull market. Yeah, I think during bull markets, people are really excited about refreshing their token chart, a token price chart. What comes with it is obviously also increased tax withholding. So, that's something to keep in mind to get you a little bit more grounded.

[00:11:26] Dominika: As you are getting excited and again, tax withholding on the applicable for employees. Contractors have to deal with that on their own.

[00:11:33] Umar: That's a good segue onto the next question. Which is, yeah, a little bit about tax. So for the listeners listening and they want to set up token compensation. Having a basic understanding of the tax implications, as you just pointed out is essential. So for example, you'd need to start by classifying the tax status of the employee. Is it a full-time?

[00:11:54] Umar: Is it a contractor? Is it resident, non-resident, et cetera. What are some of the deeper considerations of implementing an international token compensation program?

[00:12:05] Dominika: Yeah, this could be, a whole podcast series running for many years, but, in a nutshell, it really comes down to legal and regulatory compliance. So what is the classification of a token? Is the token classified as a security or not? What are the implications on the employment laws, right?

[00:12:25] Dominika: If it's an employee in country A versus country B, it might come with very different regulatory expectations and, the project needs to think through this before granting those tokens data privacy as well in some cases and a disclosure about being a recipient of a grant has to be shared with the regulators, which, exposes that information, obviously, to a lot more parties. 

[00:12:50] Dominika: Tax implications. That's a really big one. There is an income tax. There is a capital gains tax, social security contributions. Again, this really will depend on the country and on the specific status of the worker. So full-time employee in Argentina versus a contractor in Argentina will be treated very differently.

[00:13:11] Dominika: And then really finally it comes down also to the vesting schedule and the type of the grant. So the vesting schedule lockup period intersecting that with the type of a grant. So whether that's a restricted token unit, restricted token agreement, token option. All of those different structures have their own implications in a specific jurisdiction where the recipient might be.

[00:13:33] Dominika: So when we are working with projects that are structuring those token compensation plans, like the first thing we do is a comprehensive audit of all of the people that are going to receive token compensation. Where are they based and what is the type of a grant that they will be receiving? Because this allows us to map different regulatory

[00:13:55] Dominika: obligations that either we have as an employer of record or that the project will have if they are hiring people directly.

[00:14:02] Umar: So these different token compensation instruments you just pointed out, like: restricted token awards, restricted token units, RTUs, or token options. What actually boils down to a team choosing one of these instruments? Is it also a jurisdiction? Like, one of these methods might be a little bit more popular in one jurisdiction. How should they go along to choose these different types of instruments?

[00:14:30] Dominika: Yeah, so the first question is, what is the stage of the project? We see most pre-launch projects or very early stage choosing restricted token agreements. Especially if the team or the founders are based in the U.S. where they can structure the grant in a way that allows people to file 83(b) election and be taxed on the value of the tokens at the grant, which usually pre-launch or around the token generation event is essentially nominal.

[00:15:02] Dominika: And then outside of the U.S. The other jurisdiction where sort of mimicking or replicating that same structure is possible would be U.K. Section S431 enables people to be able to pay taxes up front on the ground. So that's only possible in very limited number of countries and also only prelaunch where the valuation of the token is really low.

[00:15:27] Dominika: And then after that, and everywhere else, most of the companies opt to go with restricted token unit. Restricted token unit in most places creates taxable events every time there is either vesting or unlock. It really depends on, the jurisdiction, but we are distinguishing between vesting, unlock and the transfer of tokens.

[00:15:50] Dominika: One of those three will be relevant in a specific jurisdictions. So that allows people to pay taxes every month. So if their grant vest every month, there would be a monthly taxable event. So it's smooths out the process throughout three, four years, depending on the length of the grant. We see token options occasionally.

[00:16:10] Dominika: It's a fairly difficult type of an agreement, but it can be. it can be structured in a way where it gives a lot of flexibility to the employee in terms of them being able to choose when they exercise and when they create a taxable event. So token option would create a taxable event in most places at the time where the employee exercises.

[00:16:33] Dominika: So it gives you flexibility to choose the right moment to doing that. There is a sort of emerging almost like field of creative token grant structuring, where people are also using token appreciation rights, phantom tokens, cash settled token grants, and so on.

[00:16:50] Dominika: So there's a lot of new structures coming as well. And each of them, combined with a specific jurisdiction would create a new set of tax obligations.

[00:17:00] Umar: Before we continue, we'll take a quick commercial break from our sponsor. 

