Episode 41

Megan Knab from Franklin on Tax Compliant Web3 Payroll

Megan Knab from Franklin on Tax Compliant Web3 Payroll

What We Discuss With Megan Knab

If you’re an employee receiving your net salary at the end of the month, there is a series of financial operations that your employer must address.

Starting with your gross salary, there is a string of deductions like taxation, pensions, social security, medical insurance before arriving at your net salary – the actual funds that get credited in your bank account.

If you’re a company seeking to pay your employees and contractors in crypto, you need a single dedicated payroll solution that takes into account all these components, otherwise the payroll process becomes fragmented.

Enter Franklin, a hybrid fiat and crypto payroll solution which allows you to automate all payment flows for payroll.

On Episode 41, I spoke with its co-founder and CEO, Megan Knab.

Megan is a recognizable leader & sought after speaker on crypto accounting , and as a former accountant, she decided to take matters into her own hands to address one of the missing gaps in web3 payroll.

Connect with
Megan Knab
Co-Founder & CEO @ Franklin

[00:00:00] Umar: Welcome to The Accountant Quits brought to you by the web3CFO club, a community by Request Finance. With a curated community of web3 CFOs from companies like Aave, the Sandbox, Binance, Consensys, Ledger, and many more, joining this club will allow you to network and learn best practices on web3 financial operations.

[00:00:24] Umar: On The Accountant Quits Podcast, we discuss how blockchain will impact the accounting professions and how accountants should prepare themselves for the future of work. My name is Umar, your host, and even if some might refer to me as the accountant gone rogue, my job is to provide you with the blockchain knowledge that you need that will be relevant for the accounting industry as a whole.

[00:00:47] Umar: Welcome to Episode 41. If you’re an employee receiving your net salary at the end of the month, there is a series of financial operations that your employer must first address. Starting with your gross salary, there are a string of deductions like taxation, pensions, social security, medical insurance before arriving at your net salary, the actual funds that gets credited in your bank account.

[00:01:16] Umar: If you are a company seeking to pay your employees and contractors in crypto, you need a single dedicated payroll solution that takes into account all these components. Otherwise, the payroll process becomes fragmented.

[00:01:30] Umar: Enter Franklin. A hybrid fiat and crypto payroll solution, which allows you to automate all payment flows for payroll.

[00:01:39] Umar: Today on The Accountant Quits, I’m speaking with this co-founder and CEO Megan Knab. Megan is a recognizable leader and sought after speaker on crypto accounting and as a former accountant, she decided to take matters into her own hands to address one of the missing gaps in web3 payroll. In this episode, you will learn an overview of what payroll entails, the challenges in creating a web3 payroll product, what is Franklin and its value proposition for tax compliant crypto payroll, the crypto payroll setup for workers inside and outside the US, tax implications of receiving payroll in crypto and much more.

[00:02:24] Umar: Megan, welcome to the show. I’m glad to have a former accountant to discuss web3 payroll.

[00:02:30] Megan: Thank you so much for having me. Thanks for the awesome description.

[00:02:33] Umar: Before we dive into web3 payroll, could you tell us a little bit about your background, how you became interested with blockchain and the story that eventually led to co-founding Franklin?

[00:02:45] Megan: Certainly. So I am an accountant by trade. I got a job on Wall Street right after college that I worked at for a couple years as a staff accountant. So doing pretty normal cycles that I’m sure a lot of the listeners to this podcast are familiar with, like trying to automate and streamline a monthly close, making sure that we’re properly booking revenue, collecting the revenue, all of that good stuff.

[00:03:08] Megan: One year during our annual budgeting process, something didn’t seem right to me and ended up spending a lot of time pulling on this thread of what I thought was wrong and ended up along with others at the company I was working with, uncovering this massive multimillion dollar accounting fraud going on.

[00:03:26] Megan: And something you know about that experience really clicked with me about how broken back office processes really are and how perverted some of the dynamics are between front office and back office. During this time when I was going through this sort of very traumatic professional experience, trying to work through who had done it, who had covered it up, how much was actually missing, I was also going to business school at night to try and get my MBA, and I actually learned about Ethereum in business school, in class.

[00:03:59] Megan: And this confluence of events really made me think that Ethereum is this open source accounting tool and it can actually create a lot more transparency and set a new standard in how we think about moving around money in corporate America. And so that’s how I got into it. The long and short of it is the company ended up not caring that this person that had worked there had stolen a few million dollars over the course of a couple of years. I was extremely frustrated by that experience that nothing seemed to change, and it just seemed like the same thing would happen again. So I rage quit . I dropped out of business school and I went into Ethereum full-time.

[00:04:37] Megan: So that’s my quick genesis story about how, how I got into crypto and, and sort of why I think it’s so, important.

[00:04:44] Megan: But in terms of founding Franklin, you know, I’ve done a couple of different things in the Ethereum ecosystem since 2016. Immediately prior to starting Franklin, I was the VP of Finance at a company called Serotonin, which is the largest web3 marketing consulting firm in the business today.

[00:05:02] Megan: And Franklin is really born out of the struggle of operating a web3 native back office. So we have you know, on average 40 or so clients a month, staff of over 60 based in the United States, outside of the United States. We had a bunch of different assets on our balance sheet. And paying people was a real struggle, super manual, lots of spreadsheets that were very messy.

[00:05:25] Megan: And so, Franklin has really come out of the process of figuring out how do we automate and improve some of these processes? And our thesis is building out payroll software that is tax compliant, and that’s our quick mission.

[00:05:38] Umar: And for the listeners, Megan has been involved in the crypto accounting space, like she said for a while.

