Startup Legal Talks (15)
With the prevalence of the concepts of metaverse and NFT, the concept of DAO has also gradually entered people's view. It is a western import, but has a very eastern characteristics of the mysterious name "DAO". We all know it is equivalent to a company in the meta-universe world, but I guess you have read a lot of articles explaining DAO, but you still don't know what DAO actually is? What are the advantages of DAO over the traditional company organization structure? Today we will look at this mysterious organization structure under the blockchain - DAO.
1. The agent system of traditional company
When it comes to the company, for us living in modern times, its existence seems to be a matter of course, if not through the company, then how to do business? But in fact, the formation of the company is only 500 years old, and the East India Company, born in the 16th century in the Netherlands during the age of navigation because of cross-border trade, was the first company in the world.
So besides companies, are there other business structures? Of course, there are one-person proprietorships, and then there are partnerships.
People tout the advantages of the corporate system is often its limited liability system, because it allows people who want to do business not because of the fear of losing their families because of business failure, but only to put money as the upper limit of losses, so that more creative and adventurous business people can be more liberal, so that business has more kinds of possibilities.
But what I would like to praise is another major progress of the corporate system, that is, the "agent system", that is, the separation of ownership and management. Under the partnership system, the owner of the partnership is the operator, and the same people are in front of and behind the scenes. However, under the corporate system, the shareholders can simply be the investors behind the scenes and never need to appear, while the managers are professional managers hired by the shareholders. This allows a perfect combination of people with capital but no talent and people without capital but with talent, and allows rich bigwigs not to be overwhelmed by managing their own businesses, but to invest in multiple businesses and sit back and reap the benefits at the same time.
However, in addition to the above advantages, the agent system also has a huge disadvantage, that is, whether the manager really takes the owner's interests as the fundamental starting point in the process of carrying out the company's functions for the owner, or whether he or she is pretending to be a public servant or has other plans?
In the real world, at best, companies use a variety of compensation incentives to keep executives in place, commonly known as "golden handcuffs", at worst, so many white-collar crime, in fact, because of the separation of ownership and management in the corporate system caused by the side effects.
And DAO can solve this problem very well. The rules are written in advance by the owners of the DAO, the equivalent of the company's shareholders, and can be implemented automatically when the appropriate conditions are met, without the need for artificial manipulation by another agent; the DAO's rule changes also require a majority vote of all shareholders to approve.
This is to ensure that the actual implementation of the company is highly consistent with the original intentions of the company's founders, rather than the opposite or even contrary to them.
2. The non-self-executing nature of traditional contracts
Just now I mentioned that it can be self-executed when the corresponding conditions are met, many people may think that it is just drawing a blank and redundant. Perhaps you think that once the contract is written, you can rest easy. But as a lawyer I can tell you responsibly that the biggest problem in the writing stage of the contract is incompleteness, that is, no amount of detailed contract can exhaust the full meaning of the parties. And after the contract is written and signed, the biggest problem is that it is not self-enforceable, which is probably easier to understand in English, not self-enforceable. The contract agrees that Zhang San will sell a document to Li Si, worth $1000. The transfer of ownership of the document requires Zhang San to pass the document to Li Si, after this action is completed, the $1000 is not directly transferred to Zhang San's account, but requires Li Si to put the cash into Zhang San's hands or Li Si to complete the bank transfer online. If Zhang San passed the document to Li Si, Li Si is dead or not pay, then Zhang San can not directly execute Li Si's property, if the good or bad Li Si is not cooperating, Zhang San, in addition to suing Li Si, so that the public power to enforce Li Si's property, there is no legal means to complete this action under the existing legal system.
You can say in the contract to agree on a breach of contract clause, if how many days not to pay the money will add how much interest or even how much liquidated damages. But even 1000 can not pay back, let alone interest and liquidated damages. So often in real life, interest and liquidated damages are only really useful when they get to court. That's why in real life countless contract defaults are difficult to resolve.
In other words, the contract is only the plan of the two parties for the next action, the actual implementation of the contract binding content, or rely on the contracting parties for the conscious implementation of the contract, or in the case of non-performance of the parties, the public power to enforce.
The real role of DAO is to completely automate this process through smart contracts. When the system detects that Zhang San has passed the document to Li Si, Li Si's account will be automatically transferred to $1000.
This is actually a very disruptive innovation, if the contract does not need to rely on the consciousness of the parties, and does not require complex legal processes, can be self-executing, self-monitoring, then it will be for social costs greatly reduced.
3. Legal barriers for traditional multinational companies
Nowadays, it is very common to have multinational entrepreneurial teams, and all friends who have planned the structure of multinational companies should understand how complicated the process is. Let's not even mention the multinational, let's say that the corporate system in China and the United States are vastly different, a Chinese shareholder and a U.S. shareholder, intends to create a company, such as the final determination of the company to be set up in the United States, then the Chinese shareholder will ask the U.S. shareholders, our company's "legal person" who is? Where will the official seal be engraved? How much is the registered capital? In what department is the shareholder register filed? The U.S. shareholder is bound to be confused. If you add one or two shareholders from other countries, just to figure out the legal system and corporate structure of each country a few months have passed, and nothing has begun to do it.
This is actually because technology and the economy have been globalized, but in the law there are still national boundaries. Technological development is always ahead, which subsequently drives the economy, and the last to change is the law. So in the era of technological change, the law often becomes a stumbling block to the progress of the times.
And the emergence of DAO can be a good solution to this problem. Let the founders of a company focus more on substance and less on some formalism. Good teams will no longer be unable to work together because of legal restrictions.
What is DAO? Code is law. So it sounds like DAO has all the benefits and none of the harms, so why don't we seem to see DAO pushing through all the traditional company structures in a decisive way? In the next issue, we'll talk about the shortcomings of DAO and what the US law says about DAO.
