Model Distributed Collaborative Organizations
Produced by the Stanford working group on Distributed Collaborative Organizations, which was itself the extension of the Harvard working group on the same, the results of which are available here: https://www.scribd.com/doc/255347578/SWARM-Working-Paper-Distributed-Networks-and-the-Law
A Distributed Collaborative Organization or DCO is a proposed form of organization with characteristics that include: 1) primary governance and operations are conducted via a distributed network (blockchain); 2) stakeholders are afforded with a more active and possibly democratic role in the management and operation of the organization and 3) the interests in the organization are structured with so as to fall outside of the existing, conventional definition of a security under U.S. Securities law. The concept of a DCO has emerged to address the demand for a more collaborative organization that can allow more decentralized participation - and perhaps, in the future, economic participation - in companies that cannot currently raise capital from or grant traditional interests to the general public.
A DCO is an example of what is generally called a DAO, or Decentralized Autonomous Organization by which the general structure exists on a Blockchain. The way this works is by a technology known as a “smart contract” by which a piece of computer code determines what is done at any point, typically including some token that has financial value. There is no necessary or explicit human agency in the concept of a DAO, but there very often are ways that humans can interact with one, including the possibility of structuring in stakeholder systems that allow some degree of control.
The proposed DCO structure is a substantial modification and enhancement of the DAO structure in that it allows for a human interface and interactions with a DAO such that the trust is extended into the human world and distributed through a number of stakeholders. This potentially allows the DAO to evolve or build in integrations into the existing world.
The function and goal of this paper is to explore the DCO model in greater length to establish the benefits and limits of a DCO, and to begin to examine how the concept of a DCO can be brought into existence. Most notably it wishes to establish both best practice for setting up a DCO, both with respect to the foundation of the DCO and its on-going governance. In addition, it wishes to establish the bottom limit. What qualifies as “sufficient control” that will qualify something as a DCO instead of an “investment contract” under U.S. Law.
Unlike the last Harvard working paper, this Stanford extension is conducted on the basis of multiple real world organizations which are attempting to structure themselves as DCOs. These span multiple different jurisdictions and types of organizations. Consequently, on the basis of this information, we attempt to provide a generalized example.
The ideal organization is one that rapidly extends to reach a global audience, provides a meaningful benefit to its stakeholders, and has sufficient funding to reach its goals. This generally includes the ability to rapidly make decisions and the ability to rapidly replace people who make poor decisions that are not in the best interests of the organization’s goals. These ideals will be kept in mind when considering more broadly the various variables that apply.
Major constraints on organizational growth and organizational structure are quality of team to execute on ends, funding, and regulatory constraints. When it comes to any particular replacement of traditional share based offerings or other organizational structures that are traditionally conducted by lawyers by blockchain technology or a ‘smart contracting’ system, there are significant technological constraints as well. These may mean that various proposed aspects of an optimal organizational structure simply do not have technological support. For example, it could be that some stakeholder voting is a necessary part of an ideal structure, but no such voting system has been implemented.
A distributed organization can more rapidly engage stakeholders who are interested in the projects success. If the stakeholders can also experience some financial returns associated with their participation, this opens up a larger possibility of liquidity around associated offerings. Consequently, this can open up the larger possibility of funding and can be seen as a logical conclusion and extension of the crowdfunding model.
With the possibility to engage a larger section of the populace and engage capital from people who care about the success of that particular projects comes several negative possibilities. These range from outright fraud which is the misuse of funds, misreporting in the potential by the issuer, and the general potential that something will turn out to be an inadvisable investment. In general, the angel investing ecosystem deals with these by due diligence, especially focused on the founding team, and spreading one’s bets across a large number of startups. As reported by famous angel investor David Rose, among ten bets you expect approximately 50% to fail and the return to be concentrated in one outlier.
This high risk / high reward nature of startup investments differs it from most crowdfunding projects to date, as well as the more generalized problem that people may put in more than they can afford to lose. In fact, the crowdfunding ecosystem has already had this problem in the realm of software or technical projects, for which it is much more difficult to judge whether or not the software project will meet user expectations. While there are possibilities of mitigating these risks, this makes it a more difficult problem.
Protocols and technology that allow distributed trust and the birth of what we have called the “Trust Web” are constantly evolving. In particular, although certain structures which would enforce the guidelines could be developed, very frequently they are not developed until there is a clear need for that particular service. Given the general lack of funds directed towards long term development, this often requires a service that can easily be monetized.
In the context of existing protocols, for example there is a general lack of ability to restrict transfer of a particular right, as well as any ability to restrict access of funds. While important to the idea of a model DCO, it will probably be some time before the fullness of the outlined vision can be accomplished simply due to technical constraints.
DCO: _ [to be customized by the organization in question]
By sending funds you are entering into a binding stakeholder agreement with the DCO. This includes a series of rights as included in this document and may also include some obligations.
Your submission of Bitcoin or other assets entitles you to a pro rata share of stakeholder rights including the following:
Periodic decision making rights in the DCO on significant matters related to the future of the organization.
These rights are represented by an asset issued on a cryptographic ledger.
Assets are distributed in a programmatic way determined at the beginning of the sale based on the conditions described on sale page.
This asset is stored in a wallet that you can access by use of a passphrase.
If you lose this passphrase or someone else gains access to it, your ability to exercise these stakeholder rights is lost forever.
The general categories of action are the following:
Type of minor actions:
Adjustments to strategy or timelines Minor budget adjustments ( < $25k )
2-7 day notice via email 1 week time frame in which to vote
Minor actions require a majority of voting members.
Types of major actions:
Major budget adjustments ( > $50 - 250k )
Election of an open delegate seat
1 week notice via email 3 week timeframe in which to vote
Major actions require 60% approval of voting stakeholders within the time period specified.
Type of critical actions:
Issuance of new stakeholder rights Adding new delegates Opening an additional funding round Approval of budgets of greater than $250k Removal of a delegate Amendations to these bylaws
2 week notice via email 4 week timeframe in which to vote:
Critical actions require 70% approval of voting stakeholders within the time period specified.
Changing or emendations to these bylaws require 80% approval of voting stakeholders within the time period specified and universal consent of delegates.
Notification of a pending action will primarily be delivered by email provided by the purchaser of the DCO share at the time of purchase.
“Budget adjustments” include any outgoing usage of funds and may include money necessary for operations paid to delegates or other full-time staff, bounties or other monies paid to contractors for work, distribution of stakeholder rights in exchange for services, or some sort of reward that are returned to stakeholders for their contributions.
Managing delegates of this DCO consists of 3_ members.
Delegate 1: _________ Delegate 2: __________ Delegate 3: To be chosen by stakeholders within 90 days after sale end and/or Swarm representative
DCO delegates agree to make a best effort to inform stakeholders of any upcoming action requiring their approval and to follow any approved budgets. Allowable adjustments are anything below $5k.
Proposal and budget language requires a majority consensus among delegates. The delegates that have explicitly agreed to each modification in language shall be listed.
A delegate may or may not have a term associated with their election.
By sending of Bitcoin or other assets it is assumed that you approve the following contract , as well as any accompanying budget.
In the case that there is no included budget, a budget will be issued within 30 days after the close of the sale (no later than 90 days after purchase date) to be approved by stakeholders within the context of a “critical decision.”
In event of a dispute arising from perceived improper, arbitration will be conducted by Swarm or the dispute shall be submitted to arbitration in accordance with the laws of the State of California. This decision shall be made by Swarm.