An Introduction to Sporos DAO
We believe ownership and governance in a startup, company, or DAO should be earned by those who provide real value by contributing their talent, energy, and skills — not just those who are founders or ‘in the boardroom’.
One of the major pain points for early-stage projects is how to split equity among founders and contributors in a way that’s fair, transparent, and aligns incentives for the long run. Sporos enables projects to reward all contributors with sweat equity tokens that represent ownership and governance rights in the DAO based on the value of their contribution. Importantly, this all done in a way that complies with U.S. securities and tax regulations.
The idea is pretty simple:
- Continue to contribute more value to a project = earn more sweat equity tokens.
- Stop contributing value = get diluted by those who continue to provide value.
While we’re building Sporos to be utilized by for-profit companies in general, much of our history and battle scars come from the open source community. That experience has driven much of Sporos’ vision.
So, before we get into it you first need to have a quick context of open source software projects before you can understand our WHY.
Here goes 4+ decades in a few paragraphs…
Quick Open Source History
Starting in the 1970s, open source projects were very much on the fringe of the developer community, and business models were an afterthought as software was given away for free. Peter Levine calls this the “Free Software Era.”
That changed in the ’90s though. Companies such as Redhat and MySQL started experimenting with commercializing open source software through paid services and support, and by the 2000s, cloud computing enabled businesses to start offering open source software-as-a-service. We were now seeing these businesses realizing multi-billion dollar valuations being built on top of open source software.
The problem is capturing value in commercialized open sourced projects is very difficult as a contributor.
In this a16z blog post, Jesse Walden correctly points out what many developers have experienced first hand through involvement in previous open source projects over the years.
Open source code has enabled trillions of dollars to be generated by software companies that use it, but the communities that develop that code typically haven’t had a means to capture much of the value directly. That’s because there is a major difference between open source code libraries, which can be easily copied, and networks that form around running open source code as a service. An open source library is an empty blueprint. It’s dead code, until it’s run as an instance and is filled with data, users or both, forming a network or service.
Our focus at Sporos DAO is primarily on who gets to participate in the value accrual of a commercialized open source project and how that value is distributed among those that contribute.
Open Source vs. Open Source Plus
We think web3 has ushered in a new era of open source. We call it Open Source Plus (OS+):
Web2 = open source
Web3 = OS+
The ‘Plus’ in OS+ represents these main additions:
- Additional skill sets of contributors working on the project
- Compensation / incentive alignment for contributors
In web2, it’s hard to attract non-developer talent to open source projects. This is because non-devs often struggle to understand the project and what it is trying to achieve. Developers approach projects from a technical standpoint, but non-developers normally think in users and markets rather than code. This difference in mentality and skillsets translates to communication gaps and can mean that non-devs miss the point of an open source project entirely.
In addition, there’s no economic incentive to get involved in open source as a non-dev. While developers get practice, experience and connections to other developers, non-devs experience little of these incentives. You rarely see open source projects launch as for-profit entities on day 1 where non-dev talent would actually be needed.
As a project gains traction (wordpress, mysql, linux) then business savvy people enter the picture and likely start extracting value for self benefit. Oftentimes, this leaves the original developers out in the cold except for the select few who may get hired for their technical expertise by companies that raise capital on the back of their success leveraging the open source software.
It is very rare for developers to think early on about the business aspects of the project and even more rare to attract business people to help the project with commercial viability.
This is where DAOs really made their first wave in creating OS+ because they were able to attract cross-functional talent at very early stages (engineers, designers, marketers, content creators, business development, etc.). DAO contributors are free to come and go as they wish — same as open source contributors — but they also typically get paid in the project’s tokens if they contribute.
DAOs are a step change in how open source projects are organized, launched, and developed.
How Sporos Empowers the Next Evolution of DAOs
Web3 unlocks the incentive tools that can help attract crucial early talent that is required to round out a project and steer it in the direction of real world sustainability. The problem is the vast majority of DAO tokens don’t actually represent ownership in the project primarily for U.S. securities reasons (See: Uniswap and Uniswap Labs) and mostly act as glorified cash comp with the veneer of governance (See chart below).
Tokens are also normally allocated using a traditional corporate distribution system (e.g. fixed amount with x% to founders, y% to contributors, z% to advisors, etc.) with amounts being arbitrarily determined by a select few.
However, we’re asking these questions:
What if contributors were rewarded with tokens that represent actual ownership and governance in the project/company?
What if a contributor’s ownership and governance was proportional to the amount of value they provided relative to all other contributors?
What if a contributor’s percentage of ownership and governance ebbed and flowed based on their sustained involvement relative to other contributors?
That’s what we’re building.
We’re creating an equitable environment to assist for-profit projects to wrap themselves in a Delaware LLC and utilize a sweat equity distribution system during their initial bootstrapping phase.
