Living Our Own Gospel: How We Plan to Decentralize OtoCo’s Governance

Our “DAO or Die” post in the June issue of The Otonomist caused many to reach out to us to discuss how their project could be further DAOfied.

It also lead to some introspection how to make sure we live by our own gospel, which believes that by giving stakeholders a guaranteed voice, we will win their loyalty, leading to a far greater mobilization of talent, which in turn will help defy and defeat centralized players.

Governance Design

With this in mind, we started an internal discussion on how to design our governance such that anybody who walks with us on the road to OtoCo knows they can expect a share in the platform’s success.

This aim ripples through in 3 key governance design imperatives:

  1. To make it easy for stakeholders to participate;
  2. To have checks and balances in place against centralization of decision making; and
  3. How to measure and recognize people’s contributions.

Lots remains to be defined, and what follows is a snapshot of our current thinking.

A token litmus test

We looked at many projects that issued a governance token and ran a litmus test on our own token, asking if we could achieve the same result without issuing one.

Our test ran as follows:

1. Why we don’t need a native token for users to access our services

On the Otonomos side, users currently pay us in any major crypto or fiat.

As a result, we do not feel OtoCo users should have to purchase a native token to access our onchain incorporation services on otoco.io. (which are currently free).

It would mosty likely create a barrier to wider adoption. Once our services are chargeable (from September), we will let users pay in ETH and DAI and possible others.

2. We need a token to let all stakeholders share in our revenue

In a traditional setup, stakeholders typically coincide with shareholders: a narrow group who acquired an economic interest in a joint project through labor (founders, first employees) or capital (investors).

This excludes a wide group of people who legitimately helped a project, most importantly paying customers who help grow revenue!

Customers could be made shareholders when they buy a product or service, but this is not practical.

Say you bought a Tesla car and Elon, by way of saying thanks, wants to pledge some TSLA shares to you: though simple and powerful as an idea, it’s hard to do as securities laws will likely kick in (share offering to retail?) and you’d need a brokerage account where the shares can be held, etc.

Why not issue a token that like-for like represents an actual share certificate in a project’s operational entity? Clients could then become shareholders by virtue of being gifted the token as part of their purchase.

Whilst this approach has some appeal, it has significant drawbacks:

  • First, as we have seen with other projects, token holders often don’t wish to join a captable and become part of a shareholder base.
  • Second, securities law issues are daunting: by gifting a token to a paying client, you are likely offering a security to non-accredited investors.
  • Third, such token would limit voting rights to actual shareholders of a company, which would repeat the sins of the traditional setup described above.

Our solution is to make token holders beneficiaries in a trust.

As beneficiaries, they would then receive payouts from the trust. These payouts would be a portion of the revenue that streams back up to the trust from the underlying money-making operating company.

Overall, it is a lot easier under a trust instrument to make somebody a beneficiary of the trust vs. making them a shareholder in a company.

And since payouts from a trust are not a share dividend but essentially a grant in nature, a nice side effect is that tax may be more beneficial, depending on the tax status of each individual token holder.

The above setup is not designed to shortcut securities laws: any instrument that promises income is likely to be considered an “investment contract” for securities laws purposes (though we are firming up what the position is for a token that makes its holder a beneficiary in a trust that pays out a revenue share by way of grants).

Closer to our sale, we will post separately on the details of the bonding curve model that will continuously mint the OtoCo token as a function of buyer demand, how this token will be linked to an actual revenue reserve, and how part of this reserve will fall back to token holders including paying users. We don’t think it’s been done before.

3. We need a token to guarantee participation in our governance

In our envisaged design, token holders — despite not being shareholders governed by a shareholder agreement — can still enjoy a right to vote.

The way we do this is by giving token holders voting rights under the trust instrument.

We know trusts can be set up with “indeterminate” beneficiaries (i.e. beneficiaries do not have to be listed by name in the trust instrument).

We also know that beneficiaries, though not usually, can be given a say in matters related to the trust, including how its assets are managed.

They can do so indirectly, by exercising their power to appoint or dismiss the Trustee, or they can be given the right to vote on trust matters directly.

Increase participation through delegation

This opens the question: what can token holders directly vote on?

Here we take a balanced approach:

  • Day-to-day matters related to the operational company are decided by its Board.
  • However, who sits on the operational company’s Board is a matter for the Trust as its shareholder to decide, and is one of the “reserved matters” subject to a shareholder vote.
  • Meta-matters related to the Trust, including who sits on the Supervisory Council that oversees the Trustee, the size and frequency of working capital grants to the operational company, the % of revenue earmarked to the reserve pool for payout to beneficiaries, etc are all subject to an onchain token holder vote.

Importantly, token holders can table motions to vote on any matter if a treshold number of token holders support the motion.

This right to table motions, combined with token holders’ powers to appoint (or dismiss) members of the Supervisory Council, who in turn oversee the Trustee who appoints the operational company’s Board, puts a linear transmission mechanism in place that allows token holders as the ultimate beneficiaries of OtoCo to express their pleasure or discontent with how things are managed, without being called to vote on every daily detail.

The actual setup

In the final part of this post, we summarize our actual setup hoping it is a template other decentralized projects want to copy.

OtoCo’s governance structure: A linear transmission mechanism of tokenholders’ wishes.

The vehicle where ultimately all value in OtoCo crystallizes is a Wyoming trust with our token holders as beneficiaries, as described above.

Initially, a Private Trust Company in Wyoming will be Trustee of the Trust until a first vote takes place to appoint an independent Trustee and the members of the Supervisory Council.

The Trust 100% owns Otonomos LLC, which is the operational company in the U.S.

Otonomos LLC is Sole Member in each of the Master LLCs that function as OtoCo’s company assemblers in the jurisdictions where we offer onchain incorporation: Intially OtoCo DE LLC in Delaware, to be followed by OtoCo WY LLC in Wyoming, and further States where we roll out our product.

Otonomos LLC is also the Registered Agent for each LLC our users create on OtoCo, since all LLCs need a Registered Agent, primarily for purposes of service of process.

Importantly however, neither Otonomos LLC nor any of the Master LLCs (nor any other Otonomos entity) is a Member of our users’ LLCs: we have no control nor say over any of the companies our users create on OtoCo.

Finally, if at some point we want to let investors in at the operational company level, we could have the Trust own a C-Corp (a preferred entity with traditional investors) in which investors hold a stake, and the C-Corp would then own Otonomos LLC.

If there were to be an exit of the operational company, all proceeds would flow back to the Trust and hence to the token holders, minus the investors’ pro rata share of the sales proceeds.

Timeline

We’ll be using (West Coast) summer to finalize the token design and legal setup whilst further growing our user base and the wider OtoCo community.

So expect an announcement in September together with all detail on the token sale and timing.

Meantime, feel free to chip in by joining our Road to OtoCo Telegram group so we can get this right together!

DISCLAIMER: This post is by no means a solicitation to invest or a securities offering. This post does not constitute legal advice.

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