Incorporating Your DAO: The Pros, the Cons, and the Weird Sh*t No One Tells You About by Mark Lurie

Hi everyone. We're talking about incorporating your DAO. That's a big topic. Who wants to hear about incorporating your DAO? Come over to the stage right now.

Let's make some noise to attract people. Audience, please. All right. Here we go. There's nothing nothing more exciting than incorporation.

I'm sorry. All right. So, we're going to be talking about incorporating your DAO. That's the pros, the cons of doing it, and the weird that no one tells you about when you actually endeavor to do it. So, hopefully this will be helpful.

So, first, let's step back and put Dows and Incorporation in a little bit of historical context. So when you think about it, what what is our biggest strength as humans, right? It's not our uh it's not our strength, right? Our superpower is not our strength. We don't have fangs.

We don't have claws. We're not that strong. It's not our speed. There's lots of four-legged animals that are faster than us. And it's not really our intelligence because dolphins are the most intelligent in the seas and they don't rule the oceans, right?

Our superpower is our ability to organize because we're stronger together as a group than we are alone. We can accomplish more together. And throughout human history, that is exactly what we've done. So, you know, imagine you were a hunter gatherer. You would hunt willy mammoths in squads using flint arrowheads.

Imagine you were a Neolithic farmer in the agricultural revolution. You would use uh organized religion to create shared values in the first cities. Imagine you were an ancient Sumerian. You'd use writing to govern across time and space in the first empires. And imagine you were an Indian craftsman.

You'd use shrenies known as or guilds to speak with one voice against the power of the state with the innovation of corporate personhood. And imagine you're a Dutch merchant in the 17th century. You'd use joint stock companies and exchanges to aggregate in enormous amounts of private capital to uh in capitalist endeavors. But in the 21st century, we have amazing new technologies. We can communicate across space instantly.

We can send money globally instantly. Right? We can use computing and AI to magnify our efforts exponentially, right? And those are amazing things we can accomplish. And the the issue is our existing forms of organization are all built on a foundation that didn't evolve for those capabilities.

And that foundation is trust. All of our forms of organization rely on trust. Now the problem with increasingly complex systems is that as they get more and more complex they either tend to societies tend to evolve or they collapse, right? And so what we need is to be able to evolve our forms of organization beyond trust in order to keep up with the pace of innovation and our new capabilities. And Dows are a response to this need.

They're they're an evolutionary imperative. Now, if you're here, you know that Dows also can be a lot more than just a corporation, right? They're a potential pathway into a more grassroots organic democratic society, right? We have yet to see all that they can become. So, just before we get in a little further, I want to give some context for myself and where I come from when I grapple with Dows.

So, I helps our Admiral DAO. Uh, it is a member-managed LLC, nonprofit LLC in the Marshall Islands. Um, we incorporated with the help of my DAO, uh, which Adam represents. Um, and it governs a set of decentralized exchanges, namely Clipper, which has the best prices for retail trades, trades under about uh, 20K. What we realized is, you know, a billion dollars in liquidity doesn't really help a small trader, right?

They don't really need that much liquidity. They're only trading $1,000, a couple thousand dollars. And yet, they pay fees to attract billions of dollars that only helps whales. They're subsidizing whales. So, Clipper is a rejection of that focus on TVL.

Uh, and the outcome is better prices and execution for retail traders. Needs a Dow to govern it. Um, and it's developed by Shipyard Software where, uh, we're a US corporation, um, where I'm the CEO. Um, and I've also spent some time in traditional markets. So, uh, I've done two ventureback companies, uh, both in the US.

I've been an investor at Bessmer and FJ Labs and on on the board of a a New York regulated stablecoin company. And so, you know, I've seen how traditional companies work. I've seen how to create Dows. And in my view, Dows might be the most important thing that comes out of crypto in a hundred years from now, right? Because money uh in a lot of ways is just a mechanism for us to organize, but organizing is our superpower.

But you know the problem that often comes up is that you know we're so focused on Dows as a revolution that can just remake and move apart from the traditional system that we risk losing the best benefits and learnings from traditional corporations and we risk alienating the very society we seek to change. And so I prefer not to think of Dows as a revolution, but think of them as an evolution that builds upon the past, right? Because you know, Dutch merchants didn't stop using corporate personhood, right? And guilds didn't stop using writing and Samarians didn't stop working in squads and teams. They built upon the best of the past and used it to propel themselves forward.

