Author: Iris
In an online discussion about the Yescoin dispute two days ago, attorney Mankiw saw a message like this: "How can starting a business together not be considered as investing?"
This is actually a common problem in Web3. People may think: As a member of the core team of the project, I have contributed my technology, experience and even funds to the project. How can this not be considered as an investment?
But in fact, even if you have the title of project partner and make great contributions to the project, you are not necessarily considered a shareholder.
Why do you say that?
Equity investment under the traditional entrepreneurial model
Before discussing this issue, let us first look back at how "investment" is defined in traditional entrepreneurship under the legal framework.
Usually, what we understand as "investment" is that entrepreneurs or investors invest funds, equipment, technology, intellectual property, etc., and obtain clear shareholder status in the company by establishing a company or signing a shareholder agreement. This type of investment has mature and clear legal definitions and protection mechanisms in the company laws of various countries.
In the traditional model, the rights and interests of each shareholder, such as the right to dividends, voting rights, the right to know, and the right to transfer shares, need to be clearly agreed upon in advance. The company's articles of association or shareholder agreement will clearly record each shareholder's investment method, equity ratio, and corresponding rights and obligations. In other words, whether you invest in cash, technology, patents, or sites, it will eventually be converted into a clear equity ratio and formally recorded in the industrial and commercial registration documents or shareholder registers.
Because of this clarity, when traditional enterprises raise funds, distribute dividends or transfer equity, the rights and responsibilities of each shareholder can be clearly protected by law. Even if shareholder disputes arise in the future, all rights and interests can be clearly defined, and there will be no ambiguity such as "Am I a shareholder?"
But it is precisely because of this clear reference that the issue of Web3 equity investment seems even more confusing.
Equity investment in Web3 startup model
Unlike the traditional entrepreneurial model, Web3's entrepreneurial approach is more flexible and more "decentralized" - many teams are not in a hurry to set up a company, or even have not considered setting up a company first. Instead, they adopt a seemingly easier approach, such as a few people forming a core team based on a verbal agreement, or directly setting up a DAO.
However, under these models, can the time, technology and even funds you invest be clearly identified as equity investment like in traditional enterprises?
Core team model
In the early stages of Web3 startups, a particularly common model is that several core members start working together based on mutual trust, enthusiasm, and simple verbal commitments. At the same time, everyone's investment in the startup may not necessarily be financial, but may be technology, operations, or industry resources, but everyone assumes that they have become partners in the project. When the project successfully raises funds and issues coins, they will obtain tokens and shares in a certain proportion.
However, from a legal perspective, this “seemingly simple” model may hide huge uncertainties and potential legal issues.
Strictly speaking, this verbal acquiescence based on commitment or contribution does not automatically equate to "shareholder status" in the legal sense - this generally requires a clear written agreement or share registration procedure .
But this does not mean that you cannot assert your rights.
For example, in mainland China, according to the Supreme People's Court's "Provisions on Several Issues Concerning the Application of the Company Law (III)", if you can provide sufficient evidence to prove that you have invested or contributed resources (such as technology development, capital investment, etc.) and actually participated in the project or company's operation and management, then the court may identify you as a "silent shareholder."
Similarly, in some cases in Delaware and California, the courts also recognized "de facto partnership", that is, if several founders start a business together, contribute resources and bear risks together, even if there are no formal documents and registrations, they may be regarded as de facto partners, thereby sharing profits and assuming joint and several liabilities.
However, these judicial practices do not mean that you can safely participate in this model of entrepreneurship. Because once the project is successful, such as smooth financing and a substantial appreciation of the token after issuance, the initial verbal agreement is often not worth mentioning in the face of huge interests: how to prove that you are a shareholder, ordinary workers are also contributing to the company and the project; even if you are recognized as a shareholder, how to determine your contribution ratio; even worse, if the project fails, some people think that their rights and interests have been damaged, and they are likely to claim that they have made contributions but have not received due compensation, which will lead to disputes and even legal proceedings.
DAO Pattern
In addition to core small team entrepreneurship, another popular form of entrepreneurship in the Web3 field is DAO (decentralized autonomous organization).
Completely different from traditional corporate startups, DAOs do not have formal corporate entities, nor do they have so-called articles of association or business registration. Most members of DAOs join by contributing content or purchasing tokens, and receive corresponding governance tokens, exercising decision-making power through voting, including the direction of fund use, investment project selection, etc.
From a strict legal perspective, the original intention of DAO is decentralized governance, so the tokens launched by DAO are usually defined as tools for participating in project governance voting and incentive feedback for contributing to DAO, and are not directly equivalent to company equity in the traditional sense. Therefore, in this case, the laws of most countries or regions will not easily regard DAO members holding governance tokens as traditional "company shareholders."
But the key point is that there is a type of investment DAO, whose members jointly decide to invest funds in a certain target project or asset through voting, and then distribute profits according to each member's proportion of currency holdings or contribution after the investment is profitable. This mode of operation is actually very close to the traditional investment partnership or company shareholder investment model. At this time, the model of DAO members' gains through token governance has the characteristics of traditional dividend or profit distribution.