[00:05:43] Umar: While preparing the episode on, for example, DeFi Accounting and DAO Accounting, previous episodes on the show, I was actually reading the content that you had prepared, which was, I think dated back to 2019. So you were very early to address like the issues with the accounting for crypto and like very specific for DeFi and DAO.

[00:06:05] Megan: Yes I went through this phase where I was obsessed with DAOs and thinking that this is the way that you can think about streamlining and automating a lot of back office functions, and I still think that. But being just by proxy of being around people that were starting up DAOs and experimenting with them, I was asking a bunch of extremely nerdy questions that are , you know, maybe of interest to this community that you’ve built of, how do you think about reconciling these kinds of transactions, you know, and what are the sort of implications for balance sheet of a DAO? And so, yeah, I wrote these blog posts that I think got a little bit of traction with people, you know, accountants in the space that were also starting to experiment with DAOs.

[00:06:45] Megan: But yeah, so exciting. And I’ve also, you know, been a listener of your podcast for quite a while, and I was just so excited to see somebody building a community in this space because it’s so important and there is so much conversation that needs to happen. And even just accounting policy is something that is created by proxy.

[00:07:01] Megan: And so this niche that you’ve created, I think is super cool and excited to be a part of it.

[00:07:06] Umar: Thank you. Well, as a former accountant I always saw blockchain as an accounting technology, so that’s why I got really interested and given that accountants were not really speaking about it, I thought, why not create more content on the crypto accounting.

[00:07:20] Umar: Let’s dive into payroll now. So I want to start the episode by providing the listeners with an overview of what the payroll process entails. In the intro, I mentioned that there’s a gross salary and then there’s a series of deductions before arriving at the net salary. Could you walk us through how the accounting and payroll department would tackle this at the end of every month?

[00:07:44] Megan: Certainly. Yeah, so there are a lot of factors that go into running a compliant payroll run. So, you know, when we think about the innovation of smart contracts and being able to automatically split payments, like this is very exciting and payroll is like a very apt use case to it. But what we lack right now is the sort of contextualization or bridging mechanisms into the web3 world where those requirements exist.

[00:08:11] Megan: So as an example, if you are an employer and you have employees in four different states and you also have contractors, There’s a lot of things to think about there. So each state has at least three to four different sort of line items that need to be deducted from each payroll run. There are city requirements, there are federal requirements, and those requirements are also dependent upon things that are unique to the worker.

[00:08:40] Megan: So they’re withholdings rate and things like. On top of that, right, there’s a lot of things in the United States specifically that are administered through payroll. So health benefits, right? You access health insurance through your employer in the US. That is a deduction and that is dependent on are you single, do you have a family?

[00:09:01] Megan: What type of health profile health plan are you on? There are retirement benefits, right? That get automatically deducted. And then there’s other things that sort of simmer below the surface. Do you have to pay child support? Do you have a lien on your taxes or something like that? All of these are administered through payroll processes and it’s extremely complex. And so, you know, if you take all that complexity for one person and then you multiply it on every worker that you have within your infrastructure, it becomes something that’s pretty much impossible for any small business to manage themselves.

[00:09:36] Megan: And so, you know, in the past 10, 15 years, we’ve seen this advent of payroll, HR management softwares come about in the web2 context to help small businesses and venture scale startups, startup, and they can eliminate a lot of that complexity. What we haven’t seen in the web3 world yet is something that allows for this ecosystem to also be onboarded in a web2 context, right?

[00:10:01] Megan: So you can operate web3 natively, but also meet all of the obligations that you have depending on the jurisdiction that you’re operating in. And that’s really where Franklin is trying to fit in and to be able to help. A lot of crypto companies will sign up for Gusto or Deel or something what have you. And then they sort of backend try and figure out what the net calculation is and then they’ll send, you know, a transaction and stablecoin as an example to try and hatch together a full experience.

[00:10:30] Megan: And it doesn’t have to be that way. You can have your cake and eat too. You can pay people in cash, you can pay them in crypto, and the taxes can be streamlined on the back end. And so that’s really the sort of problem that Franklin has set out to try and solve. And, and you know, that’s the problem that the customers that we have are, are working.

[00:10:47] Umar: And so next I wanna move on the challenges that you’re encountering to creating this payroll product. The benefits of using cryptocurrencies for payments over traditional ACH and Wire transfers is enticing of course, mainly for settlement times and cost. But creating a single dedicated crypto payroll product that is tax compliant is not very straightforward.

[00:11:10] Umar: That’s because taxation is jurisdiction specific. For example, in the US receiving salary in crypto would be considered property and not currencies, and that would have different tax implications. . And of course if you want to create a product on a global level, you have to be addressing all those different different jurisdiction implications.

[00:11:32] Umar: So for this reason, Franklin first product version provides tax management only for US residents. Could you elaborate on some of the hurdles creating payroll product for crypto on a global scale?

[00:11:45] Megan: Sure. Yeah. So Franklin is a year old. We started off with US tax compliance just because that’s the jurisdiction that myself and my co-founders are in, and we understand this jurisdiction pretty well.

[00:11:57] Megan: I think that there’s some things we’d take from our initial build, right, and apply globally. So one is making sure that you have like a nice aggregated tax logic feed. So you know, it’s a similar issue that I think a lot of web3 data has, and there are a lot of great companies out there trying to solve for this.

[00:12:15] Megan: But there’s not a database in the United States that shows every local, state and federal tax withholding rate. You know, it’s all just separate. And the United States is is kind of special in that each state really honestly acts like its own like mini country, right? They’re subject to their own rules.

