How to Prevent Equity Disputes in Web3 Entrepreneurship?

Written by: Iris

In an online discussion about the Yescoin dispute a couple of days ago, Lawyer Mankun saw a comment that said, "How can we not count as shareholders when we are starting a business together?"

This is actually a common issue in Web3. People feel that as a core team member of the project, they have contributed their skills, experience, and even funds, so how can they not be considered shareholders?

However, in reality, even if you hold the title of project partner and have made significant contributions to the project, it does not necessarily mean you are a shareholder.

Why do I say this?

Equity Participation in Traditional Entrepreneurship

Before discussing this issue, let's take a look at how "equity participation" is defined within the legal framework of traditional entrepreneurship.

Typically, we understand "equity participation" to mean that entrepreneurs or investors contribute funds, equipment, technology, intellectual property, etc., and through the establishment of a company or signing a shareholder agreement, they obtain a clear shareholder identity. This method of equity participation has mature and clear legal definitions and protection mechanisms in the company laws of various countries.

In traditional models, the rights of each shareholder, such as dividend rights, voting rights, rights to information, and rights to transfer shares, must be clearly agreed upon in advance. The company’s articles of association or shareholder agreements will clearly record each shareholder's contribution method, equity ratio, and corresponding rights and obligations. In other words, regardless of whether you contribute cash, technology, patents, or premises, it ultimately needs to be converted into a clear equity ratio and formally recorded in business registration documents or shareholder registers.

Because of this clarity, traditional enterprises can ensure that the rights and responsibilities of shareholders are legally protected during financing, dividend distribution, or equity transfer. Even if shareholder disputes arise in the future, all rights relationships can be clearly defined, avoiding ambiguous situations like "Am I really a shareholder?"

However, it is precisely because of this clear reference that the issue of equity participation in Web3 becomes more perplexing.

Equity Participation in Web3 Entrepreneurship

Unlike traditional entrepreneurship, the entrepreneurial approach in Web3 is more flexible and "decentralized"—many teams are not in a hurry to establish a company, and some may not even consider forming a company at all. Instead, they adopt seemingly easier methods, such as forming a core team based on verbal agreements or directly establishing a DAO.

However, in these models, can the time, technology, or even funds you invest 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 for several core members to collaborate based on mutual trust, enthusiasm, and simple verbal commitments. At the same time, each person's contribution to the startup may not necessarily be financial; it could be technology, operations, or industry resources. However, everyone implicitly assumes they have become partners in the project, and when the project successfully raises funds or issues tokens, they will receive tokens and shares in proportion.

However, from a legal perspective, this "seemingly simple" model may hide significant uncertainties and potential legal issues.

Strictly speaking, this kind of verbal assumption based on commitment or contribution does not automatically equate to a legal "shareholder status"—generally, a clear written agreement or share registration process is required.

But this does not mean you cannot assert your rights.

For example, in mainland China, according to the Supreme People's Court's "Regulations on Several Issues Concerning the Application of Company Law (III)," if you can provide sufficient evidence to prove that you have contributed funds or resources (such as technology development, financial investment, etc.) and have actually participated in the project or company operations, the court may recognize you as a "silent shareholder."

Similarly, in some cases in Delaware and California in the United States, courts also recognize "de facto partnerships," meaning that if several founders start a business together, contribute resources, and share risks, even without formal documents and registration, they may be considered de facto partners, thus sharing profits and bearing joint liability.

However, these judicial practices do not mean you can safely participate in this entrepreneurial model. Because once the project succeeds, for example, if financing goes smoothly and the token appreciates significantly, the initial verbal agreements often become insignificant in the face of substantial benefits: how to prove you are a shareholder, ordinary employees also contribute to the company and project; even if you are recognized as a shareholder, how to determine your contribution ratio; worse, if the project fails and someone believes their rights are harmed, they may claim they contributed but did not receive due compensation, leading to disputes or even legal lawsuits.

DAO Model

In addition to small core team entrepreneurship, another popular form of entrepreneurship in the Web3 field is the DAO (Decentralized Autonomous Organization).