And that's really important because we're at a bifurcation point, right? The future is very bright, but things are getting more complex. And again, if we don't evolve to keep up, then it can collapse. Um, you know, that's why situations where we trust the most are where we feel most betrayed, like SPF, right? And that's why we have to address this issue of trust.

That's what Dows can do. And so, you know, my message from this before we move on to corporation incorporation is, you know, try not to think of Dallas as a revolution. Don't reject working with the real world. Leverage it. And to do that, the first thing you have to do is incorporate.

All right. Thanks, Mark. Just a very brief bio of myself. I won't go through this whole thing. Anyone recognize the QB?

What that is? My first programming language. Qbasic long time ago. Web one. It was really pre-web.

Anyways, let's skip over the rest of this. I'm currently the CEO of my Dowo, which provides legal entity solutions for Dows. Okay. What is a DAO from our perspective when we're thinking about incorporating a DAO? It's any organization that uses the blockchain for one or more of membership tracking, governance, and treasury management.

Okay? I don't care how you organize like the social and political hierarchical nature of how you get work done. If you do these things, it's hard to fit into the traditional legal system. But that's what we're here today to talk about is how you can fit into the traditional legal system. Okay, why do Dows need legal entities?

This is the most important thing for anyone who does not yet know. Okay, number one, limited liability. So you've probably heard in the news about Dows that are getting sued like Uki Dow BZX because there's no illegal entity. Regulators are suing all of the members of the DAO for what the DAO did and holding them personally responsible. Right?

That's why everyone who starts a regular company knows that the first thing you do is incorporate is you don't want to be personally liable for the activity of the organization. Right? Same thing with Dows. Corporate personhood is the ability for the DAO to act like a person in the eyes of the law, which means it can enter into contracts. It can own property, right?

Does your DAO want to own its own name, its logo, so that it can protect that if a if a trad company or another DAO comes along and just steals your name, right? Steals whatever other intellectual property you have. If you're not incorporated, you can't protect that. Also, if you want to open a bank account or buy real estate or again just sign any contract, you need that corporate personhood. Finally, tax optimization.

So, just like the liability I talked about before, any DAO that's not incorporated, if it has earnings, net earnings in a year, let's say your Dow makes a million dollars this year, right? Next year, if there's a hundred members, the IRS would say each of those hundred members is responsible for 1/100th of the taxes on the million dollars of earnings. Right? The IRS has not yet been suing all the Dows. But this is something that almost every lawyer, every person I talk to agrees that's how the IRS and other tax institutions will treat Dows, right?

They'll look at the earnings and say the individual members involved in this DAO, especially with governance rights, are responsible for those taxes. That's why you need a legal entity. Not just a legal entity to solve that problem, but you need a legal entity to get there. This is not legal advice, okay? Really important that I say this.

I'm not a lawyer. I just run a company that provides a legal service. And beyond that, every situation really is different, right? You really do need to talk to a lawyer if you can afford it, so they can understand the ins and outs of the situation you're in and make the recommendation for you for the best solution. Now, I am the author of the guide to DAO incorporation.

I'll give you a QR code at the end where you can download it. I think there's three important questions for every DAO to ask itself if it's thinking about incorporating. One, what jurisdiction will you choose? Right? What country, nationality, state?

Two, what type of legal entity will you choose? And three, how are you going to actually create this thing? Right? Who are you going to hire to do this for you? Where in the world is Carmen San Diego?

Anyone remember that? Okay, good. So, not talking about Carmen San Diego, but where in the world should you do your DAO as a legal entity, right? I'd say the biggest question that comes up for people is US versus non US versus both, right? And and even maybe more than two legal entities.

Um, that's one of the things you're going to have to consider is what are the laws and regulations related to the business that you're in, the way you operate your DAO. How might those be different based on what jurisdiction you're in, you're doiciled in, what things might not change depending on what jurisdiction you're in. So that's going to be one really important thing to think about. So like a lot of crypto projects just not going to be in the United States, right? They're afraid of US regulators.

Just doesn't make sense. There's definitely a lot of people that's look everywhere else in the world. What legal entity type will you choose? Now not each of these is available everywhere. And so that makes this whole decision tree a little bit more complicated.

But there are tons of different types of legal entities. First of all, for-profit versus nonprofit. There's even other nuanced types of tax statuses. A corporation, and if it's a corporation, what kind of tax status do you want for your corporation? Foundation LLC, DAO LLC, a newer thing.