[00:12:31] Megan: So there’s the logic, there’s the math, and then there’s also just the sort of higher level employment law requirements, right? So there are some states that explicitly say you cannot be paid in a form of cryptocurrency, right? We bake that into our platform to make sure that you can compliantly pay your workforce in a mix of both cash and crypto, and we’ll help you through that whole process.

[00:12:54] Megan: With regards to, you know, internationally, there are a lot of other things to take into account depending on the jurisdiction that you’re in. So, places in Europe, for example, have pretty strict requirements around paid time off and you actually have to like, you know, drain your PTO bank down to zero at the end of the year.

[00:13:13] Megan: Right. That is actually part of like what a full stack payroll software looks needs to have, right? And so, Building for the whole world off the bat, it’s too big of a green space for someone to be able to one company, right to be able to do. You know, if we look at the web2 payroll giants like ADP SAP, they’ve been around for 30, 40 years , you know, and so, and you know, they have many sort of like localized subsidiaries, right?

[00:13:41] Megan: That specialize in the different employment laws and tax rates of that jurisdiction. That’s one way to consider expanding.

[00:13:48] Megan: The thing that I’m kind of excited about as I think you know others in this industry are is, you know, we can streamline a lot of this data using web3 and certainly like you have the added benefits that you mentioned before of operating natively in crypto assets, so near instant settlement time.

[00:14:06] Megan: You can have exposure to other currencies other than your own. So one example that I think is pretty common, you know, in this industry is there’s a fantastic developer community in Argentina that suffers from hyperinflated currencies, right? You can pay developers in Argentina in a USD pegged currency, right?

[00:14:25] Megan: That’s very appealing. And so, you know, there’s a lot of complexity. It’s not for the faint of heart, certainly to to dig into this kind of problem. But I think it’s also just the benefit of being an accountant, you know, by trade and sort of understanding myself some of the complexities that go into this and having been someone that’s operated payroll and also operated a bunch of crypto transactions that, you know, it’s maybe like a little bit easier to mesh it all together into a nice consolidated product.

[00:14:51] Umar: So now that we’ve spoken a bit about how payroll works and the challenges creating a payroll product, could you tell us a little bit more about Franklin today and how does it allow companies to automate their payroll using both fiat and crypto?

[00:15:06] Megan: Sure. So, you know, as someone who’s been around the industry for a little bit, I’ve always been frustrated by the fact that web3 builders don’t have web3 tools to operate their companies in.

[00:15:17] Megan: You know, and this is something that I talked about, you know, back in the day around DAOs, right? Like, is this a framework that we can use to operate our businesses natively in this industry? And so, you know, as time has gone on, I’ve, I’ve adjusted some of my opinion to be, you know, we need web3 experiences that translate well into the web2 world or the traditional finance.

[00:15:38] Megan: And so, you know what I found, interesting talking to a bunch of people that I knew that had this kind of issue is they wanna be able to pay people in crypto, but it’s just too hard. And it’s too hard because the government doesn’t accept crypto for taxes. You know, you have to do quarterly reportings to each sort of local state authority.

[00:15:57] Megan: And it’s too much for one person to be able to manage their workforce properly. And so the solution is like, okay, we’re just not gonna pay anybody in crypto. We’re gonna onboard a web2 payroll software that’s really expensive and is clunky to use, and nobody’s really getting what they want and it doesn’t cover the full compensation spectrum that web3 employees have. And so Franklin is really trying to solve this problem. You wanna pay your staff in cash. Okay, we have you covered there. You want the optionality to distribute tokens to them. We can also help you there. You wanna pay people using stablecoin. Got you covered.

[00:16:36] Megan: And so it’s this sort of like meshing the web3 ecosystem with web3 primitive products into the web2 context, and make that easy for founders who wanna be building their products and innovating and not spending a ton of time managing their back office. So that’s what Franklin’s all about.

[00:16:57] Umar: I want to dive a little bit deeper on the different layers and features of Franklin now, and I will start with the tax management side. So one of the big value propositions of Franklin, like I mentioned before, is handling tax payments right now, like you said, available for US companies only. Let’s take a simple example.

[00:17:14] Umar: Let’s say the organization’s treasury is in crypto and the company has to pay the employee salary in crypto plus the tax deductions to the IRS. Could you explain how this would work on Franklin?

[00:17:28] Megan: Sure. So every company that signs up for Franklin has to have a USD bank account as the bare minimum requirement.

[00:17:36] Megan: The USD bank account is what we’ll charge to facilitate ACH transfers to each of the sort of like governmental jurisdictions that need to get paid. We will eventually release some functionality where we can charge those costs in another currency and then convert them on the backend. But for now, for ease of use, like that’s a requirement.

[00:17:58] Megan: You also have a treasury with Franklin, which Franklin is non-custodial, so we’re never in custody of your crypto assets ever. And you have a mix. So you’ll log in to see, you’ll get a sort of breakdown of what’s getting charged to your bank account, what’s getting charged in your treasury and we’ll remind you throughout like the payroll periods to say, Hey, don’t forget you need to deposit $10,000 of USDC.

[00:18:24] Megan: Or don’t forget, we’re gonna be charging your bank account $5,000 in the next two days. And so that’s generally how it works. You know, some things to be aware of that are kind of cool on the fiat side, which are , you know not talked about as much, is that a traditional payroll processor will do a complex set of ACH pools and they will hold your capital for 5, 10 business days, and so you have no access to that cash and many companies, right?

[00:18:55] Megan: your cash isn’t always in one place, right? You’ll have to move it around to get it into the right bank account to make sure that it’s in there in time for the ACH pool. With Franklin, we have a much smaller ACH processing time of two business days, which was pretty cool. And on the crypto side, you can have it execute instantly.

