Guide

Token Management for Lawyers: Untangling Webs of Token Agreements

December 6, 2023

Token Management for Lawyers: Untangling Webs of Token Agreements
Toku Background Effect

Do you need an international token compensation plan?

Get started for free

As new regulations on cryptocurrency continue to be introduced around the world, crypto companies are increasingly relying on law firms to make sure that their token compensation structure is compliant.

As a lawyer, if you’ve experienced onboarding such clients, you will often see inconsistent implementation and documentation across their different token compensation plans. 

Especially when advising early stage teams, many companies set up unoptimized token agreements that are leaving millions of dollars worth of of tax inefficiencies on the table. 

Working with such clients means you will be faced with the task of going through every single token grant agreement and streamlining each one of them. In a way, it’s like getting a bowl of spaghetti and having to sort each individual strand into nice straight lines.

Toku works with the top law firms in the world dealing with cutting edge questions on token compensation. In this article, we’ll share our experiences and expertise to answer the most common problems lawyers face in these situations, and solutions that we’ve seen work.

Problems Deciphering Token Agreements

Most crypto companies who come through your doors will not have standardized documentation and practices for token grants, which can lead to confusion and operational inefficiencies. As their lawyer, you will be tasked with the challenge of considering and reworking their legal structure and design after-the-fact, rather than from the start.

Here are some key problems you will see in these agreements:

  • Lack of Consistency: Organizations often struggle to maintain consistency across various grant agreements, making it challenging to manage and track token-related obligations.
  • Lack of Consideration for Jurisdictional Variability: Global organizations are bound by regulatory frameworks across jurisdictions. Many organizations simply do not have the internal resources to adhere to and keep up-to-date with tax laws, reporting requirements, and legal obligations in multiple jurisdictions.
  • Tax Compliance Operations: Many organizations struggle with managing their tax liabilities, calculating gains and losses, and reporting requirements to tax authorities
  • Complex Grant Structures: Token grants and agreements can become increasingly complex, particularly when attempting to optimize grants for founders or early contributors. Balancing the desire to incentivize stakeholders with the need to comply with tax and legal requirements may lead to convoluted grant structures.
  • Escrow Arrangements: Escrow plays a crucial role in many token grant scenarios. Organizations often use simple arrangements to maintain escrow arrangements, particularly by utilizing on-chain wallets, where access control is binary and lacks the ability to confer beneficial ownership to the grant recipient.
  • Documentation and Verification: Proving ownership rights while demonstrating that tokens remain restricted can be an issue, especially when filing 83(b) elections to optimize taxes.
  • Tax Optimization: Some token agreements may not be structured in a way that would enable it to be taxed at lower rates, even though it would be able to qualify if modified slightly.
  • Operational Overheads: Managing the day-to-day operations of token grants, including distributions, vesting schedules, and payroll calculations, is operationally intensive. Organizations will sometimes call on their law firms to architect an operationally-efficient structure.

These problems are often due to a lack of understanding of the complexities of creating a token compensation plan, including how to structure their token grant agreements, and how to distributing your token compensation plan.

Untangling The Web of Agreements

Every crypto company will have different implementation and documentation of their token compensation agreements. Once you have worked on enough of these agreements, you will see common patterns emerge.

Below, we will discuss a few common points that we commonly work together with law firms on:

Optimizing for Token Distributions

Staggered token grant distribution dates create an operational burden for organizations to do time-consuming off-cycle payrolls and distributions multiple times in a month. This is often due to how token grant agreements are structured to have vesting dates that are based on the recipient’s join date.

We recommend understanding the common types of token grant agreements to pick the right one for the situation, and then set distribution dates on specific days of the month. This ensures that as a company scales up, your various payroll processes do not increase in complexity with each new hire.

Optimizing for Taxes on Grants

One of the common challenges faced by organizations is tax optimizing initial grants for early joiners. For instance, clients may seek to structure token purchase agreements to allow the early team members to purchase tokens outright, enabling them to make an 83(b) election. This strategy is often employed to significantly reduce tax liabilities.

However, token grants can quickly become complicated, especially when clients inadvertently take actions that result in valuations exceeding the nominal price of the tokens. Moreover, some jurisdictions, such as Japan, lack the concept of an 83(b) election. In such cases, organizations must adapt their grant structures to find equivalents or other similar mechanisms found in the respective local tax laws.

Escrow Arrangements and Beneficial Ownership Rights

Escrow arrangements play a crucial role in token grants; on-chain escrow arrangements can present unique challenges, primarily due to how access to these funds is ‘binary’. This means you either have full control or no control of the tokens.

This topic in particular can be very nuanced and dense with technical information. Toku has collaborated with leading organizations and law firms in the world to create a methodology that addresses this concern.

Conclusion

Toku recognizes the complexity of managing token grants and agreements. 

Toku shines by partnering with law firms, automating and simplifying data intake, processing and tracking, while auditing each result manually. Our dedicated token grant administration specialists can answer questions and your law firm can also ensure accuracy and compliance.

We ensure your workflow remains simple to reduce operational burdens, and ultimately to save your time and resources. 

Get your token grants up and running today with Toku.