It's what we work on. It's what they did in Wyoming. Associations or vines as they call them in Switzerland. cooperatives, unas, which are actually unincorporated associations. Uh, that's what it stands for, but they get some of the benefits of being incorporated, right?

And then who will you hire to actually create this legal entity for you? So, I think you really have three choices. Ideally, you will have a lawyer, a law firm, and really a crypto lawyer, right? As long as they say like, "I'm a crypto lawyer. I'm a Dow lawyer."

They sound like they know what they're talking about, probably good enough. You'll find out within the first half hour. There are people like Josh right here in the front row who have been doing crypto and DAO law, right, including legal entities for years. You got to get these people on your team if you can afford it. Okay, those lawyers will still need to work with a registered agent.

That's what I do, which is an organization that can actually create the legal entity because it is physically doiciled, the same place as you're creating the entity. You can also go straight to a registered agent to set up your entity if you don't have a lawyer and it will recommend you get one, but you don't have to get one. also governance consultants. So there's a lot of people in crypto who are helping people think through like how should your DAO operate? How should the governance work?

Those are good people to talk to also. They'll probably refer you to a lawyer or a registered agent as well, but they can be helpful. Okay, this QR code is not going away. I'm going to have a smaller version on a slide that's going to be up for about 10 minutes, but uh you can download the guide where I go into everything I just said and even a fair amount more detail. Again, the QR code will be back.

This will be back too, but feel free to check out our socials and our we both have a podcast. Mine's called Just Dow It where I interview people who have started a number of Dows and been involved in Dows. WTF crypto is a little more broad. Now, let's talk about the weird that you usually don't hear about when you're thinking about incorporation. And I'll leave this slide up here in case you want to check out our socials or download our guide.

So, let's talk. Mark, awesome. Weird is my favorite topic. Part of the reason we're in crypto. Yeah.

So, all right. Um, I think one of the weirdest things, first of all, tell me if you agree, is what happens when you create a legal entity for your DAO that's already been around for a while. Yeah, that is complex. Uh and it comes up a lot I think because um especially right now people didn't think that incorporation was necessary. They often just went and did their DAO.

often they have a lot of users, a lot of members and they might even have a token, right? So that creates complexity and they might have IP too, right? And that creates complexity because if you're going to create a DAO, right, it could be a realizable tax event. There are, you know, IP has value. You may have to value that.

You don't want to give all your members some sort of tax liability. There's there's like IP transfer restrictions. Like it's actually quite complex to deal. you can have unexpected uh financial consequences to incorporating your Dow later which makes the whole thing very complex. Yeah.

And of course we think Dow should still incorporate even if it's later in the cycle but a lot of the biggest Dows we talk to like common household names you know unis swap and all the big protocols like that they might not actually wrap their whole DAO in a legal entity because there would be such a major taxable event that that creates and I'll just try it's hard to explain I'll try to briefly explain what we're talking about in terms of this taxable event. Let's say your DAO has a mill hund00 million dollars in its treasury and now you incorporate that DAO to the IRS and other institutions. It's almost like you're the people involved, those 100 people, 100 million, whatever, they're giving that money to the DAO to the new company at the time that you create it. And so just like when you spend Ethereum from your MetaMask wallet and that can create a taxable event for you, if that Ethereum has risen in value, when you create your legal entity and you give all this Ethereum or other assets to it, that can also be a major taxable event that you may want to try to avoid. None of this is stuff you can't navigate around, right?

I think like most traditional companies have to navigate around these issues also, right? It's just the more the later you do your incorporation, the more complexity there often is to work with and the more expensive it will get and the more constraints you'll have and the more of a pain it is. Yeah. And it reminds me too of another weirdish thing that a lot of uh Dows do when they're creating legal structures, which is use multiple legal legal entities, right? So this is a a counter example of what we don't want to do.

But you may have heard about FTX having like 140 legal entities all over the world. That's not what you should do, right? We don't want people hiding from all the governments of the world. But it makes a lot of sense in a lot of situations, for example, to combine a nonprofit organization and a for-profit organization, maybe a development company that's separate from that, and then even think about the protocol itself as having its own unincorporated status that's separate from those other incorporated entities. So, it's something we see a lot is a little bit of a spiderweb of entities that can actually be the optimal solution.

