Free to choose compensation
There is one caveat to being free to choose the compensation mix of cash and shares. If the company does not have enough money to pay everyone 100% in cash, it is not feasible to allow everyone to take 100% in cash.
Also, if a team member asked for 100% cash compensation, then in fact the member would not bring any contribution. Yes, they would contribute their work, but this work would have already been compensated 100% in cash.
For that reason, we can only allow compensation of up to 90% in cash.
Also, in order to incentivize every team member to choose shares rather than cash, we apply a sub-1 factor to the cash to be taken out, so it becomes less, and we apply a factor higher than 1 to the shares to be taken out, so they become proportionally more valuable than cash.
Decision-making power to those with the most expertise
Decision making power should go to those people that are able to make the best decisions.
So decisions are only up for vote in case they affect the whole company. The vast majority of decisions are taken by the person directly involved with the decision at hand. Furthermore, if a company-wide vote is held for decisions that are related to someone’s area of expertise, that person gets their voting power multiplied by 3.
General voting power is not only dependent on the number of shares held; rather, it is the average of the amount of shares held and the amount of responsibility held. We recognize that a person could have a lot of responsibility but due to the fact that they just started working with the organization, their past contribution and therefore the amount of their ownership is still limited. Nonetheless, the high level of responsibility in general means that the person would have a high level of expertise and high stakes in the company too.
Speed of decision making
For a startup to be successful, it has to make decisions quickly. However, making decisions by involving all team members from the whole company is often slow and leads to bottle necks.
For that reason, we have to provide additional measures for fast decision making.
First, as mentioned above, the whole company makes decisions only in rare cases. In general, decisions are made by each individual confronted with a certain decision in their area. Only when a decision affects many areas or the whole company do we vote as a company.
Also, we use voting shortcuts. A shortcut means that before involving all team members, we have a vote among the core team members: those with the highest amount of responsibility. These team members have more than 50% of the voting rights, so if these members come to a decision, we do not have to involve more team members.
Even with the objective of decentralization and with the governance set up as described above, it is easily possible to become too centralized. For example, imagine one founder with a high hourly rate that works full time and does not take any cash compensation. If the other founders are working part time, at a lower hourly rate or are requesting a high cash compensation, the net contribution of the single founder could easily become over 50%.
That means this founder could change the governance structure alone or with the help of one or two other founders.
To avoid this, we created a founder council. The founder council is an institution composed of three founders who each hold less than 15% of the shares in the company. The founder council gets elected not by the normal voting procedure, but by a special procedure in which each founder, even minor founders, have one single vote.
The founder council then is solely responsible for dealing with founder grievances, resolving founder conflict and making proposals related to team issues. It also gets 33% of all the voting rights, so to avoid that a single founder has too much voting power.
The above are the foundational principles of the True DAO. As we are gaining more experience, the governance protocol is constantly improving and becoming more detailed.
Legality of the true DAO
Recently, there have been calls all over the world for regulation of the DAO. In fact, the state of Wyoming recently passed legislation to establish a DAO in the form of an LLC. We do not see why specialized legislation is required. In fact, we have a legal form of Delaware C-Corp but are still organized as a DAO. This is possible as the legal form is important for the relationship to the outside world, such as the government, contractual partners or public investors. But for the inside relations between contributors to the company, we are able to freely choose how to manage ourselves.
How does it work in practice?
Our core principle is that ownership, and thereby financial and control rights, depend on contribution to the company. But contributions are made daily and thus, the shareholding would vary daily. For that reason the shares are not held as actual legal shares but as what we call ownership shares. Ownership shares are a contractual right to receive the shares and their associated benefits, both financial and control-related, in the future. This is done by a continuous SAFE agreement. SAFE stands for Simple Agreement for Future Equity. Normally, a SAFE is given to investors and is valid until the company raises Series A funding. In our case every founder holds a SAFE, a contractual right to get their ownership shares and all the benefits of being an owner when the company gets sold or IPO-ed.
It provides the same benefits as legal ownership in the book, but it avoids the prohibitive legal costs of having to change ownership every time ownership changes, which in our case literally happens daily.
This model has worked so well that we believe there is no need for specialized legislation for DAOs. Delaware C-Corps, using our true DAO model, can become DAOs without having specialized legislation.
The promise of the True DAO
We started developing our DAO structure 16 years ago, although at the time we did not call it DAO. The model became more and more mature over time as we built into it our learnings from using it in different startups.
We now believe that, even though it is not perfect, the True DAO is the best model to organize companies, especially startups with the aim of
- right incentives, and
The model works particularly well in situations where many founders come together and want to start a company working remotely and part time.
We have used the model over the last year for this particular circumstance and have been able to create a founding team that is very productive and satisfied with the company environment.