In the online sharing about the Yescoin dispute a few days ago, lawyer Mankun saw a comment saying, 'How can it not be considered equity participation in a joint venture?'
This is actually a common issue in Web3; people feel: As a core team member of the project, I have contributed my technology, experience, and even funds to the project, how can it not be considered equity participation?
But in reality, even if you bear the title of project partner and contribute significantly to the project, it does not necessarily mean you are a shareholder.
Why do I say this?
Equity Participation in Traditional Entrepreneurial Models
Before discussing this issue, let's first look back at how 'equity participation' is defined within the legal framework of traditional entrepreneurship.
Typically, what we understand as 'equity participation' refers to entrepreneurs or investors investing funds, equipment, technology, intellectual property, etc., to obtain a clear shareholder identity by establishing a company or signing a shareholder agreement. This method of equity participation has mature and clear legal definitions and protection mechanisms in company laws of various countries.
In traditional models, the rights of each shareholder, such as dividend rights, voting rights, rights to information, and share transfer rights, need to be clearly agreed upon in advance. The articles of association or shareholder agreements will clearly record each shareholder's investment method, equity ratio, and corresponding rights and obligations. In other words, regardless of whether you contribute cash, technology, patents, or premises, it eventually needs to be converted into a clear equity ratio and formally recorded in business registration documents or shareholder rosters.
It is precisely because of this clarity that traditional enterprises can have their rights and responsibilities clearly protected by law during financing, profit distribution, or equity transfer. Even if disputes among shareholders arise in the future, all rights and relationships can be clearly defined, avoiding ambiguous situations like 'Am I a shareholder or not?'
It is precisely because of this clear reference that the issue of equity participation in Web3 becomes even more ambiguous.
Equity Participation in Web3 Entrepreneurial Models
Unlike traditional entrepreneurial models, Web3 entrepreneurship is more flexible and decentralized—many teams do not rush to establish a company or may not even consider forming a company first, but adopt a seemingly more relaxed approach, such as a few people forming a core team based on a verbal agreement or directly establishing a DAO.
However, in these models, whether the time, technology, or even funds you contribute can be clearly recognized as equity participation like in traditional enterprises?
Core Team Model
In the early stages of Web3 entrepreneurship, a particularly common model is that several core members rely on mutual trust, enthusiasm, and simple verbal commitments to work together. At the same time, each person's contribution to the entrepreneurship may not necessarily be financial; it could be technology, operations, or industry resources, but everyone implicitly assumes they have become partners in the project, and when the project successfully raises funds and issues tokens, they will obtain tokens and shares in proportion.
However, from a legal perspective, this 'seemingly simple' model may hide significant uncertainties and potential legal issues.
From a strict sense, this kind of verbal default based on promise or contribution cannot automatically equate to the legal concept of 'shareholder status'—generally, clear written agreements or share registration procedures are necessary.
But this does not mean you cannot assert your rights.
For example, in mainland China, according to the Supreme People's Court (on several issues related to the application of company law (III)), if you can provide sufficient evidence to prove that you have invested or contributed resources (such as technology development, capital investment, etc.) and have actually participated in the project or company operation and management, the court may recognize you as a 'silent shareholder.'
Similarly, in some court cases in Delaware and California, the courts also recognize 'de facto partnerships,' meaning if several founders start a business together, contributing resources and sharing risks, even without formal documents and registration, they may still be seen as de facto partners, thus sharing profits and bearing joint responsibility.
However, these judicial practices do not mean you can participate in this entrepreneurial model with peace of mind. Once a project is successful, such as smooth financing or a significant increase in token value after issuance, the initial verbal agreements often become insignificant in the face of huge profits: how to prove you are a shareholder, while ordinary workers also contribute to the company and the project; even if you are recognized as a shareholder, how to determine your contribution ratio; worse, if the project fails, someone may feel their rights are infringed upon and may claim they contributed but did not receive the due compensation, leading to disputes and even legal litigation.
DAO Model
In addition to core small team entrepreneurship, another popular entrepreneurial form in the Web3 field is DAO (Decentralized Autonomous Organization).
Completely different from traditional company entrepreneurship, DAO has no formal corporate entity, nor any so-called company articles of association or business registration. Most members participating in a DAO join by contributing content or purchasing tokens and obtain corresponding governance tokens, exercising decision-making rights through voting, including directions for fund usage, selection of investment projects, and so on.
From a strictly legal standpoint, the original intention of the DAO is decentralized governance, so the tokens issued by the DAO are generally defined as tools for participating in project governance voting and incentives for contributing to the DAO, and do not directly equate to traditional company equity. Therefore, in such cases, the laws of the vast majority of countries or regions will not easily regard DAO members holding governance tokens as traditional 'company shareholders.'
But the key issue is that there is a type of investment DAO whose members collectively decide through voting to invest funds in a specific project or asset, and after making profits, distribute profits according to each member's token holding ratio or contribution level. This mode of operation is actually very close to the traditional investment partnership or company shareholder investment model. At this point, the model in which DAO members govern through tokens and receive profits has the characteristics of traditional profit distribution.
