Financial Upside for Sporos Users
Sporos is designed to be a launchpad for for-profit DAOs. The product allows founders to create a Delaware Limited Liability Company (LLC) on-chain and distribute equity using our sweat equity framework. This is an effective way to coordinate activity and bootstrap an early-stage project, whilst protecting contributors from personal liability.
See ‘An Introduction to Sporos DAO’ for more detail.
Each LLC has its own Sweat Equity Token (SETs), which are non-transferable and do not have a liquid market value. A typical question users have is how will their SETs achieve a market value?
DAO or On-chain Business?
Projects using Sporos are likely to be pursuing one of two paths:
- Operating as an on-chain company
- Operating as a DAO
The key distinction between these paths is how the organization is governed. Is it run by a small group of contributors or a broad group of token holders without a hierarchical structure? There is no rigid distinction between these structures, it often comes down to time. Every DAO starts life looking like a small company run by a few founders but can grow to becoming a decentralized organisation over time.
Whether an organization is opting to run as a company or as a DAO affects what financial upside options it will favour.
Routes to Financial Upside
All founders want to profit from their hard work and dedication. Ownership of their organization is traditionally represented through equity. Here are some typical routes founders could take to imbue their equity with value and to realise some financial upside:
- Acquisition
- Merger
- Investor Financing
- Public Offering of Transferable DAO Tokens
What these routes have in common is that some external party (another company, an investor, the market) has ascribed value to the given project.
To follow any of these routes it is of course first necessary for a project to find product market fit (PMF). Without a product that people want, there will be no users, no business and any equity in the project will be worthless.
Sporos is intended for projects to use whilst they find PMF. Assuming they do, all of the routes to financial upside mentioned above are theoretically possible for projects that have used Sporos.
Acquisition / Merger
In this scenario, another company has seen value in what you have built and either wishes to acquire the business or merge it with their own. All equity is transparently recorded on chain using Sporos, so a proper appraisal of the ownership structure is trivial. Once deal terms have been agreed a transfer of equity can all occur on chain.
Investor Financing
In this scenario, an outside investor wants to purchase some amount of equity in the business, in the expectation that the business has a chance of becoming wildly successful. This is an uncharted path for projects using Sporos. Institutional investors normally want the companies they invest in to be structured as C-corps, whereas Sporos projects are structured as series LLCs.
One option for Sporos projects is to transition from the series LLC structure to a C-corp structure. This could be done as part of an investment deal. Thanks to the Sporos sweat equity system, teams following this route would have a crystal clear idea of how the cap table should look under this new structure.
Another option for Sporos projects is to find investment from parties that are willing to invest in projects which are not c-corps. We are confident such investors exist.
Public Offering of Transferable DAO Tokens
In this scenario, the project offers its token for sale to the market. The Initial Coin Offerings (ICO) craze of 2017 taught us that the SEC will scrutinize these offerings closely, and is more than willing to take enforcement action against entities it believes have sold securities (tokens) without first registering with them.
If a project is to take the route of offering its token for sale to the broader market without being designated a security by the SEC, it must consider whether it is sufficiently decentralized.
Sufficient Decentralization
‘Sufficient decentralization’ is a concept introduced in June 2018 by william Hinman, who at the time was the director of the SECs division of Corporate Finance. Hinman said: “If the network on which the token or coin is to function is sufficiently decentralized — where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts — the assets may not represent an investment contract.”
Hinman is indicating that a project which is sufficiently decentralized may fail the 4th prong of the Howey Test, namely that an investment contract does not exist because profits cannot be expected from the sole efforts of others (i.e a central team).
Marc Boiron wrote this piece on Sufficient Decentralisation which looks in detail at different aspects of web3 operations (both on-chain and off-chain) and offers suggestions for decentralizing those activities. In essence, projects which are seeking to become ‘sufficiently decentralized’ should be looking for ways to remove reliance on any core team’s efforts and instead distribute the expectation put upon a core team to multiple teams working independently. This increases the expectation that token holders will profit from the efforts of a broader group, and decreases expectation that profit will come from the initial team’s efforts.
The full article is a must read for anyone considering this path.
Progressive Decentralization
Progressive Decentralization written by Jesse Walden at 16z is another long-form article on the topic of decentralizing web3 projects. Walden breaks the path for founders down into three objectives:
Objective 1: Product/Market fit
Objective 2: Community Participation
Objective 3: Sufficient Decentralization
Fostering community participation hinges on a successfully evolving relationship between users, contributors and the core team. Over time, the core team should hold less responsibility, and contributors and users should hold more. In practice, this will mean attracting and incentivising long-term contribution. Simply launching a token is arguably not the best way to attract and retain high quality contributors as this can result in a large passive audience who do not add significant value to a project as well as falling foul of securities registration requirements.
This table from the article gives a good summary of how to achieve different objectives at differing stages of a businesses journey:
Conclusion
Sporos provides a safe sandbox environment for early stage projects to find product market fit and figure out how their business should operate. Understanding the different paths available to financial upside is vital for teams to stay motivated. Different paths will also impact the decisions teams make on their journey. Until Sporos, teams that want to operate as DAOs have had no framework to follow that simultaneously #
- Allows them to build effectively with a central team at the helm
- Remain legally compliant
- Allows them to progressively decentralize
Sporos provides that framework.
At the same time, teams which do not want to decentralize over time but still want to run their business on-chain can use Sporos and instead of following the path to a token launch, they can follow one of the alternative paths to acquisition or investor financing.
Sporos projects can take confidence in the fact that the Sporos team itself will be the first to follow one of these paths. We eat our own dogfood at Sporos and use our sweat equity system to compensate contributors and remain on the right side of the law. The lessons we learn along the way will be shared and discussed out in the open.
If you want to join the conversation, head to our discord: https://discord.gg/eeQuEhwRvF
Follow us on twitter: https://twitter.com/SporosDAO
If you are a founder who is interested in using the Sporos sweat equity product, sign up to our waitlist on our website: https://sporosdao.xyz/
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.
