LOS ALTOS, Ca, July 2014 - In our first blog entry we introduced Participalism as Capitalism’s rebel child.
The enabling technology for a Participalist society is emerging as we speak, and quite a few blogs and forums discuss the underlying software. Some of the projects under development, most notably Ethereum (www.ethereum.org) hold the promise to truly unify logic, economics and law in one decentralised protocol. If God’s language is physics, then surely that of human ingenuity is code!
However this blog post isn’t about code in itself, but how the emerging technologies could change our lives. In the first of this series, we will look at how this applies to the “legal container” of most human endeavour, the limited company, and how it will change beyond recognition in a Participalist society.
In essence, a company is a centralised unit based on a set of legal contracts that govern the relationships between the various parties involved.
There’s the constitutional documents that anchor a company within a chosen jurisdiction (say, Delaware, or Panama). This almost without exception involves a government-sanctioned registration in return for a fee. Then there’s the set of documents that together form the company’s governance protocol. They deal with issues such as how many shares will be issued, to whom shareholders will delegate the day-to-day management of the company, the relationship between the shareholders, etc. These are typically referred to as the company’s by-laws.
The Dutch are generally recognised to have invented the joint stock company back in the 17th Century, as a result of which they had their Golden Age of extraordinary wealth creation. The genesis company was in essence a contract. Over time, as governments felt mandated to step in, company law increasingly marked the boundaries of what could be privately contracted. In civil law countries, most of these boundaries are codified by law, whilst in common law countries precedents box in and interpret the limits of what can be freely contracted between parties.
All of this has been abundantly documented by historians who, depending on where they stand ideologically, at the extremes either loathe or applaud (with every possible shading in between) the increasing role of government in company formation.
We believe that in the same way Bitcoin and other so called crypto-currencies are set to largely circumvent existing banking laws, decentralised protocols, which we will refer to as the blockchain, allow for a new type of company, often referred to as a DAO (Decentralised Autonomous Organisation) that would live outside of existing company laws.
So far, nobody has comprehensively specced up the DAO, but from the various blogs and discussion forums on this we can start to see its contours.
There’s mention of how the DAO would be based on self-executing, “trust-less” smart shares with embedded code which – with iron logic – would make sure that when Bob does X, Alice receives Y. Governance protocols use the blockchain on distributed networks, so there’s no need for a central authority. Multi-sig(nature) technology would validate transactions so the potential for fraud is reduced, if not eliminated altogether.
In this respect, fraud elimination is generally considered a “solvable problem” by the crypto-community. Moreover, there is unanimity that solving it is a prerequisite for the DAO not to be a stillborn idea.
No doubt the debate on how fraud can be eliminated will move in lockstep with how the underlying technologies develop, and fraud will indeed prove a solvable problem. More generally, we are less concerned with whether a DAO can be built (it is software after all), but rather with whether it should be built.
Therefore, the approach we will be taking today is to play a little mind-game and ask ourselves the question: if God, in His infinite wisdom, would design an autonomous company, how would it look like?
The overall requirement would be that it’s a vehicle that advances human ingenuity. That would mean that as large a number of people as possible would be able to help in its creation and development. That in turn implies that the autonomous company gets to be funded collectively, that those who contribute to its funding should also reap the rewards in proportion to their respective investments, that they have a proportionate say in how the vehicle is governed, and that they can individually contribute to it as collaborators and/or users.
A London-based company called Otonomos is working on a spec along those lines. They gave it the suffix ĐAC instead of Ltd, for Decentralised Autonomous Company, which they plan to offer alongside traditional company formation services. So instead of setting up your UK limited company with them, or your Delaware C-Corp, you’ll soon be able to have your very own NEWCO, ĐAC.
Their spec as it stands is both revolutionary and realistic, building on the limited company as we know it but radically rethinking its funding and governance.
1. IPO on day one
A ĐAC’s shares would be open to the widest possible group of people to invest in. There’s no phase in which the company stays “private” and then goes “public”.
Compare this with how startups are currently funded. Typically, its founders are its first shareholders who, if they have some money on their own, are also its first investors. Assuming there is more than one founder, they’ll have the equity split agreed. From that flows the voting power if it were to come to an impasse on major issues. Day-to-day issues are delegated to the company’s directors who in a startup are typically its founders, so its first shareholders. Whilst it’s not always articulated through the daily workings of a young company, everybody who joins soon understands that the founder who owns the most shares has the final say.
