A decentralized autonomous company, as the name implies, should mimic the behavior of a company in most (if not all) regards. This implies that a blockchain that implements a DAC comes with a few components among which are:
- shareholders that own and control the DAC
- corporate governance to allow decision making
- services that generate revenue for the company
- employees that work for the company and earn a salary
Remark: It’s worth emphasizing that the terminologies used on an actual blockchain should be reconsidered and reviewed by a legal term. The reason is that “shareholder” as well as “employee” comes with legal implications that may not necessarily fit the setup of the blockchain. For sake of simplicity, this article will stick with the traditional notion, even though an actual implementation might use terms like token holders and workers instead.
The purpose of this article is to present a way to launch a DAC while trying to comply with securities as much as possible, or at least minimize liabilities for all parties involved (legal review required!).
Mimicking traditional startups
Here, we try to mimic how regular startups bootstrap a business. In particular, we consider the blockchain/DAC to be the actual startup.
The business idea
It all begins with a “business idea” that fills a need and can earn revenue. In case of a DAC, this business idea most probably involves some digital automation or smart contract that offers some service to people at a fee. What particular service that might be is left open and is irrelevant for the rest of the article, however, for sake of simplicity, we assume that the DAC will operated an exchange for digital tokens (e.g. crypto currencies).
In contrast to a regular company where a team gets together to work on the project and share the stake among the founders, our case is different mostly, due to legal reasons but also due to desires to establish a decentralized ecosystem where pre-mines (e.g., founders setting aside some token at launch time) is often considered harmful.
Instead, when launching a DAC, the team building the software will have to commit their resources without the promises of a return of investment as they compete for stake in the DAC in the very same way as everyone else. It’s worth mentioning a certain information asymmetry that might benefit the founders.
Separation of Profits and Control
Similar to silent partnerships, the DAC should have a way to distinguish tokens that grant voting control from tokens that offer a claim on the profit payouts. It’s also worth discussing the possibility to vest shares for certain periods of time and/or have tokens expire.
Assets and Tokens
Additionally to the profit-sharing and governance tokens, some “cash-equivalent” token is required for people to pay the fee; a token that ends has value outside the DAC and that ends up as profits in the DAC’s treasury.
A good candidate (depending on technical feasibility) would be Bitcoin, Ether and others.
The technical implementation details around custody through gateway or non-custodian “side-chains” are left open for another article intentionally. What counts is that the DAC has a cash-equivalent token with value outside the DAC itself.
What’s needed at launch
Already at the launch, the DAC need to have an operational governance setup. It does not need a working product but decision making is required to ensure the DAC develops towards a common goal, a profitable exchange.
To achieve this at the start, the DAC either needs to start with governing bodies pre-filled (e.g. by the founding team), or some initial tokens have to be distributed so that people can be voted into the governing bodies, accordingly.
Now, with a working governance setup, the DAC can start hiring 3rd parties.
The first hires
Obviously, there is no cash or cash equivalent available to the DAC as it, so far, operates outside of the existing financial realm and outside the existing crypto currency community.
Hence, the first hires can only be paid in “company stock” or “tokens” that allow the first “employees” to claim profits generated from the DAC further down the road.
This is quite similar to startups that often reduce their burn-rate by replacing parts of the cash-salary by stock or stock options, with or without vesting. Obviously, a DAC can do the same and after all, no money is involved so this is all just moving numbers around at this point in time.
Obviously, the first hires are taking a huge risk as they essentially work for (still worthless) tokens and only have expectations of future profits. Considering tax laws in some countries, this setup might be discouraged entirely as the worker might still owe tax on delivered work despite being paid worthless tokens!
At some point, the DAC will offer a service that goes life and will be used by customers that pay a fee. This fee ends up in the treasury of the DAC as revenue. At this point, governance can share the profits with token holders, including the first hires.
At some point, the DAC might need to raise capital, e.g. for further development, new business opportunities, additional hires or marketing.
Instead of asking hires to take on the financial risk, the DAC could decide to instead “raise money” by selling profit-sharing token to investors, or the public. An investor would pay cash-equivalent token (e.g. Bitcoin) into the treasury and would get profit-reward token in return. This could take place as an OTC deal, or using the internal exchange.
Spending Cash and Cash-Equivalents
At this point, the DAC has cash at hand and can hire people without letting them take the financial risk that the first hires had to take.
Additionally, the DAC does not need to dilute it’s own shareholders for its new hires but can instead spend the cash instead.
Obviously, the fun begins when the generated revenue outperforms the expenses for hires (and block producers) as then, the funds in the treasury grow. This allows for the DAC to buy back it’s own shares, or to pay “dividends” to hits shareholders.
Additionally to earning revenue and sharing profits with token holders, the other option would be to allow trading of those profit-sharing tokens for the cash-equivalent token.
However, it is worth mentioning that those profit-earning tokens might tick all the prongs of the Howey-Test and thus be declared a security token. Selling them to non-accredited investors could involve risks. This particular aspect needs a thorough investigation by a securities lawyer.
However, a few aspects work in the DAC’s favour such as:
- there is no common enterprise that works to earn the profits - there are independent hires that work for the blockchain directly.
- there is no centralized issuance of the token, rather a set of governing bodies whose seats are filled by independent people and businesses
Additionally, further options to reduce legal risks in this regard are:
- requiring KYC for participants of the trade involving the profit-earning token
- registering the profit-earning token with the SEC
- as well as potential other means ..
The above setup brings corporate setups to the blockchain. Even though there are some unresolved questions about the legal implications and risks associated with the sale of profit-generating tokens, the general setup itself appears sound and worth pursuing.
Room for Innovations
Required innovations for setup to work flawlessly are
- legal clarity (Wyoming, anyone?)
- bringing cash-equivalents into the DAC in a trust-less manner (the holy cosmos?)