[00:19:14] Megan: You can schedule it to be executed on another day in the future, or if you so choose, you can stream out your crypto payments. So we’re experimenting with these different sort of like web3 primitive type payments mechanisms. And our thesis is maybe more people would use them if they can use them in a tax compliant manner.

[00:19:34] Umar: What makes payroll product appealing is the speed is at which you can basically start and close your payroll process. I’ve never worked in payroll in the web2 world. I don’t know how much time it takes, but in order to automate and scale the payroll process , a fundamental feature that you need is the ability to mass pay people.

[00:19:55] Umar: Yeah. Depending on how many employees the company would have, you don’t want to take too much time for each employee. Could you explain how this would work, this mass pay function today with Franklin?

[00:20:06] Megan: Yeah, I can definitely explain it, but I wanna start off with like a anecdote that I have.

[00:20:11] Megan: So I am a New Yorker. During Hurricane Sandy, I was living in New York and working in the financial district in the evacuation zone of the hurricane. The hurricane blows through , you know, nobody can go to work. You know, our office is flooded and myself and a couple of others ended up going down into to the financial district from our homes to do some pretty like normal sort of, processes that we had to do from the office.

[00:20:37] Megan: So it was the first of the month, it was November 1st. We had to pay our rent. I had to go initiate some wires that could only be initiated from my computer on the floor of my office building. And similarly, the people that were responsible for processing payroll had to come into the office. Because we had local instances, like on-prem instances of ADP.

[00:21:01] Megan: Right. And they weren’t able to remote in via Citrix or whatever for whatever reason. And so, you know, for them, they came down during a hurricane or right immediately after a hurricane, to be able to make sure that everybody got paid on time, and this was in 2012, like 11 years ago. It was not, it’s not ancient history by any means.

[00:21:20] Megan: And so for them, what they have to do is, you know, we had a staff of a thousand people say, you got these summary reports. You check to make sure that all the data is the same or not the same. You tie the reports to see, okay, does the gross versus the net make sense? And then you watch it as payroll is actually executed to see, okay, did the transactions to the New York State Unemployment Bureau go through, check.

[00:21:46] Megan: You know, did everything else go through where it was supposed to? And it’s just this wildly manual process. And so it no longer really needs to be that way for so many reasons. And one is pretty like, You know, or, or maybe classical transformation of, okay, you can move away from on-premises software to in cloud.

[00:22:08] Megan: Big deal for some firms, right? And so Franklin is certainly like, obviously it’s in cloud native, it’s all virtual. There’s no on-prem instance of Franklin that you would ever have to have. But you do have local instances of Franklin for each organization. So each organization gets its own set of payroll, smart contracts deployed to them.

[00:22:25] Megan: So you’re never co-mingling funds into a single protocol. Franklin will also only ever transact in the native assets that are being transacted in, unlike other sort of streaming protocols that will give you a sort of like derived asset of a claim that, you know, accesses another pool of assets, right? It’s pretty complicated if you’re getting paid.

[00:22:47] Megan: You don’t want like some derivative of DAI. You just want the DAI in your wallet and then you can go deposit it onto an exchange account or it gets deposited directly into an exchange account, et cetera. Just trying to simplify and, you know, make very accessible some processes that have been historically extremely manual.

[00:23:06] Umar: I want to provide the listeners with a hypothetical example of let’s say, a company hiring different contractors around the world. So for remote first companies or just for contractors who maybe want to have the option of getting paid in multiple currencies.

[00:23:22] Umar: So let’s say we have three contractors that the company has to pay.

[00:23:25] Umar: Contractor A is based in the US and wants to receive 50% USD, Fiat, and 50% USDC, the stable coin

[00:23:34] Umar: Contractor B is based in Portugal and wants to receive 90% Euro and 10% of Ethereum on the Ethereum blockchain.

[00:23:43] Umar: And finally, the third contractor C, based in Mauritius Island wants to receive 50% polygon and 50% DAI on the polygon network.

[00:23:53] Umar: Let’s say in this case, the employer only has U S D. Euro and USDC in its treasury and the USDC let’s say it’s on the Ethereum blockchain. Can this work today?

[00:24:06] Megan: So it’s certainly possible for it to work, but it is a pretty complicated compensation sort of management scheme. So a couple of things. One is for each sort of cryptocurrency out there, you know, through Franklin, we support a whole bunch of ERC20 tokens.

[00:24:24] Megan: It’s fairly simple to be able to set up a payroll run. So once you’ve onboarded all of your staff, you said, okay, 50% USDC, 50% cash, 50% MATIC, 50% DAI, right? As an example. We’ll automate those flows and all you have to come in is do is come in and say, okay, this is correct. Press execute, and then you sign a transaction in your wallet.

[00:24:46] Megan: And so this kind of like innovation of multicurrency batch processing and then with Franklin multicurrency batch processing with cash as well is eliminates, you know, 85% of the effort and streamlines a lot of the sort of, flows that exist, even with just other sort of like crypto payments tools in general.

[00:25:08] Megan: That’s one part of it. The sticky part comes in when you think about doing multiple chains. So, with certain wallet clients like Metamask, right? It’s fairly simple to be able to toggle between, you know, Ethereum Mainnet and Polygon right, or whatever, L2, whatever, what have you. Bridging those assets between Ethereum mainnet and Polygon or whatever other L2 you’re dealing with is a little bit more complex and so, you know, it’s, it’s certainly possible.