As the company evolves, more shareholders are likely to join in, and something of a command centre grows around the founders with external directors who typically represent the company’s largest investor(s), and advisors to the Board.
External investors come in with the understanding they’ll eventually want to come out and achieve a multiple of what they’ve invested. Each funding round is a fine balancing act between the freedom to execute that management seeks to preserve, and the tools external investors want to have at hand in case things go wrong.
Whilst each venture capitalist (VC) firm will have its own reason to invest in a company, as such there is no mechanical link between how many people use and pay for the company’s product and the price at which fresh money goes in.
More fundamentally, VC investing is a borderline paternalistic and elitist process in which a few judge themselves specialists capable of identifying companies worth investing in. As the money being committed is typically other people’s money, the classic agency problem arises (arguably less so than in other corners of finance such as institutional asset management).
Perhaps most importantly, it is difficult to imagine how Venture Capital, once called “the least scaleable of all businesses”, could continue to be the sole transmission mechanism between savers and the massive funding needs of a Participalist economy.
The ĐAC as it is envisaged could address this problem. It would “internalise” peer-to-peer investing that is currently happening on equity crowd funding and angel platforms like AngelList and bolt digital currency technology on top of it. A ĐAC’s shares would be sliced off the block chain, which doubles as the company’s digital share registry. Each and every single share is “smart” with all the rights and obligations that come with being a shareholder coded on to it.
Consequently, a funding round would be an open, transparent process: when a company decides to raise extra funds, more shares are sliced off the blockchain in exchange for an instant digital money transfer, and existing shareholders can decide to sell or top up.
Trust would be built in the same way AirBnB builds peer-to-peer trust, by social frisking through the various social media platforms, user recommendations, and reviews.
To put it in a simplified way: a shareholder in a ĐAC is granted a pair of digital keys, one public and one private, that verify his/her transactions on the company’s ledger. These transactions go beyond the mere digital money transfers of today’s altcoin wallets: they include transferring funds to pay for shares, receiving dividend payments, exercise voting rights, participate in Board meetings, even entering the C-suite.
2. Digital governance
It is from harnessing the potential of the blockchain beyond digital currency transfers the ĐAC represents a true departure from the company as we know it. Each and every smart share has the company’s voting rules embedded and changes to them can be broadcast digitally to each share. As a consequence, investors can directly exercise the voting powers and other prerogatives that come with holding a stake in the company.
Board meetings become online meeting rooms in which shareholder’s access is validated through their cryptographic key. Resolutions on executive pay, budgets, capital increase etc are tabled and passed unless the required quorum blocks them (this is more practical than voting on each to see if a sufficient majority has been established), and even the bye-laws themselves can be revised. Any resolutions and changes are instantaneously written onto all outstanding shares so not only is a whole lot of drama taken out of the board room, armies of lawyers and compliance staff are eliminated in the process, resulting in huge cost savings. The business can just go on focusing on delivering for its customers – a lot of whom will be its shareholders themselves!
3. Accounting
For the first time, under the ĐAC accounting is sexy. Think of the ĐAC’s accounts as a walled-off ledger visible to each and every shareholder when they log in. More powerful still, as transactions are debited or credited from the digital currency ledger, accounts update instantaneously, reflecting the ĐAC’s financial situation by the second. Contributions by collaborators, sales revenue, expenditures: all financial transactions pass through the company’s digital wallets and get aggregated tick by tick. Book-entry is a mere microprocessor clock cycle, top and bottom line are calculated real-time, taxes paid automatically. There goes an army of accountants.
4. Shareholder = Customer = Collaborator
In a Participalist economy, each and anyone of us with internet access can be shareholder, director, customer, and collaborator at the same time, or any combination of these. A customer who is delighted by the company’s product can decide to bring his/her skills to the table, join the distributed team (using any Slack-type collaborative platform), help out on a project, and get paid in digital currency. Through this virtuous cycle, users of the company’s product can help improve it and benefit from its success as a shareholder.
What may have witnessed here is the birth of the idea of a genuine Participalist company: a vehicle in which all of us can freely decide to be shareholder, manager, user and collaborator at the same time.
Perhaps this is where the greatest value of the decentralised protocols lies: that they allow for the advancement of our ingenuity by tapping into the broadest possible number of individual neurons which, connected through the network, serve as nodes in the ever expanding collective brain of humankind.
The company vehicle to channel this human ingenuity is to be fully specced still and we at Participalismo o Muerte welcome any comments and contributions.
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