Questions Lawyers Ask When Starting a DAO

Advancements in technology have given rise to new quasi-business organizations known as Decentralized Autonomous Organizations (DAOs). DAOs are fluid and often international in scope. They are minimally regulated in some jurisdictions, with most jurisdictions still wrestling with preliminary regulatory questions. Many people join DAOs and form DAOs without a strong grasp of the potential legal underpinnings of such an organization.

Harris Bricken attorneys Jonathan Bench and Arlo Kipfer sat down to discuss DAOs and the issues that should be considered when starting a DAO. A transcription of this talk can be found below.

Transcript:

Jonathan Bench  00:05

Arlo, thanks for joining me today on a chat about DAOs. I’d love to hear a little bit about your background. I know you and I’ve talked but let’s let’s let our friends know who are watching this. What are your credentials in the Web3 crypto space?

 

Arlo Kipfer  00:21

Hi, Jonathan. I’m glad to be here. My experience in the web space started back in 2013, when I started researching and investing in cryptocurrencies and became quite interested in a couple years later in the the development of smart contracts and how that would relate to the work we do. And so I’ve been following it from from afar for a while, and then eventually, as you know, there became legal aspects to both investing cryptocurrencies and building things on the blockchain and and been involved with that.

 

Jonathan Bench  01:00

Excellent. So we’re going to try and keep this video to one question, then we’ll have another video for a follow on question. So when clients come to you asking for assistance on starting a DAO, what are the kinds of things that you talked to them about?

 

Arlo Kipfer  01:14

Well, one of the first things I asked them if they haven’t started a DAO yet, and they’re asking for our advice on if they should do it, and how should they should do it is, is do you even need one? What’s the objective? It’s quite possible. I mean, it is trendy to start a DAO, and it might sound good, but it’s quite possible that for the purpose, they’re thinking of it. Maybe an LLC, or some other traditional form of business structure could be more appropriate. I do ask them things like, are you going to be a nonprofit or for profit, and enterprise. And then there’s really several main categories of DAOs today. And I try to see if what they’re proposing fits into one of these categories. There’s, as you know, there’s NFT DAOs. And what they do is they kind of incubate and collect, you know, NFT projects, trying to advance market accessibility for creators. And maybe that’s something they’re thinking about, there’s a protocol to governance DAOs, you know, that allow their participants and members to vote on proposals that influence a development direction of a certain protocol, it’s kind of an odd way of distributing governance. That’s quite interesting. Sometimes it’s an investment management though. Maybe they want to pull assets together to invest in promising opportunities. While splitting profits across the members, sometimes there’s a high degree of social interest. And maybe there’s a social community or an exclusive club, they want to build around some idea. And this requires in a social DAO, this requires some type of token ownership to access that, that community. And then there’s also a grant house, these kinds of our communities have web three builders, that networking collaborate to further the Web3 ecosystem. So really, we’re just trying to figure out what the client, you know, is a DAO appropriate? If so, what kind of DAO? And maybe if it’s not, we try to form some other type of entity.

 

Jonathan Bench  03:17

I really like that thinking about it this way. In terms of the key question, do you really need to do this because DAOs are unwieldy, right? I mean, you’ve got even the smallest DAOs, maybe hundreds of members, right? The largest ones, thousands, maybe tens of thousands of members. And so I think I mentioned this to you offline. When I was at a basketball game recently with some accountants, I said to them, and they’re in the middle of tax season. So they’re all a little bit deranged right now anyway, because of that. And I said, What if I told you that I had a partnership with 2000 partners, and they both almost dropped to the floor? Right? I mean, they just couldn’t handle it. And so the the idea, I mean, and the accountants will probably be the last people to really get comfortable with DAOs. I think, because, of course, the technology adopters come first. They creative lawyers come next to say, I think we can figure this out in terms of legal structures, right, the accountants have to do all of the all the record keeping on the back end, and they are they are going to be hating this when they finally have the first DAO project dropped in their labs.

 

Arlo Kipfer  04:22

Right, I can see that.

 

Jonathan Bench  04:26

So I’ve seen DAOs that have all kinds of purposes. I think you’re right, when we’ve got DAOs that have a real social purpose. We have DAOs and I think probably one of the best places to start is to ask the DAO members or who the DAO executive leadership team, what is your focus and keep asking that over and over again until they give you a satisfactory answer, right. It’s a we’re interested in this, you know we’re interested in space, we’re interested in helping children, I know about a DAO that’s that’s trying to get insurance to third world countries, right. They want to form an insurance DAO to help get, you know, I mean, so that’s a social component, there’s certainly a financial component to it. But getting them to really hone down on what is the purpose of the DAO, because then you can decide what parameters you have. And maybe you want to split this into multiple DAOs or like you said, maybe you don’t want a DAO depending on on what the goals are and where the investors are coming from where the participants are coming from. It may make sense just to use the DAO community as a springboard to form something else. And I’ve seen that as well. DAOs that really act more as a collaborative frameworks, collaborative ways for people to get together so that then they decide, now we found ten people who we like who we think have all the right skills, who then we can go off and form a more traditional company, or maybe they will turn it into a DAO because they want they like, there’s some Web3 components they want to it. But I think that asking that question is, is a really smart thing. Yeah. Any other advice?

 

Arlo Kipfer  05:55

Yeah, just my thoughts are, you know, like what you just said that a DAO can be more of a governance than it is a legal structure kind of governance of the group, a brain so to speak, that controls the entities is how I’ve heard it described. And, yeah, just getting the clients to understand that, you know, this could be many things. I mean, it’s a really a spectrum of possibilities. But it may just be something where it just handles the governance of a, of an entity or a group of entities.

 

Jonathan Bench  06:22

Excellent. I think let’s leave it at that. We’ve got other questions to discuss. We’re gonna pause this, get over to the next video. So catch us on the next video if you’d like to learn more about how we think about DAOs as lawyers in the space right now.

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