And you definitely definitely need a lawyer to do that. Yeah. and and a lot of that is I think traditional structuring that a lot of companies have to deal with. The thing that you especially have to think about with the DAO is how are you connecting the users and the rules encoded on the blockchain to the to a legal entity at some point. Once you link that everything else can be a lot of corporate structuring that you know links to that entity that then links to the blockchain, right?

And so there's a lot of ways, creative ways to do this. Some of them, you know, are nonprofits. Some of them are foundations where you appoint a director and it's or it's a trust and they work for the bene benefit of the token holders. Uh the Marshall Islands entity just kind of says your bylaws can be on the blockchain. That's somewhat similar to Wyoming.

So there's like this is a very complex topic and that's where I think the the hardest the the the first principle problem is in figuring out how to incorporate your DAO. It reminds me of another weird thing that I see a lot which is legal structures that are like corporations like corporations foundations etc being used for Dows. And here's why that's weird. A corporation and a foundation has a board of directors or board of trustees. Most Dows do not think of themselves as having a board of trustees or board of directors.

It's just antithetical to what Dows are trying to go for. That said, especially until DAO LLC's came around, there were not really any good options for Dows out there. And so, a lot of Dows did form, for example, a nonprofit foundation in Switzerland or BVI or Cayman Islands. And what they did was they had the board members, one or more, sign a contract saying that they would do exactly what the DAO votes and tells them they should do unless it's against the law. So, it actually works most of the time, but I still think like a real DAO like honestly wants to be decentralized, does not want to have to indicate to a board what they're supposed to do if they agree it doesn't break the law, and then that board signs a document saying this is what we're doing.

So I think that's it's weird and it's not ideal. It's also like who are those directors? You know, everyone has their in theory there's all those there's a fiduciary duties and there's you know all sorts of duties but in practice a lot of people follow their own self-interest and it's really hard to know what that is in all cases especially when you know in in certain Dow structures it's very hard to hold people accountable perhaps because membership's so distributed um and so the director thing is is complex. Yeah. Speaking of directors and having to trust them, another weird is called uh UBOS's or ultimate beneficial owners.

So if anyone has not heard of these terms, I want to explain them to you. Beneficial owners generally refers to the people with the most control, ownership, governance rights, power over an organization. And they're usually required to undergo a fair amount of KYC, know your customer compliance, which means completely doxing themselves to whatever governments may be involved. um if you're applying for a bank account. So those are known as beneficial owners and they could be board members, they can be management, they can be again owners.

Um UPOS's ultimate beneficial owners is something I think even fewer people have heard of which is if there is an entity that owns or governs part of another entity. So for example, let's say you have a Delaware CC corporation that owns 20% of a DAO or of its tokens. If that DAO is going through a compliance process where they have to dox the beneficial owners, the company is it's not adequate for the company to dox itself. The company has to share all of its documents and history and finances and you have to find the beneficial owners of that company and they have to do KYC and compliance. That's why they're called the ultimate beneficial owners or uboss because you'll go as many layers deep as you have to through organization after organization to find the actual human being people that have power over an organization and dox them and KYC them for a KYC and compliance process.

What what's interesting is you know it's also then possible to have an organization with no beneficial owners right if you look through all the layers of corporations and no one is over the threshold and then I think normally they would look to managers and officers right but in a DAO there aren't necessarily those and so it puts this it's it creates this kind of weird situation and and conflict with I think traditional laws and regulations which is a tough thing for Dows to deal with. Yeah. Yeah, and that beneficial ownership laws are evolving and I'd say most of the world is like catching up to the latest international standards. Um, but it's going to be different everywhere, right? Is it 10%?

Is it 20%? Is it 25%. Right? Is it governance rights or is it actual ownership? Right?

Is it being on the board, etc. I think we're out of time, but maybe we can take one question. Um, if anyone has one. Sure. trusts.

What role can trust play? Yeah. So, I forgot to put that on my list. So, that's a good addition. That's another legal entity you can look at.

I mean, to me, so there's creative trust structures, right? Trusts are different everywhere in the world and there's lots of different types of trust. To me, the biggest issue at least like philosophically, conceptually, is trusts have trustees and you're trusting the trustees to do what the DAO wants them to do. So similar to the problem of a foundation. Um do we have time for one more question?

No. All right. Do you had a question? Oh. Oh, sure.

Sure. Okay. I think we're I think we're uh at our time. Thank you guys so much. It was great uh speaking with you today.

Thank you. [Applause]