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[00:19:04] Umar: As you rightly said earlier, this whole podcast could be just on this topic. So for the listeners, if you want to learn more about what Dom just described around different token compensation instrument and their tax implications. Toku has published an excellent guide called Token Compensation Primer, which is available at: toku.com/toku-primer I will share it in the show notes to make it easier for you. So this is an excellent guide and it captures everything that you'd have to know for tax and which method to actually choose.

[00:19:37] Umar: The next topic Dom, is about EOR and PEO services. Last month, you wrote an extensive guide on theaccountantquits.com on employer of record services for crypto. I'd like to bring forward some of the content that you shared in this article. Even though I had previously heard of platforms like Deel a few months ago. I didn't know what EOR services were. It might be the case for our listeners as well. So could you explain what an EOR is, some of their co-functions and when should a company consider working with an EOR service provider? 

[00:20:16] Dominika: Yeah. So EOR stands for Employer of Record and you can think about it as a sort of superpower, HR department, that can hire people anywhere you want in the world and make sure that they get paid, legally and compliantly. So that's really cool. But, it comes with its own set of sort of questions. And each company needs to determine that. Yeah. Yeah. Yeah. Whether it makes sense for them to engage an EOR, and if so, which one? There's a lot of traditional EORs, some of them you mentioned. Not all of them, very few of them actually can meet requirements that a typical crypto company would have.

[00:20:55] Dominika: So an EOR is essentially an employer on paper. They assume all of the obligations of an employer in the local jurisdiction. They have a local entity, they have a license, they administer payroll, they administer benefits, and it's essentially ensure that your employee in the jurisdiction has the same experience as if they were hired by a company, next door to where they live.

[00:21:19] Dominika: So that's a little bit for, what an EOR is and to your question about an EOR for crypto. One of the fundamental things that every crypto company usually would have is a very distributed global team, and then Token compensation, whether that's a stable coin payroll or long term incentive token grant those come with their own challenges and have to be treated properly for payroll.

[00:21:45] Dominika: And traditional EORs are not able to understand tokens sufficiently well. And they also don't have the on chain infrastructure to be able to ensure the proper flow of funds. And also, more importantly, the appropriate tax withholding on tokens. So that's where, there is a definitely a need for a crypto native solution.

[00:22:08] Dominika: This is something that we are building, but, ultimately, I think that the key questions to ask if you are a company looking to do it is: Are you going to be hiring locally? internationally? Do you want to set up your own entities in every country that you will hire people? Is this sustainable?

[00:22:28] Dominika: Is this, something that you have the right people on the team to manage from HR standpoint, from payroll standpoint, from finance standpoint? And then how fast are you able to go? Usually the process of establishing your own entity banking relationships and everything that is needed for you to legally operate in a country, can take months.

[00:22:48] Dominika: So if you want to hire someone tomorrow, that's probably not the right fit. But if you choose to hire everyone in one place that might be a more cost effective solution. So yeah, that's a little bit of background there. And let me know if you want to deep dive on any of those.

[00:23:02] Umar: Maybe one of the follow up would be like for the company's perspective, when to choose whether they want to hire that person as a contractor or as an employee.

[00:23:13] Dominika: Yeah. So this depends on a lot of different things. One thing is just a preference, right? Like, what is the project? What is the role? And how important it is for this person to be, classified as an employee or a contractor. A lot of people have personal preferences. Usually we probably see more.

[00:23:33] Dominika: People who come from traditional companies that want stability and want to make sure that they have tax withholding done, access to pension, social security, they can take maternity leave, paternity leave, and so on. Those are the people that would likely want to be full-time employees. On the other hand, we have people who are, more digital nomads who want to have the flexibility, who have the tax advisor or are, capable of doing their taxes on their own and want to maintain usually lower taxes, but also obviously at the same time they have to manage everything on their own.

[00:24:12] Dominika: So this is one aspect is just purely what is the role and the person in front of you that you want to hire? What is their personal preference? And then the second topic would be compliance. So it would be very difficult to justify to German labor authority, bringing your CFO as a contractor.

[00:24:31] Dominika: So usually we see in different jurisdictions, different spectrum of requirements when it comes to worker classification with Germany, UK, most countries in Europe having very strict regulations when it comes to who can be classified as a contractor and who shouldn't. A lot of those comes with fine and penalties for companies that try to, circumvent those laws. 

[00:24:53] Dominika: And then, another important point is that if you are working with someone and someone is engaged with the project for a really long time, let's say three, four or five years, they are receiving long term token compensation or equity. Again, very difficult to justify that this is just someone who is should be a contractor.