[00:25:36] Megan: Like to do. Uh, I don’t know of any employers that are doing that right now. Most that at least we’ve worked with most will kind of pick to a chain and stick to it with regards to compensation just because it sort of streamlines their treasury a little bit better. But I can certainly see a scenario in the future where as like bridging mechanisms get a little bit quicker, I would say, or you have a little bit more transparency too when you’re moving assets between Ethereum Polygon or optimism, for example.

[00:26:05] Megan: You know, you can have a multi chain multicurrency batch processing tool. But you know, I think the thing to ask if that’s something that yourself, you’re an entrepreneur, you wanna pay your staff on different chains, is like, How do we optimize, right? The kinds of transactions that we wanna have, right? So most exchanges, they will take in deposits from Ethereum mainnet.

[00:26:27] Megan: That’s very easy. That makes it really easy for your workers, right? Some may say, well, Polygon is super fast, and you know, we have, for whatever reason, most of our assets on Polygon will just do it on Polygon. You know, I think that’s the consideration there. But certainly the optionality is possible.

[00:26:45] Umar: On the homepage of Franklin, there’s a table listing the features available to customers inside and outside the US.

[00:26:52] Umar: Yeah, there’s just three features not available for global employers, which are direct crypto deposit, direct bank deposit, and tax management. We spoke about tax management and we understand why. I could not really understand what does direct crypto deposit and direct bank deposit mean.

[00:27:10] Megan: So for the direct bank deposit, what we mean is we only support USD right now, so we work with a licensed money transmitter, which is a requirement in the United States to move money around.

[00:27:23] Megan: So Franklin’s actually not taking your cash from your bank account and you know, putting it into your employee’s bank account directly. We have to go through an ACH processor for that. So that’s the reason there. . And then for direct crypto deposit, what we mean is we will support contractors outside of the United States.

[00:27:42] Megan: So if you are not a US W2 employee, you can take crypto. A lot of our customers will, they usually pay their contractors in a stablecoin. What it means is really we’re not paying them in like a Euro as an example, or Yen, or a Peso at the moment.

[00:27:59] Umar: Got it. Now, there’s a lot of crypto payroll solutions.

[00:28:04] Umar: A lot of emerging crypto apparel solutions. Crypto native ones. Yeah. There’s for example, Request Finance, Bitwage, Utopia Labs, Parcel, Coinshift, Rise. The list goes on actually, I wanna ask you what how does Franklin differentiate itself today in this very competitive market?

[00:28:21] Megan: Yeah, so I think that first of all, these are all like lovely tools to use and don’t have anything bad to say about any of those guys building, building those. And you know, myself, I’ve been an early user of the Request Network too, and I think that that works really well for certain types of transactions that you wanna do. Kudos to this industry for building out more sophisticated tooling to help out web3 entrepreneurs.

[00:28:45] Megan: The Franklin thesis is like, payroll is pretty specific, you know, and it’s pretty specific in the United States, and we see a lot of web3 entrepreneurs out there using Gusto, and they should be using a web3 alternative.

[00:28:56] Megan: So, so that’s really how we, we think about it. Some things that Franklin has from a product perspective that are a little bit different are, you know, because we focus on workforce management and, and facilitating a compliant crypto payroll is we also have some HR management tools. So if you want to be having a portal to manage your staff where you can update their titles, you can look at org charts, right?

[00:29:21] Megan: You can manage all of their sort of employment agreements and receipts or invoices. All of that can sit within Franklin and you have like a nice sort of, uh, one-stop shop to be able to manage your workforce from an HR perspective and also from a payments perspective. So, so that’s what I would say you know, we look at some things that we do that, that you know, are pretty cool is that we do automate a lot of the sort of like recurring processing.

[00:29:47] Megan: So with Franklin, you’ll never have to upload a csv, you know, full of, you know, names and crypto addresses, right? All of that is stored natively within Franklin. And you know, the ideas here is that it’s supposed to be pretty easy to manage. So, , that’s what we look at. You know, some of these other competitors that you mentioned focus on other types of products, like some are a little bit more tailored to streaming payments, which we could certainly talk about more.

[00:30:11] Megan: You know, kind of depends on what you’re looking for.

[00:30:14] Umar: 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.

[00:30:30] Umar: For example, as the leader in a web3 organization, it’s up to you to figure out the most cost effective way to off-ramp the company’s crypto, or what’s the most efficient setup to mass pay your contractors in crypto. Getting your organization to run on crypto is daunting if you’re alone. That’s why Request Finance the industry leader in crypto invoicing, payroll and expenses has curated a community of web3 CFOs to share best practices around web3 financial operations. With CFOs from leading projects like Aave, the Sandbox, Binance, Consensys and many more, joining this community will allow you to network and fast track getting your organization compliant in crypto.

[00:31:16] Umar: And you know what? I’m also responsible for accepting new members and growing the web3CFO club. So if you’re web3 business founder, CEO, CFO, or in charge of financial operations, you can join this exclusive community today by filling up an application form at theaccountantquits.com/web3CFO.

[00:31:37] Umar: Subject to a screening check, you will then start interacting with high profile web3 CFOs, get access to members-only benefits like webinars, resources, and invitations to physical meetups. Join the club today and let’s win web3 financial operations together.

[00:31:56] Umar: I could not have done this episode without touching on tax. So, or on the tax implications of receiving salary crypto.

[00:32:04] Umar: So for workers choosing to receive their salary in crypto, what are the tax implications in the US? I mentioned earlier that the IRS designates crypto as property and not currency, but that would differ in the case of stablecoins right ?