In this case, even if the DAO's tokens were not initially clearly marked as having economic benefit attributes, some jurisdictions (such as the United States) may still regard the DAO's governance tokens as de facto securities or equity, and the DAO's participants as "de facto partners" or "dormant shareholders." The U.S. Commodity Futures Trading Commission (CFTC)'s enforcement action against Ooki DAO is a typical case. In this case, the regulator believed that DAO members actually exercised the functions of corporate managers or partners through voting and must bear corresponding legal responsibilities for DAO's illegal activities.
Therefore, under the DAO model, whether a member has "invested" cannot be simply determined by whether the company is registered or whether there is a formal shareholder agreement, but requires a comprehensive assessment of whether there are clear investment decisions and profit distribution behaviors.
Traditional company model
Even though some Web3 projects now choose to register companies and adopt traditional equity structures to standardize operations, when it comes to token financing, the boundaries between equity and currency rights can still easily become blurred, and may even lead to legal disputes.
Web3 projects often involve not only traditional equity financing, but also token rights financing. Although token holders may not be shareholders of the company, in many cases, they may also participate in governance, enjoy economic benefits, and even influence project decisions. This intersection of "token rights" and "equity" often brings about the following two major legal issues:
First of all, will participants in currency-rights financing be recognized as shareholders?
In Web3 project financing, some investors may participate in financing and obtain a certain proportion of project tokens without holding company equity. Whether these investors can be identified as shareholders depends on the legal attributes of the tokens. If the tokens are only used for governance and ecological incentives, investors are generally not considered shareholders. However, if the tokens have dividend rights, income rights, or investors participate in key project decisions, they may be identified as "de facto shareholders" or "partners" in some jurisdictions.
Second, are the governance rights of token holders sufficient to constitute shareholder status?
In some Web3 projects, the project party will grant token holders certain governance rights, such as allowing community members to decide project proposals and fund flows through voting. When token holders, especially investors with large positions (whales), exert substantial influence on the company's core operating decisions, some jurisdictions (such as the United States) may believe that these token holders perform functions similar to shareholders, and thus identify them as de facto shareholders or general partners based on the principle of "substance over form".
How to prevent equity disputes?
Regardless of the entrepreneurial model, the most likely cause of disputes is often not the "failure to build the project" itself, but the once ambiguous ownership of equity becomes a problem after the project becomes larger. So, how to prevent equity disputes in Web3 startups?
Therefore, Attorney Mankiw recommends starting with the following key points.
First, under the core team model, the contribution relationship needs to be clarified and a written agreement needs to be signed as early as possible.
In the core team model, it is easy for entrepreneurial members to assume that they are "partners", but if there is no clear legal document, this default relationship is often not legally binding. In order to avoid possible disputes over interests in the future, team members should sign a written "Contributor Agreement" or "Equity Structure Agreement" in the early stages of the project to clarify their respective contribution types, future equity realization methods, exit mechanisms, and decision-making rights .
Ultimately, trust is beautiful, but clear agreements are the cornerstone of protecting everyone's legitimate rights and interests. Once there is a written agreement, even if the project is financed or tokens are issued in the future, the rights and obligations of each party can be clearly defined to prevent legal disputes caused by expectations gap.
Second, under the DAO model, it is necessary to clarify the legal attributes of tokens and distinguish between governance tokens and de facto equity.
Equity disputes under the DAO model mainly come from the unclear legal attributes of governance tokens and the influence of token holders in DAO decision-making. In order to prevent possible legal disputes in the future, DAO project owners can take the following preventive measures in advance:
In token design, a clear distinction is made between governance tokens and equity tokens.
Through voting rights caps, time-weighted voting mechanisms, delegated voting and other methods, we can avoid whale manipulation and maintain decentralized features.
Establish a participant agreement to clarify roles and legal responsibilities.
Third, under the traditional corporate model, ensure that the boundaries between equity and currency rights are clear to avoid mismatch of interests.
In order to avoid disputes caused by the mixing of equity and currency rights, Web3 startup teams need to clarify the boundaries between equity and currency rights in the early stages. On the one hand, the company's articles of association and shareholder agreements should clearly define shareholder rights, while the rights of token holders should be managed through another independent governance framework; on the other hand, it should be clear that tokens do not constitute traditional shares of the company, and token holders do not automatically become de facto or silent shareholders of the company.
Fourth, keep good records and archives, and bring in professional legal advisors to prevent problems before they occur.
All contributions, equity distribution and agreement documents should be recorded and archived to prevent future disputes from being unable to provide evidence. This not only helps with internal team governance, but also provides strong support in financing or legal proceedings.
In addition, in Mankiw’s professional experience, he often finds that many Web3 startup teams tend to focus on technology and the market, but ignore legal issues, such as equity structure. Therefore, it is highly recommended to introduce legal advisors during the project development process, especially in the early stages, and conduct regular reviews to ensure the stable and compliant operation of the project.
