Illegible Enterprises: DAOs, Unwrapped

*This is the second in a series on legal entity structuring for DAOs. Part I, on the problem of illegibility in entity formation, can be found [here](https://mirror.xyz/iamnotyourlawyer.eth/9-4CU4aaj1ND8v1Yawk9punzRewyfoY43ytxO2m2KmI). Part II, below, addresses the role of entity formation in risk management for DAOs, and Part III addresses risk management for DAO contributors (and will be linked here when published).*

**DISCLAIMER:**  As my ENS address clearly states, I am not your lawyer. Nothing herein should be construed as legal advice. The material published below is intended for informational, educational, and entertainment purposes only. Please seek the advice of counsel, and do not apply any of the generalized material below to your individual facts or circumstances without speaking to an attorney.


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You, me, and corporations are legal persons. We are legible to the state. They can see us, they know which rules to apply, they know whose throat to choke if things go wrong.

In contrast, most DAOs today are unable or unwilling to pursue legal personhood by incorporating or “wrapping” their DAO in one or more corporate entities, either because they see no reason or they never even think about it.

DAOs may choose to remain illegible to the state, but they are not invisible. The state can see them, but they have no idea how to interact with them. They can't impose their rules efficiently or effectively, and there's no obvious throat to choke when things go wrong. Bureaucracies cannot do their jobs if they don’t know which rulebook to apply, so when faced with the illegible they reach for as many books as they can find—and, when threatened, throw all of them.

Illegibility is risky, but so is legibility. Navigating that tradeoff is at the heart of risk management for illegible enterprises. How to strategically use legal entities is a critical threshold issue for every DAO.

Most corporate lawyers can help you figure out the right structure for you, and I recommend all founders work closely with counsel early in the DAO structuring process. Many guides have been written explaining the different utility of Delaware Corporations, Wyoming DAO LLCs, Cayman Foundation, Guernsey Purpose Trusts, Unincorporated Nonprofit Associations, and so on.

But in order to understand what structure is appropriate for their DAO, founders must first figure out how “decentralized” and “autonomous” the organization is today and wants to be in the future. Based on the vision, values, and purpose of the DAO, one of three structural archetypes will be appropriate:

1. **Wrapper.**  A DAO is fully wrapped in a corporate entity where every DAO member is a shareholder or member of, or in privity of contract with, at least one corporation holding DAO assets.
2. **Ecosystem.** A DAO can maintain an ecosystem of corporate entities that fall into two broad categories: what I call **D-Corps**, which function as any other DAO member; and **Bridge-Corps**, which are deployed to solve a narrow and defined legal, financial, or political issue.
3. **No Corporate Structure.** A DAO can unplug entirely from the legacy legal-financial protocol, living the dream of true decentralization and autonomy.

DAOs can move between some or all of these archetypes throughout their lifecycles.

## “Fully Wrapped” DAOs, aka Automated Companies

DAOs that can be fully wrapped are neither decentralized nor autonomous.

Any DAO that can be fully “wrapped” by one or more legal entities is, from the state’s perspective, indistinguishable from a traditional enterprise. By defining a *comprehensive* corporate structure, the DAO subordinates itself to states which can, in their sole discretion, “unwrap” the DAO by ignoring (or revoking) legal personhood and piercing the corporate veil to hold DAO contributors liable.

This is why every single well-intentioned DAO LLC law, from Wyoming to the Marshall Islands, is ultimately doomed to fail. DAOs are exposed to legal risk because th

Illegible Enterprises: The Problem of DAO Legal Structuring

*This is the first in a series on legal entity structuring for DAOs. Part I redefines the fundamental problem facing DAOs and their counsel with respect to legal structuring, and Parts II and III outline two potential solutions, with additional Parts to follow as the law of DAOs evolves.*

**DISCLAIMER:**  As my ENS address clearly states, I am not your lawyer. Nothing herein should be construed as legal advice. The material published below is intended for informational, educational, and entertainment purposes only. Please seek the advice of counsel, and do not apply any of the generalized material below to your individual facts or circumstances without speaking to an attorney.


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Let’s start at the very beginning:

What's a DAO?

[https://twitter.com/manasilvora/status/1507517909999886338](https://twitter.com/manasilvora/status/1507517909999886338)

Depending on who you ask, a decentralized autonomous organization is:

1. “a group chat and a bank account” (Kei Kreutler, [A Prehistory of DAOs](https://gnosisguild.mirror.xyz/t4F5rItMw4-mlpLZf5JQhElbDfQ2JRVKAzEpanyxW1Q))
2. “a member controlled organizational structure that operates absent a centralized authority” (David Kerr and Miles Jennings, [A Legal Framework for Decentralized Autonomous Organizations](https://a16z.com/wp-content/uploads/2021/10/DAO-Legal-Framework-Jennings-Kerr10.19.21-Final.pdf))
3. “an entity that lives on the internet and exists autonomously, but also heavily relies on hiring individuals to perform certain tasks that the automaton itself cannot do” (Vitalik Buterin, [DAOs, DACs, DAs and More: An Incomplete Terminology Guide](https://blog.ethereum.org/2014/05/06/daos-dacs-das-and-more-an-incomplete-terminology-guide/))
4. “a ‘virtual’ organization embodied in computer code and executed on a distributed ledger or blockchain” (Securities and Exchange Commission, [The DAO Report](https://www.sec.gov/litigation/investreport/34-81207.pdf))
5. "a set of smart contracts that encode the bylaws of the entire organization" (Laila Metjahic, [Deconstructing the DAO](https://cardozolawreview.com/wp-content/uploads/2018/07/METJAHIC.39.4.pdf))
6. “a decentralized network of autonomous agents coordinating resources with cryptographic fidelity” (Tracheopteryx, [DISRUPTORS: Why DAOs?](https://members.delphidigital.io/media/disruptors-why-daos-with-tracheopteryx))
7. “a mechanism of governance enabled by smart contract execution of tokenized commands” (Dane Lund, [DAO Governance Primer: The Initial State](https://mirror.xyz/0x367B4bDf414Df673Df0129838ebfB9913147427F/R-ZpVf8WUpgZh30FpoUtVsxG4ysRqgMe4JOliDfL5fk))
8. “an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members and not influenced by a central government” ([Wikipedia](https://en.wikipedia.org/wiki/Decentralized_autonomous_organization))
9. “an unincorporated association of persons (an *organization*) utilizing censorship-resistant technologies to permissionlessly (*autonomously*) engage in non-hierarchical, widely distributed (*decentralized*) governance of shared resources and goals” (Gabriel Shapiro, [Defining Real and Fake DAOs](https://lexnode.substack.com/p/defining-real-and-fake-daos?s=r))

…and on, and on.

Why is this so hard?

Because decentralized autonomous organizations are *illegible*, meaning they resist a particular type of definition: they cannot be easily categorized or labeled in a way that makes them easy to administer and control. Bureaucrats cannot do their job unless they make the subjects of their administration *[legible](https://www.journals.uchicago.edu/doi/full/10.1086/688053)*. They must reduce economic activity into “income” or “investment” so they can tax it, people into “citizen” or “alien” so they can distribute (or revoke) privileges, organizations into “corporation” or “partnership” so they can assign duties and responsibilities, and so on.

Illegibility is a problem for bureaucrats because they do not know 

The Lawyers' Dilemma

I’ve made a nice little career for myself as a technology lawyer, so far. I've moved from big corporate firms, to a large in-house team, to managing a team at a mid-sized firm, to general counsel of a fast-growing startup, and now I’m building my own practice.

The constant in my career has not been where or how I worked, but who I chose to represent: entrepreneurs, technologists, artists, creatives. I represent the creators.

I’ve noticed something strange after all these years: our society simultaneously worships and demonizes creators, that’s been true for a while. But over the past seven years or so, those most hostile to them have grabbed political power, and they’re starting to use it.

There’s a word I like to borrow from Polish: the *inteligencja*. They are the tastemakers, the educated, the stewards of their culture. The word has a particular meaning in Poland, but it can be applied differently in different cultures. In one society, the *inteligencja* might be soldiers and politicians; in another, farmers and priests; another, journalists and academics.

Our *inteligencja*, the American *inteligencja*, is and will always be the creators. We revere the revolutionaries and the pioneers, the missionaries and the millionaires. We send our most ambitious to Manhattan, to Hollywood, to Silicon Valley, where they stand on the shoulders of those who built flying machines in North Carolina, crashed atoms in Chicago, built new religions in Salt Lake, tapped into higher consciousness in Big Sur.

Those are my people. I represent them because I believe they are doing important work. It has been my job for the past decade to help creators navigate the American legal system (itself an amazing innovation, at least in theory). I am a transactional and regulatory attorney, which means creators come to me with an idea for a business or technology and ask me to help them do it legally. I figure out what laws apply to their work, how to best structure their deals or designs to avoid regulatory attention, and send them on their way to turn dreams into reality.

That’s not really what I do anymore, not for a while now.

What I do now is more like soothsaying those who make and enforce the laws, divining what their whims might be should they turn their all-powerful eye on my client. To represent technologists and creators today is to listen to bright, ambitious people explain their exciting, grandiose visions of the future, and to charge them hundreds of dollars an hour to listen to me explain exactly how regulators will work to crush their dreams. To practice as a regulatory attorney today is to be a bureaucrat-adjacent, a narc-for-hire, deputized to enforce the performance of the proper rituals, recitation of the proper spells, and payment of the proper tithes.

I don’t know, maybe it’s always been this way, maybe the entire idea of a “regulatory attorney” proves the point—that our society demands a translation service between laypeople and the Sphinx-like overclass that manages their economic and political lives.

Maybe I’m overreacting, maybe that’s too cynical.

But maybe not.

I remember some advice I got early in my career from a colleague, a decorated data privacy attorney, a lifelong European bureaucrat finally cashing in on his experience in private practice: “Bad lawyers win in court. Good lawyers never get there in the first place.”

Practical, that advice. Litigation is expensive. Regulators and their subjects are repeat players; of course it’s not worth pissing off the crown just to win one argument. Much better and cheaper (though obviously not cheap) to hire a good regulatory attorney than a good litigator, one that can tell you how to play it safe, to keep your head down, to be the model corporate citizen.

There’s a poisonous assumption buried in there, though. The advice isn’t “don’t break the law”, but rather “don’t even give the appearance that you’re not strictly complying with the regulator’s interpretation of the law