[00:25:12] Dominika: So it comes down to jurisdiction, type of a role, length of the engagement. And yeah, that would then determine the classification besides, just personal preference.

[00:25:24] Umar: Very clear. Thanks for clarifying that. Now, some companies in Web3, they claim to offer payroll, but I'd like the listeners to understand the true experience of what a payroll product should look like. One of the required features for payroll is ensuring social deductions are calculated and deducted correctly. In the case of Web3 teams paying in crypto, that would mean converting to fiat, taking out all the social deductions, and then converting back to crypto for net pay, and offering that employee or contractor their pay stub. Now in the article you wrote, that crypto guide, you listed some of the questions these teams would look for in an EOR partner.

[00:26:06] Umar: Could you go through some of these essential features?

[00:26:10] Dominika: Yeah. So a few things to note maybe before I answer. So one of them is that, as you said, there is a very clear distinction between a payroll product and payments product. So payroll involves all of the tax withholding calculations, tax withholding, tax filing, and usually, pretty much in every country.

[00:26:30] Dominika: Payroll would be a process that is applied to employees, and then payments would be something that you could use for contractors where there's no tax withholding, no social security deductions, and then, payments for your vendors. So if you want to pay your law firm, you would not need a payroll provider there, but you need some, payment system.

[00:26:53] Dominika: So that's a very big distinction because a lot of projects in crypto are, labeling themselves as a payroll product where they are actually a payments product. So there is a big distinction and a lot of different regulatory requirements and licenses that are required for one and, a different set required for the other.

[00:27:10] Dominika: So this is first distinction. And then second distinction is. Payroll is one of the components of an EOR. So every EOR is expected to run payroll, but at the same time, payroll can be a standalone product that you would use as a company that has their own entity. So let's say that company A has an entity in the U.S.

[00:27:30] Dominika: They might not necessarily need a EOR, but they might need a payroll provider just for the specific payroll component. So that's a little bit of clarifying comments before I dive in. But going back, to your question about payroll providers or EORs in crypto. One of the most important requirements when you are looking for a payroll provider is to ensure that they can deal with crypto.

[00:27:53] Dominika: So that means are they able to calculate tax withholding on crypto? So do they understand how to determine fair market value? Are they able to run tax calculations in real time? But if we run tax calculations now, by the time I end this sentence, tax calculations on tokens might change. It's a very different world than if you are running a crypto payroll.

[00:28:16] Dominika: And I think a lot of people know that payroll providers usually would tell you that they are closing payroll, 10 days in advance of actually running a distribution. In crypto, if you would do it, the tax withholding would be just simply incorrect. And so you would have to then run a reconciliation process.

[00:28:32] Dominika: And that's in itself, another issue. So yeah, you are looking for a payroll provider that understands crypto, understands how crypto is taxed, can run tax withholding calculations in real time, and then can provide pay slips and entire documentation and filings in a way that allows employees to stay compliant in the jurisdiction where they are based.

[00:28:54] Dominika: It doesn't always require you to convert fiat to tokens, but of course there is a question of if you're an employer and you need to meet tax withholding obligations in a specific country, are you going to sell the tokens in order to meet the tax withholding obligation in fiat? Or are you going to use cash on the balance sheet to pay tax authority in fiat?

[00:29:20] Dominika: So it doesn't always require a sale of tokens. And usually we advise clients to manage token sales as part of broader treasury management and not only for the purposes of meeting tax withholding obligations. But yes, we are still not seeing a tax authority that would accept a native token. And that would be an exciting development that we are all waiting for. 

[00:29:43] Umar: Yeah, for sure. Before we continue, we'll take a quick commercial break from our sponsor. Working in Web3 can transform your career, be financially rewarding, and surround you with a vibrant community. But as you're very much aware, this space requires rethinking a lot of the old models of how we work. For example, as the leader in a web3 organization, it's up to you to figure out the most cost effective way to offramp the company's crypto, or what's the most efficient setup to mass pay your contractors in crypto.

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[00:31:26] Umar: Yeah, for sure. Now getting social deductions correct based on employee demographic, that's not an easy feat. For example, let's say there's a U.S. Company employing someone from South Africa as a full-time employee. Would you have a local partner in South Africa to ensure the social deductions are filed to the appropriate authorities? I just want the listeners to understand how it works under the hood.