Ultimately, our solution and associated legal framework is intended to answer one simple question (and provide the tools to support it):
How can a sweat equity token (SET) represent both financial and governance rights in a company while complying with U.S. tax and securities regulations and while also eliminating the associated administrative burden for both the company and its contributors?
Problems we aim to solve with sweat equity
It’s difficult to attract, compensate, and retain contributors while bootstrapping a project.
Sporos makes this easier by providing a level playing field where everyone shares in the upside of the project based on the value they provide. This is true incentive alignment.
Many contributors are willing to be compensated with upside but doing so while complying with U.S. legal, tax and securities regulations is costly and complicated.
Sporos provides a simple, out-of-the-box solution designed to comply in the U.S and minimize compliance headaches for both the company and its contributors.
Cap table decisions are traditionally arbitrarily made by a concentrated few. As such, it’s impossible for contributors to gain meaningful ownership in a project without being an early founder or investing capital.
With Sporos, your ownership in a project is the direct result of the value you provide relative to other contributors. To maintain your level of ownership and governance, you must continue providing value on an ongoing basis or risk being diluted.
Web3 ownership usually isn’t really ‘ownership’.
DAO governance tokens give contributors the facade of ownership with negligible associated governance rights. Sweat equity tokens give contributors actual ownership interests in the project and the equivalent amount of governance rights.
Project needs are dynamic and can change at any given time. However, projects often find themselves with meaningful amounts of equity owned by people who are no longer helping build the business or not providing their expected value. As a result, incentives aren’t aligned and projects are unable to recruit new participants and reward them with upside.
Instead of being stuck with a poorly designed and static cap table, Sporos enables dynamic cap tables where projects can flex to new contributors and reward them appropriately.
While investors get to diversify risk by placing multiple bets with their capital, employees are forced to make concentrated financial (and time) bets on the success of their employer.
Sporos enables contributors to earn upside in multiple projects simultaneously when contributing to projects that reward in sweat equity tokens.
Core Tenets of the Sporos Platform
- Intuitive formation process. The Sporos platform enables a “self-service” Company formation process which requires no lawyers or third party involvement. We’ve built Sporos on top of what the giga-brains at KaliDAO have built which enbables users to mint an on-chain Delaware LLC as an NFT in minutes. (NOTE: Though an attorney is not required to form this entity, users are encouraged to discuss matters with competent legal counsel as they see fit.)
- Cost-Effectiveness. Setting up a Sporos Equity LLC (a Delaware LLC using the Sporos Operating Agreement) costs less than $500.
- Compliance. The Sporos Equity LLC is designed to optimize and prioritize compliance with U.S. Securities and Taxation regulation.
- Protection. The Sporos Equity LLC provides liability protection for all SET holders.
- Dual rights. SETs have both financial and governance rights in the company.
- Privacy. No mandatory doxxing required to receive or own SETs.
- Tax minimization. Nominal to no tax liability for SET holders, and minimal tax reporting overhead for the project.
- Securities compliance. While SETs are securities, SETs are distributed under a compensation plan that is approved by the LLC and accepted by each new contributor prior to receiving their first SET. This addresses the intended use of the tokens and explains why they should fit under the rule 701 exemption.
- A level playing field for all. Companies formed using the Sporos Equity LLC are SET holder managed, not Member or Founder managed.
Sporos as a Company Operating System
The name Sporos comes from combining Spore + Operating System (OS). Mushroom spores are tiny, reproductive cells that allow fungus to replicate and grow. Spores are present in large numbers on healthy mushrooms because successful germination by a spore only happens in very unique circumstances.
We believe we’re creating the framework for a company operating system to enable for-profit decentralized companies to prosper in a way that was never possible before.
We’ve met with dozens of attorneys and accountants to build out the tax and securities frameworks necessary to provide a sweat equity distribution system that complies in the U.S. We’ve teamed up with KaliDAO to build on top of their innovative on-chain Delaware LLC platform as we develop additional tools to support DAOs that want to leverage the Sporos sweat equity system.
Now, it’s up to you — the community. How will you take advantage of these unique circumstances to successfully develop your project?
If you have questions about our research, or want to help us in our venture to reimagine how business are formed and operated, check out our discord, signup for our waitlist on our website, or hit us up on our twitter.
Disclaimer: This framework should not be construed as legal advice for any particular facts or circumstances and is not meant to replace competent counsel. None of the opinions or positions provided hereby are intended to be treated as legal advice or to create an attorney-client relationship. This analysis might not reflect all current updates to applicable laws or interpretive guidance and the authors disclaim any obligation to update this post. It is strongly advised for you to contact a reputable attorney in your jurisdiction for any questions or concerns.