[00:32:19] Megan: Exactly. Yeah, So I think that if you are getting paid in stablecoin, you should also be getting those sort of requisite payment information that any employer, if you’re getting paid in cash, should be sending you.

[00:32:32] Megan: Right? So you should be able to download a pay stub, right? These are things that don’t really exist broadly, right? But at Franklin we built it. You can come in if you’re getting paid in crypto. You need to get a lease, like for your apartment, you need to prove your income. You can download a pay stub from Franklin that shows where you’re getting paid.

[00:32:48] Megan: On the token side, there’s more complexity here, right? So if you’re getting paid in a non-stable asset, there is, like you said, a capital gain/loss associated with that on both the employer and the employee side. And so we’ve built reporting for both sides of that coin to be able to say. This is what it costs me, or this is how much money I made as part of my compensation package.

[00:33:09] Megan: Right. And all that is automated. You know, we, it’s non-trivial for sure. You know, and I think when we look at the web3 industry, there’s so many companies out there that are accounting companies and tax, you know, some of the biggest companies in crypto are tax companies and they’ve been able to capitalize off of this pretty large, meaty problem.

[00:33:29] Megan: That there aren’t great solutions to, we don’t have tons of guidance, you know, across the world, certainly in the United States, around, you know, what do you do with a yield farmed asset? You know, there’s like, we’re not getting guidance on that anytime soon. And so what we, the approach that we take is, you know, to have a position and then you stick to that position every time.

[00:33:49] Megan: And it’s a logical position to have based off of the whatever guidance is out there that we do have access. And, and then, you know, report on it accordingly.

[00:33:59] Umar: I wanna speak a bit about the barriers for crypto adoption. It’s one thing for the employer to pay crypto and to save on transaction costs. It’s another story for the employee or the contractor to choose now to receive crypto.

[00:34:15] Umar: I’ve seen even workers at crypto native organizations who often choose to receive salaries in fiat and not crypto, even if they have the possibility to do so. Receiving salaries in crypto in countries where inflation has skyrocketed makes a lot of sense. You mentioned Argentina before, but for some other countries, these workers are often reluctant.

[00:34:36] Umar: Because they’re looking at off ramping, which remains still expensive. It’s still a hassle. Some banks are not very crypto friendly. How do you see these current barriers that we have right now evolving over time as crypto gets more and more adopted?

[00:34:53] Megan: Yeah, I agree with you. I think that that is a use case that we see as well, where you are working with a web3 native company that has pretty web2 desires in terms of how to pay staff and so.

[00:35:04] Megan: I think that there’s one thing, which is historically it’s been one or the other, and it’s been kind of very, very directly only crypto or only cash. And the ability to do both is kind of a new concept. And I think that one of the biggest ways that we can increase adoption of web3 technologies is to make them just much more usable and easy.

[00:35:28] Megan: And this is like the bridging technology that Franklin has gone to market with, which is to say you don’t have to pick one or the other. You can pick both, or you can pick one or the other and then add one on later if you want. And so it’s sort of like, you know, let’s wet the appetite and we can process your cash payroll, no problem.

[00:35:47] Megan: Do you also wanna experiment with distributing crypto assets? Do you wanna try making some payments in stablecoins? Like we can help you there. And part of it is like, you know, entrepreneurs I think have good reason to have only wanted to pay people in cash. And it’s because they haven’t had the tools to be able to do, to have optionality.

[00:36:06] Megan: And so that’s kind of what we look at. Like we, if you were to log into Franklin today, it would look very similar to other TradFi payroll softwares right with a little bit better UX and this crypto optionality, and that’s like very intentional to create a familiar web2 experience in a web3 context.

[00:36:27] Umar: I wanna speak about streaming. Yeah, So streaming is one of the new primitives for web3 and in paying someone every second, the listeners should be familiar. We’ve previously had Superfluid on the show, but if you need a reminder. Streaming allows you to pay every second. So now you don’t have to wait at the end of the month to receive your salary, but you’re actually receiving it every day, every second, periodically in a stream.

[00:36:55] Umar: What’s your take on streaming as a payroll product for now? Are we too early for streaming?

[00:37:00] Megan: Yeah. You know, I have, uh, lots of mixed feelings. I think a lot about streaming and I have lots of mixed feelings about it. At Franklin, we’ve built our streaming technology, but nobody’s using it, and I’m shocked, to be honest.

[00:37:14] Megan: So when we talk to customers or prospective customers, what we find is everybody likes the idea of streaming and conceptually, right? It just makes logical sense. Like there’s no good reason with the advent of web3 technology, that you should be giving your employer a two week interest free loan on your labor, right?

[00:37:36] Megan: You should be able to get paid every day or even every time a block is minted, right? And so conceptually, philosophically streaming is fantastic right? And when we think about it in the web 2 context too, it’s, it’s when you have this understanding of, okay, we can have transactions that settle instantly.

[00:37:55] Megan: This idea that you have to go to your employer and ask for an advance on your paycheck, like they’re doing you a favor. Right is so backwards or you know, there are other sort of TradFi payroll softwares that will enable a more real time payroll experience. But really essentially you then are creating a complex loan agreement between yourself and the payroll processor and they will charge you a lot for it.

[00:38:17] Megan: And so there’s the logical conceptual streaming makes sense. And perhaps streaming is the future. Logistically though, I think it’s a different situation. There are a couple of considerations there. One consideration is that you largely have to lock capital in advance, and there’s an issue with the timing of cash flows.

[00:38:42] Megan: So if I am running a consulting business and I’m getting paid 30 days in arrears, but I wanna pay my staff in real time, I have a 30 day cash shortfall potentially right. And so that’s problematic and some streaming protocols have been experimenting with, how do you sort of get rid of those capital lockup requirements in advance?