[00:31:52] Dominika: Yeah, so that's a perfect use case for an EOR. Right? If you're looking to hire one person in a specific jurisdiction and you don't have a local entity there. An EOR would be the right solution. And they would run the payroll process. Alternatively, you would need an entity there. And yeah, then maybe a local payroll provider that would enable you to administer a payroll to that employee.

[00:32:16] Dominika: But in terms of the process, yeah, you need someone either an EOR or a payroll provider that will be able to understand South African labor laws and social security system and know how to deduct insurance, how to deduct pay as you earn tax, any Skills Development Levy. Every country has their own set, and this is a set of things that are worth remembering for South Africa.

[00:32:42] Dominika: But every country would have a different set of deductions and those local partners or that payroll provider needs to be able to understand employee tax profile. So all of the demographic information that determines someone's tax obligation and then also their salary to date. In most cases, that also determines tax withholding obligation and then run calculations for a specific pay period for a specific, salary and a bonus and a token incentive award in order to determine, okay, what is the net pay?

[00:33:15] Dominika: What are different social security deductions across, the list that I mentioned? And more. And then what is the appropriate tax withholding obligation? Again, in fiat, because this is what the tax authority will accept. And then finally, they need to be able to come back with a payslip to that employee after the entire process is done.

[00:33:36] Dominika: And at the end of the year also do tax filings.

[00:33:38] Umar: Perfect. Very clear. Now I'd like to speak a little bit more about Toku. So Toku is the all in one EOR platform that simplifies token compensation and offers a solution for everything we discussed so far around token payroll, grant administration, and tax compliance. A few names of the users include Protocol Labs, Polygon, Near, Hedera, Scroll, dYdX, Matter Labs, Eigen Layer, Worldcoin, and there's another hundred other companies and foundations. Can you walk the listeners through an overview of your services?

[00:34:19] Dominika: Yeah, sure. Toku is a token compensation and employment platform. So we are present in 100 plus jurisdictions globally. We have our own entities, our own licenses in every jurisdiction where we operate in, and our core services come down to Employer of Record. So the ability to bring full-time employees in jurisdictions where our clients don't have legal entities.

[00:34:46] Dominika: We are also a PEO. So PEO is adjacent concept to an EOR, but more specific to a U.S. market. As a PEO, we can co-employ employees alongside our clients that have a U.S. entity and we would be a payroll provider and benefits administrator for those employees. And then we are also a standalone payroll provider.

[00:35:08] Dominika: So we work with companies that might have a legal entity in some jurisdiction and they don't need a full suite of EOR solution, but need someone to support them in that payroll administration process. And then finally, we are a contractor's management platform and token grant administrator. So we take care of all of the employment needs a project might have irrespective of the jurisdiction and whether or not they have a legal entity.

[00:35:36] Dominika: And then one of the big, products and solutions that we offer is the token grant administration platform, which allows you to manage all of the token allocation, token grants for your founders, employees, investors and community. So, all of our services are built in a way that they integrate together, but we also provide each of those solutions in a standalone way to make sure that we match the needs of a project at any given point in time and throughout the life cycle of a project, but also of a token.

[00:36:09] Umar: And token grant here is synonymous to token vesting, right?

[00:36:13] Dominika: Correct. So the token grant would come with either a vesting component or a lockup component, or both of them. Usually we see employees having a vesting and lockup and then investors usually having a lockup. So that would be the distinction.

[00:36:28] Umar: Got it. Now I want the listeners to have an understanding of how the monthly payroll process would look like. Could you provide a walkthrough of how running payroll with Toku would look like for the employer under an EOR setup? Many Web3 companies, they have non custodial wallets, like Fireblocks, Safe, Squads, and I understand you also integrate with these providers. So, how would someone close their monthly payroll from the time they onboard a new employee or contractor?

[00:37:03] Dominika: Yeah. So step number one is always getting the right information about the specific individual. So we need to collect data that's relevant for the specific jurisdiction to ensure that we have all of the information to run payroll, but also you know, everything to do appropriate social security deductions.

[00:37:26] Dominika: So we would have to usually register that specific employee for payroll, for social security, for insurance, for pension, for medical and so on. And so in the first step we would, during the onboarding process, we would collect all of that information in order to make sure that we are able to perform Payroll and social security deductions in the first place.

[00:37:49] Dominika: This happens during onboarding and then in preparation for the first or, and a subsequent payroll, we would first look at the entirety of the compensation for this specific month. We would run mock payroll knowing that the volatility of the token might still affect those numbers, but we want to give our clients general expectations and overview of how many tokens they would have to have ready and also what is the cash component that they need to also have in order to be able to to run the payroll with us. 