In this situation, even if the DAO's tokens were not initially clearly labeled as having economic benefits, some judicial jurisdictions (such as the United States) may still regard the governance tokens of the DAO as de facto securities or equity, and view DAO participants as 'de facto partners' or 'silent shareholders.' The enforcement action by the U.S. Commodity Futures Trading Commission (CFTC) against Ooki DAO is a typical case, where regulators believed that DAO members exercised the functions of corporate managers or partners through voting and must bear corresponding legal responsibilities for the DAO's illegal activities.
Therefore, under the DAO model, whether members belong to 'equity participation' cannot be simply assessed by whether a company is registered or whether there is a formal shareholder agreement, but requires a comprehensive evaluation of whether there are clear investment decisions and profit distribution behaviors.
Traditional Company Model
Even if some Web3 projects choose to register companies and adopt traditional equity structures for standardized operations, the boundaries between equity and token rights can still easily become blurred in cases involving token financing, potentially leading to legal disputes.
Web3 projects often involve not only traditional equity financing but also token financing. While token holders may not necessarily be company shareholders, in many cases, they may also participate in governance, enjoy economic benefits, and even influence project decisions. This intersection of 'token rights' and 'equity' often brings about two major legal issues:
First, will participants in token financing be recognized as shareholders?
In Web3 project financing, some investors may participate in financing and obtain a certain proportion of project tokens without holding company equity. Whether these investors can be recognized as shareholders depends on the legal attributes of the tokens. If the tokens are only used for governance and ecological incentives, investors usually would not be regarded as shareholders. However, if the tokens have dividend rights, profit rights, or if investors participated in key project decisions, they may be recognized as 'de facto shareholders' or 'partners' in some jurisdictions.
Secondly, is the governance power of token holders sufficient to constitute shareholder status?
In some Web3 projects, the project parties may grant token holders certain governance rights, such as allowing community members to vote on project proposals and fund flow. When token holders, especially large investors (whales), exert substantial influence over core business decisions of the company, some judicial jurisdictions (such as the United States) may regard these token holders as performing functions similar to those of shareholders, thus recognizing them as de facto shareholders or general partners based on the principle of 'substance over form.'
How to prevent equity disputes?
Regardless of the entrepreneurial model, the disputes most easily triggered often do not stem from the 'project not succeeding' itself, but rather from the issues arising from previously ambiguous equity ownership becoming problematic after the project grows. So, how can we prevent equity disputes in Web3 entrepreneurship?
Therefore, lawyer Mankun suggests starting from the following key points.
First, in the core team model, it is necessary to clarify contribution relationships and sign written agreements as early as possible.
In the core team model, entrepreneurial members easily assume they are 'partners,' but if there are no clear legal documents, this default relationship often lacks legal effectiveness. To avoid potential future disputes, team members should sign written (contributor agreements) or (equity structure agreements) early in the project to clearly define each person's type of contribution, future rights redemption methods, exit mechanisms, and decision-making rights.
Ultimately, while trust is wonderful, clear agreements are the cornerstone of protecting everyone's legal rights. Once there is a written agreement, even if the project raises funds or issues tokens in the future, the rights and obligations of all parties can be clearly defined, preventing legal disputes arising from expected discrepancies.
Second, under the DAO model, it is necessary to clarify the legal attributes of the tokens and distinguish between governance tokens and de facto equity.
Equity disputes in the DAO model mainly arise from the unclear legal attributes of governance tokens and the influence of token holders in DAO decision-making. To prevent potential legal disputes in the future, DAO project parties can take the following preventive measures in advance:
In token design, clearly distinguish between governance tokens and equity tokens.
By implementing voting power limits, time-weighted voting mechanisms, proxy voting, and other methods, avoid whale manipulation and maintain decentralization.
Establish a participant agreement to clarify roles and legal responsibility boundaries.
Third, in the traditional corporate model, ensure that the boundaries between equity and token rights are clear to avoid misalignment of interests.
To avoid disputes arising from the mixing of equity and token rights, Web3 entrepreneurial teams need to clearly define the boundaries between equity and token rights early on. On one hand, the company’s articles of association and shareholder agreements should clearly define shareholder rights, while the rights of token holders should be managed through a separate independent governance framework; on the other hand, it should be made clear that tokens do not constitute traditional shares of the company, and token holders do not automatically become de facto shareholders or silent shareholders of the company.
Fourth, keep records and archives, bring in professional legal advisors to prevent issues before they arise.
All contributions, rights distributions, and agreement documents should be properly recorded and archived to prevent future disputes from lacking evidence. This not only aids internal team governance but also provides strong support during financing or legal litigation.
Additionally, in the legal experience of lawyer Mankun, it is often found that many Web3 entrepreneurial teams pay attention to technology and market, while neglecting legal issues, such as equity structure. Therefore, it is highly recommended to bring in legal advisors during the development of the project, especially in the early stages, and conduct regular reviews to ensure the stable and compliant operation of the project.
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