[00:39:05] Megan: What does that mean for a payroll administrator? It means that you’re actively managing a treasury and then you have some derivative assets and your treasury now, and that’s extremely complex. And it’s just a different kind of, job description for somebody to execute payroll, meaning like you need to be actively managing your payroll treasury in a way where you don’t necessarily need to otherwise.

[00:39:25] Megan: Another logistical consideration that we have discovered is a human management aspect, which is, if I pay you today up for all the work that you did today, can I really rely on you to be here tomorrow? Or if you’re working on a long-term project, right, as a contractor, for example, are there sort of mile markers that we should be creating where payment is released upon a certain thing?

[00:39:53] Megan: Very similar to how bounties work too. And this requires a much more sort of like active management of your workforce than that’s much more tied to the financial part of it. So you know any good manager, right? You’re talking to your staff, you’re supporting them . But it adds a very strange dynamic to say, okay, I’m actually not sure that you hit this milestone and therefore will not set off your stream because of, you know, whatever reason.

[00:40:17] Megan: And so having it delineated by time right makes, is a little bit easier of a conversation for human managers to have. So when we built Franklin, we built out streaming from the start. And our thesis was, well, maybe more employers would use streaming if we could offer it in a tax compliant manner.

[00:40:38] Megan: And you know, we’re in the early days, we’ve launched, we’ve been, you know, in production for, you know, four or five months, something like that. And so maybe there is a great juicy streaming use case out there. But for a tax compliant payroll software where you’re paying out W2 employees or are managing contractors, we, we really haven’t seen it so much, which is, yeah, surprising.

[00:40:59] Megan: I think that for streaming, the biggest unlock is to actually figure out this capital requirement situation. So, that means also like streaming payments on the other side of the coin with how the business gets paid. So if I’m providing consulting services, can I get my customers to pay for those consulting services in real time as well?

[00:41:22] Megan: And then you have a more sort of like matched up time period between cash in the door, cash out the door. And that’s like a totally different kind of business model. Like, can you get paid in real time for the things that you’re selling? And in some businesses that just doesn’t work, right? So if you have like a large supply chain as an example where you’re, you know, creating swag, right? Like no, there’s no way you can automate all of the cash flows for that instantly. So, you know, then you get into a lot of complexity. Do you have a tranche loan? You draw down the tranche loan, et cetera. So those are my complex feelings, I would say on streaming.

[00:41:57] Megan: I think that it will take a long time for streaming to become adopted, but is it a worthwhile thing to be working towards? I think the answer is yes. I’m curious.

[00:42:08] Umar: Yeah, I completely agree with you for

[00:42:10] Megan: I know sorry to interrupt you. I know that you spent a lot of time on streaming. Like what do you think about streaming in this industry?

[00:42:17] Umar: Well, it completely makes sense for the employer. It might not be as enticing as for the user or for the employee. But even for the employee, we’re not wired to be actually receiving money every second. I don’t know if people They would actually demand this to be paid every second because in terms of consumer behavior, we’ve never, and most people don’t live day to day.

[00:42:42] Umar: So the money that you’re receiving, you’re not actually using that money to spend right away. I mean, from an investing side, it makes a lot of sense that you could reinvest that money instead of waiting maybe at the end of the month. And from a dollar cost averaging approach, this is like the ultimate dollar cost averaging approach that you could do.

[00:43:02] Megan: Yeah, I agree.

[00:43:03] Umar: I agree with you. It’s gonna take time and it’s , I think 2023 is still early. Yeah, it’s still early for streaming, in my opinion.

[00:43:11] Megan: Yeah, I agree.

[00:43:13] Umar: I would be remiss if I didn’t touch on accounting for payment streams, because I’m lucky to have an accountant with me today. Okay. I wanna ask you what, what’s your thoughts?

[00:43:22] Umar: We don’t have to dive deep into it, but on the topic of accounting for payment streams, like. How should this be booked in the ledger? Should it be booked like on a daily basis? Or should companies adopt their own procedure for at what time interval to account it?

[00:43:39] Megan: So I think it is highly dependent upon the way that you construct your streams.

[00:43:45] Megan: What I think auditors would probably want to see are book entries whenever there is a time of transaction. So that’s what we’ve applied at Franklin. So whenever there is money getting moved on chain or via a bank account, we’re creating a journal entry and we’ll push it into your accounting system for you.

[00:44:02] Megan: So that’s our philosophy here. But you know, I know that you’ve talked with others that do sort of token table management, which is much more sort of, you know, trying to create an analogy to equity. And so the accounting for that is kind of different, right? So if you have tokens that are getting vested out over a certain schedule, the value of those tokens might perhaps be predefined in a legal agreement, right?

[00:44:27] Megan: And in which case you’re not really taking the sort of like cost basis at the time of transaction. That’s a different use case. But for streaming payroll, it’s whenever the transaction occurs. And this is another logistical consideration for people who wanna implement streaming, which is like, do you wanna enable streaming every second and have a zillion journal entries and your general ledger that you’re gonna have to one day have an auditor come through?

[00:44:48] Megan: Like it’s pretty impractical. Is it every day? Perhaps. You know, so it certainly depends on the appetite.

[00:44:56] Umar: The last topic I want to speak of is regarding the accounting integrations that you have. When it comes to web3 bookkeeping companies with a big volume of transactions are using specialized crypto accounting softwares like Cryptio, Bitwave, Cryptoworth, and a few others together with the traditional ERP, like QuickBooks , Xero, Oracle NetSuite.