[00:38:23] Dominika: And with that Mock payroll. We would start the preparation. The client would approve all of the final calculations. And then on the day of the payroll, we would run the tax calculations again to make sure that the tax calculations match the token price at the time of the distribution. We would then in parallel run those final tax calculations and the actual transfer of those tokens and of cash. So when it comes to cash, it's very easy. We would use our traditional banking infrastructure. So an employee would receive their net cash compensation to their bank account. When it comes to the stablecoins and the native token, we would plug into our clients, either custody account or Safe, Squads, whatever infrastructure they use.

[00:39:12] Dominika: And we would essentially trigger a transaction to ensure that the net amount of tokens is going to the employee own wallet. So that's the process in a nutshell. Of course, what happens after is that we would ensure that the right amount of cash is being sent to the local government deliver payslips and also ensure that the tax filings are done correctly.

[00:39:35] Dominika: So this is, the process that happens on our end.

[00:39:38] Umar: Beautiful. Now I'm looking at the time and I'm seeing how much time we have left. There's the last question that I want to go through with you, which is around the challenges for adoption. There is the 80:20 principle, also known as the Pareto principle, which is a concept that suggests that roughly 80 percent of the outcomes or results are driven by 20 percent of the inputs.

[00:40:01] Umar: For example, in a business, 80 percent of profits may come from 20 percent of customers or products. I want to ask you in terms of growth, have there been any marketing initiatives that you've seen that has compounded results? Similarly to that 80:20 principle.

[00:40:21] Dominika: Yeah, we should be doing much more marketing than we are. So, some of the examples that I have are not necessarily from our marketing initiatives, but rather broader partnerships and product development that we do. But one of those examples that comes to my mind first would be our deep partnerships with the law firms.

[00:40:40] Dominika: So we have really extensive relationships with all of the top law firms that advise crypto companies on everything from incorporation and entity set up, to token compliance and token structuring and everything, in between. So both corporate matters and regulatory issues and really those partnerships have been really fundamental to us as a company. Because we focus so much on compliance. We want to make sure that we have the right information and that we stay ahead from compliance perspective ahead of the regulatory changes. So those relationships have been being fundamental to our product development. But also, from another standpoint, we are able to help projects earlier and earlier in their journey.

[00:41:25] Dominika: So legal firms and tax advisors are great when it comes to defining a plan for something. But there's still a need for someone who will be able to go and execute on it. When it comes to employment compliance, tax compliance and compensation compliance. This is exactly where we come in. So that, very narrow focus on very specific group of best in class law firms have really enabled us to build world's best compliance product for crypto, but also be able to work with best projects that are taking compliance seriously.

[00:42:01] Umar: All right. So very interesting. So if I'm a project about to launch a token, I'm seeing Toku there, but I haven't really figured out whether it has to be an RTA, RTU, token option. So if I come to Toku and I believe you would be able to then maybe Toku would not be advising, but you would recommend me to one of these law firms that you work with.

[00:42:24] Dominika: Yeah. We see both ways. So we see some of the projects working with a law firm on the incorporation, so really like what it takes to set up a company in the first place, even before you fundraise. And then the other they would come. To us around the time when they want to hire first employee or launch a token, and then we would work in collaboration with their law firm in order to ensure that the token plan that they have is meeting exactly the requirements and the risk profile as well and regulatory exposure and so on.

[00:42:57] Dominika: On the other hand, we see the opposite, as you said, so a project that knows that they need to hire someone or they know that they want to start thinking about launching a token, but they don't have the right partners yet, so they might not have a law firm that has the crypto native experience or maybe they want to figure out something in a jurisdiction where they don't have legal representation.

[00:43:20] Dominika: So usual situation like this would be a project thinking about where to set up their foundation and offshore structure. They might already have great lawyers in the U.S. or in another jurisdiction. But they might need a partner in Caymans or BVI we would be able to introduce them to partners that we worked with extensively and that we know and can vouch for in terms of legal and crypto expertise.

[00:43:45] Dominika: And same goes for tax advisors because that's, one of the other issues when it comes to really making sure that your Token launch is successful and really optimized for compliance and tax. That you need that structuring support as well. Of course, at Toku, we will project manage the entire process and we will make sure that the right implementation is enforced both off-chain, on-chain.

