Web3 is on the horizon: like an incoming tsunami, no one can fully bring it into focus yet, but everyone can feel it surging forward. There is a rushing sound of outpouring early investor dollars, and a dull roar in the technosphere chatter, as anticipation builds for an incoming tidal wave of new innovations to come.
Whether you prefer call it by Web3, DeFi, Crypto, Blockchain, some combination, or none of the above, few dispute that the third-wave future of the Internet is now starting to emerge.
But even the entrepreneurs building Web3 startups have their questions, particularly given the paradigm shifts in the underlying software and structures of control, about what frameworks the emerging tech should be governed by. One version of the answer, is that Decentralized Autonomous Organizations may replace traditional corporate governance structures—but what are the consequences of adopting a ‘DAO’ for Web3 founders?
As a leading venture capital investor in this space, the crypto general counsel at a16z put together this comprehensive guide on ‘A Legal Framework for Decentralized Autonomous Organizations’ - it is a dense document, and great for those who want to dive into the details—but the top-line takeaway for early-stage Web3 founders is in the paper’s conclusion:
Absent the adoption of a U.S. entity structure or a legal offshore structure, the developers and members of a DAO are at risk of potentially being (i) restricted from engaging in operations, (ii) held liable for any harm resulting from DAO activities and (iii) held liable for income tax liabilities associated with a protocol’s operation and issuances of a treasury’s governance tokens.
Founder Institute recommends therefore that Web3 founders who intend to use a Decentralized Autonomous Organization, also plan to form a Developer Delaware C-Corp, which will own the DAO Smart Contracts and associated Protocols. This extra step provides a recognized legal entity, enabling the Web3 founder to join the Founder Institute, as well as compensate future investors, advisors, board members, and other stakeholders on the cap table normally.
It's still too early to tell how DAOs will shake out legally in the United States and other legal jurisdictions—but in our view, it is better that these Web3 companies proactively comply with what regulations they can, and begin paying taxes to stay in good business standing. Plus, it is through traditional incorporation that founders establish legal protections for their companies, including for Web3 startups, which can only be advantageous in protecting Web3 founder equity and IP.
* * *
Graduates of the Founder Institute are creating some of the world's fastest growing startups, having raised over $1.75BN in funding, and building products people love across over 200 cities worldwide.
See the most recent news from our Grads at FI.co/news, or learn more about their stories at FI.co/journey.