Completely different from traditional company entrepreneurship, DAOs do not have a formal company entity, nor do they have a so-called company charter or business registration. Members participating in a DAO mostly join by contributing content or purchasing tokens and receive corresponding governance tokens, exercising decision-making power through voting, including directions for fund usage, investment project selection, and so on.

From a strict legal perspective, the original intention of a DAO is decentralized governance, so the tokens issued by a DAO are usually 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 this case, the vast majority of laws in various countries or regions will not easily regard DAO members holding governance tokens as traditional "company shareholders."

However, the key issue is that there is a type of investment DAO, where members collectively decide through voting to invest funds into a specific project or asset, and profits are distributed according to each member's token holding ratio or contribution level. This operational model is actually very close to traditional investment partnerships or company shareholder investment models. At this point, the model of DAO members obtaining profits through token governance already possesses characteristics of traditional dividend or profit distribution.

In this situation, even if the DAO's tokens were not initially clearly marked with economic benefit attributes, some judicial jurisdictions (such as the United States) may still regard the governance tokens of a 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 the regulatory agency 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 simply be determined by whether a company is registered or whether there is a formal shareholder agreement, but requires a comprehensive assessment of whether there are clear investment decision-making and profit distribution behaviors.

Traditional Company Model

Even now, some Web3 projects choose to register companies and adopt traditional equity structures for standardized operations, but in cases involving token financing, the boundaries between equity and token rights can still easily become blurred, potentially leading to legal disputes.

Web3 projects often involve not only traditional equity financing but also token financing. Although token holders may not 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 leads to 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 are typically not regarded as shareholders. However, if the tokens have dividend rights, profit rights, or if investors participate in key project decisions, they may be recognized as "de facto shareholders" or "partners" in some judicial jurisdictions.

Second, do the governance rights of token holders suffice to constitute shareholder status?

In certain Web3 projects, project parties may grant token holders certain governance rights, such as allowing community members to vote on project proposals and fund flows. When token holders, especially large investors (whales), exert substantial influence on core business decisions, some judicial jurisdictions (such as the United States) may consider these token holders to be performing functions similar to shareholders, thus recognizing them as de facto shareholders or general partners based on the principle that "substance over form."

How to Prevent Equity Disputes?

Regardless of the entrepreneurial model, the most likely source of disputes often does not stem from "the project not succeeding" itself, but rather from the previously ambiguous equity ownership becoming an issue 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 without clear legal documents, this default relationship often lacks legal validity. To avoid potential future disputes over interests, team members should sign a written "Contributor Agreement" or "Equity Structure Agreement" early in the project, clearly defining each person's type of contribution, the method of future rights realization, exit mechanisms, and decision-making rights.

Ultimately, while trust is beautiful, 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 expectation gaps.

Second, in the DAO model, it is necessary to clarify the legal attributes of tokens and distinguish between governance tokens and de facto equity.

Equity disputes in the DAO model mainly arise from unclear legal attributes of governance tokens and the influence of token holders in DAO decision-making. To prevent potential future legal disputes, DAO project parties can take the following preventive measures in advance:

• Clearly distinguish between governance tokens and equity tokens in token design.

• Use voting power limits, time-weighted voting mechanisms, delegated voting, and other methods to prevent whales from manipulating and maintain decentralized characteristics.

• Establish participant agreements to clarify roles and legal responsibility boundaries.

Third, in the traditional company model, ensure that the boundaries between equity and token rights are clear to avoid mismatched 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, maintain records and archives, and involve professional legal advisors to prevent issues before they arise.

All contributions, rights distributions, and agreement documents should be well recorded and archived to prevent the inability to provide evidence in case of future disputes. This not only helps with internal governance but also provides strong support during financing or legal litigation.

Additionally, in Lawyer Mankun's professional experience, it is often found that many Web3 entrepreneurial teams focus on technology and market while neglecting legal issues, such as equity structure. Therefore, it is highly recommended to involve legal advisors during the project development process, especially in the early stages, and conduct regular reviews to ensure stable and compliant operation of the project.

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