[00:44:08] Dominika: And when it comes to all of the documentation, tax filings, tax selections but we always want the projects to be in the best hands and surrounded by best partners whether that's: law firms, tax advisory firms, or even market makers or exchanges. Sort of everything that comes with launching a token.

[00:44:27] Dominika: We want to make sure that our clients work with best partners. So that's the extent of those relationships.

[00:44:34] Umar: Perfect. Thanks for sharing. And lastly, in terms of other challenges, we know it can be around regulation, education, communication. Have you seen any developments right now that is moving the needle, let's say, in the right direction for crypto adoption and something that you're hopeful for in 2024 or for next year? 

[00:44:55] Dominika: We always want more, we want more adoption. We want more people in crypto. And of course, it really comes down to having great products and great solutions to enable it. I don't think that regulatory environment is preventing best projects to really go to market.

[00:45:13] Dominika: I think that there is a right amount of financing and the activity in terms of support for founders to be able to raise. And I think that there is the right setup to navigate all of the regulatory ambiguity, even in the U.S. I think that most projects with the right partners, they can navigate it in a way that leads to the best outcomes and the most successful launch.

[00:45:35] Dominika: But at the end of the day, what we really want is more projects, more ideas, more experimentation and more, product market fit. I think that will solve it all. 

[00:45:46] Umar: Yeah, I agree. Now Dom, we've reached the end of the podcast as closing thoughts. The title of the episode today was token compensation and tax compliance. I've tried to cover as many different topics as possible. As closing thoughts, is there anything that we haven't touched on that you'd like to share, or what's the main message that you'd like to reiterate for our listeners?

[00:46:12] Dominika: Yeah, I think that the final message is that, for any founder that is listening or operator for an employee that is involved in anything related to the topics that we covered is that don't underestimate the importance of getting your employment and payroll and compensation

[00:46:29] Dominika: and token plan infrastructure, right. It might not be the most glamorous part of building a company, but it's really crucial, and it might, have detrimental effects later on. So if you are in doubt, reach out either to us or to anyone that you think has the right experience in guiding you to the right solutions.

[00:46:50] Dominika: And don't wait for too long because sometimes, you can avoid the mistakes early. And I'm excited to talk to more projects and I'm really excited about what is coming and every month we are meeting more and more founders that are starting and that are, building cool stuff.

[00:47:06] Dominika: So I want to see more of that. And I'm very optimistic about the future. And I think that there is still so much room for growth and for innovation, I just really want to see and meet more people doing cool things here.

[00:47:21] Umar: Cool. There's a last question, which I like to ask my guests before they leave is, do you have a favorite quote or let's say like a maxim that you live by?

[00:47:32] Dominika: There are not that many actually but one thing that I pretty much consistently repeat to my team is that the most effective way to do it is just to do it. And it's a quote by Amelia Earhart. And it, really comes down that sometimes you just, really take the first step. And, the way we work with my team is that we do the homework.

[00:47:56] Dominika: We understand the risk, we understand the limitations, but then we just have to take the leap and you launch, you learn, you iterate. I think that a lot of people really like to talk about ideas and I'm sometimes guilty of that as well. But it's, it's not that fun to plan endlessly like that.

[00:48:13] Dominika: The real magic happens when you take action and when you are willing to try and fail and learn and grow. So that's a quote I like a lot. And I, say on repeat.

[00:48:23] Umar: Perfect. I love it. Dom, thanks a lot again for coming today. And I also want to thank you for the support on the different educational initiatives that we've recently done for the article again. So the listeners, there's a fantastic guide that Dom has written called the Crypto Guide to Employer of Record Services available on our article section. We also recently published Toku in our library of Web3 tools. So you can go there to learn a little bit more about what Toku does. And yeah let's keep doing these. Let's keep educating accountants and CFOs on how token payroll compensation and compliance looks like.

[00:49:07] Dominika: Yeah, look, it was really fun to do it and also to do this podcast. And I would love to hear from anyone that's listening and has ideas about some of the areas that feel underexplored when it comes to things that you cover and the things that are relevant for your community that, really overlaps with the types of people that we work with on a daily basis.

[00:49:28] Dominika: So if there's anyone having questions or ideas, feel free to share with you or with me and yeah, let's go and let's do more of it. 

[00:49:35] Umar: And lastly, what's the best way to reach out to Toku's team?

[00:49:38] Dominika: You can send an email to: team@toku.com

[00:49:41] Umar: Perfect! Well, thanks a lot again for coming in today Dom and we'll be in touch.

[00:49:49] Dominika: We'll be in touch.