[00:45:19] Umar: So people would, I mean, you would use these tools to prepare first your subledger of crypto transactions, whereby you first have to extract, process and categorize your on chain transactions before pushing them into your traditional ERP. I wanna ask you how it works currently with, uh, Franklin.

[00:45:38] Umar: Can you categorize directly your salary expense before syncing it to the accounting software? Or are you using those specialized crypto accounting software like in the middle?

[00:45:50] Megan: Yeah. Yeah. So the answer is both, and it just depends on how you like to construct your books. And so we have released a native integration with QuickBooks, right?

[00:46:00] Megan: Which looks similar to how you would integrate like Gusto or something with QuickBooks, which is. You have to have an asset account in QuickBooks, set up for your payroll, treasury, like your crypto payroll treasury and then you’ll link your chart of accounts and we will push journal entries based off of the transactions into your QuickBooks instance.

[00:46:19] Megan: And this is kind of cool because we do hybrid cash in crypto. So if you’re operating through a crypto treasury that’s through Franklin, or you’re doing it through a bank account, we can push both. If you like to use a crypto subledger, like any one of those awesome companies that you’ve mentioned, , you can also do that.

[00:46:38] Megan: And so we’ll, we’ll integrate there. And in many ways that’s a pretty straightforward integration because these guys have already specialized so much in reading on chain data. And then, you know, that can be pushed to the, your main general ledger if you know Cryptio or Bitwave or whatever is not your main general ledger.

[00:46:55] Megan: So we can do both. We’ve sort of optimized for optionality here, depending on how you like to structure your books. You know, there’s certainly, yeah, it can become pretty quickly, like a nightmare honestly, to do your accounting if you are paying people in crypto. And so it was very important for us from a product perspective to make sure that we had that buttoned up on the back.

[00:47:16] Megan: And you know, for me, right, like I operate payroll for my team and it pushes into QuickBooks for me directly and I reconcile on my books at the end of the month and it’s nice and easy. So it’s kind of dealer’s choice on that one.

[00:47:28] Umar: Megan the conversation is fascinating. I feel I could keep speaking to you about web3 payroll, but I have to be respectful for your time and I’m seeing the time is passing quite fast.

[00:47:40] Umar: So as perhaps closing thoughts or is there anything else that maybe we didn’t speak of during the episode that you would like to share with the listeners?

[00:47:50] Megan: So we love working with web3 entrepreneurs. We, if you have any desire to pay your team, we wanna talk to you if you wanna pay them in cash, if you wanna pay them in crypto.

[00:48:02] Megan: If you wanna experiment with both, please hit us up. You can find us at hellofranklin.co or at franklinpayroll on Twitter. And you know, would love to chat and have a conversation and learn more about what you guys are all building.

[00:48:16] Umar: Perfect. Before we go, there’s a last question that I always ask to my guest, which is, do you have a favorite quote or like a maxim that you live by?

[00:48:26] Megan: Yeah, so I think that this quote comes from the former president of Uruguay, where he said something along the lines of The way to live a happy life is to live a life that is in accordance with your own values. And I think about this a little bit in the accounting context and, and just how I’ve learned professionally over the past.

[00:48:44] Megan: You know, like whatever years that I’ve been been working, which is like, people will act in accordance to their incentive structures. And it’s important to think about like what incentivizes people, you know, this great book of like how to win friends and influence people. It’s all about what motivates people, you know?

[00:49:03] Megan: And I think that it is particularly important for people working in this industry of accounting where you’re literally right telling the story of like what is going on financially. And I think that, you know, as a student of the financial crisis, right, we see this kind of like perversion of incentive structures happen so frequently and it’s the opportunity that we have in web3 to kind of reinvent those incentive structures and hold each other accountable.

[00:49:30] Megan: And so that’s my mission, what I think about. And you know, certainly what resonates with me.

[00:49:36] Umar: I love it and I do always recommend this book by Dale Carnegie, like don’t be fooled by the title, how to Win Friends and Influence People. It’s really about human interaction and it’s the art of communication with people.

[00:49:49] Megan: Yeah. Yeah. If we’re plugging books, actually there’s one other that I’d love to share, which is a great feminist accounting book called If Women Counted, and it’s a way to think about how to measure things differently, which as you know, it’s, uh, anybody who’s into feminist accounting, I’m sure there are some people out there , take a look at it if women counted. It’s a great book.

[00:50:09] Umar: Great. I’ve noted it down. Megan, thanks a lot for coming today. Thanks for your time. It was a really interesting conversation with you today on web3 payroll. If people want to reach out to you, you’ve, you’ve already shared the contact details of Franklin, but if people want to reach out to you personally, how should they do so?

[00:50:27] Megan: Yeah, I’m @knotmegan on Twitter . My dms are open. I’d love to chat.

[00:50:35] Umar: Perfect. Well, thanks a lot for coming today, Megan. We’ll be in touch and we’ll speak soon.

[00:50:40] Megan: Thank you for having me.

[00:50:42] Megan: I would like to thank everyone for listening to this episode. You’ll find all the links of the episode show notes and transcript on the website of The Accountant Quits at theaccountantquits.com.

[00:50:53] Megan: Please note that this content is for general information purposes only and is not a substitute for consultation with professional advisors. If you do know anyone who could benefit from the episode and you care about them, please do share the episode with them. All the episodes are available on Spotify, Apple Podcasts and Google Podcast, and by leaving us a review and rating, you will support the channel and all your fellow accountants.

[00:51:19] Megan: In order to be notified each time we release a new episode do follow us on Instagram and LinkedIn. We hope to have you with us next time. Bye for now.

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