In Web3 entrepreneurship, does becoming a partner count as equity investment?

During the project development process, especially in the early stages, it is important to introduce legal advisors and conduct regular reviews to ensure the project's stable compliance operations.

Written by: Iris

In an online sharing session about the Yescoin dispute a couple of days ago, Lawyer Mankun saw a comment saying, "How can starting a business together not count as equity participation?"

This is actually a common issue in Web3, where everyone feels: as a core team member of the project, I have contributed my skills, experience, and even funds to the project, so why shouldn't that count as equity?

But in reality, even if you hold the title of project partner and contribute significantly to the project, it does not necessarily mean you are a shareholder.

Why do you say that?

Equity Participation in Traditional Entrepreneurship Models

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

Typically, what we understand as "equity participation" refers to entrepreneurs or investors contributing funds, equipment, technology, intellectual property, etc., to establish a company or sign a shareholder agreement, thereby obtaining a clear shareholder identity in the enterprise. This method of equity participation has mature and clear legal definitions and protection mechanisms in the company laws of various countries.

In the traditional model, the rights of each shareholder, such as the right to dividends, voting rights, right to information, and the right to transfer shares, need to 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 the shareholder register.

It is precisely because of this clarity that traditional enterprises can have their shareholders' rights and responsibilities clearly protected by law during financing, dividend distribution, or equity transfer. Even if shareholder disputes occur in the future, all rights relationships can be clearly defined, and there will be no ambiguous situations like "Am I really a shareholder?"

But precisely because of this clear reference, the equity issue in Web3 appears even more elusive.

Equity Investment in Web3 Startup Models

Unlike traditional entrepreneurial models, the entrepreneurship of Web3 is more flexible and more "decentralized"—many teams are not in a hurry to establish a company, and some haven't even considered forming a company at all, but instead 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, can the time, technology, or even funds you invest be clearly recognized as equity like in traditional enterprises?

Core Team Model

In the early stages of starting a business in Web3, a particularly common model is that a few core members team up based on mutual trust, enthusiasm, and simple verbal commitments. Meanwhile, each person's contribution to the startup may not necessarily be financial; it could be technology, operations, or industry resources. However, everyone implicitly assumes that they have become partners in the project, and when the project successfully raises funds and issues tokens, they will receive tokens and shares in proportion.

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

Strictly speaking, this verbal default based on commitment or contribution does not automatically equate to the legal meaning of "shareholder status"—generally requiring a clear written agreement or share registration process.

But this does not mean that you cannot claim 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 capital or resources (such as technology development, financial investment, etc.), and have actually participated in the project or company operation and management, the court may recognize you as a "hidden shareholder."

Similarly, in some cases in the state of Delaware and California in the United States, the courts also recognize "De facto Partnership," meaning that if several founders start a business together, contribute resources, and take on risks together, they may be considered de facto partners even without formal documentation and registration, thereby sharing profits and bearing joint liability.

However, these judicial practices do not mean that you can participate in this model of entrepreneurship with peace of mind. Because once the project is successful, for example, if financing goes smoothly and the token appreciates significantly after issuance, the initial verbal agreement often becomes insignificant in the face of huge profits: how to prove that you are a shareholder, as ordinary workers also contribute to the company and the project; even if you are acknowledged as a shareholder, how to determine the proportion of your contribution; worse still, if the project fails and someone believes their rights have been infringed, they are likely to claim that they have made contributions but have not received the compensation they deserve, leading to disputes and even legal litigation.

DAO Model

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

Completely different from the traditional form of starting a company, a DAO does not have a formal company entity, nor does it have so-called articles of association or business registration. Members participating in a DAO mostly join by contributing content or purchasing tokens, and obtain corresponding governance tokens, exercising decision-making power through voting, including the direction of fund usage, selection of investment projects, and so on.

From a strict legal perspective, the original intention of a DAO is decentralized governance. Therefore, the tokens issued by a DAO are typically 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. Thus, in this context, 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, where members collectively decide through voting to invest funds in a specific target project or asset, and after making profits from the investment, the profits are distributed according to each member's token holding ratio or contribution level. This operational mode is actually very close to the traditional investment partnership or company shareholder investment model. At this point, the model of DAO members obtaining returns through token governance has already possessed the characteristics of dividends or profit distribution in the traditional sense.

In this situation, even if the DAO's tokens are not initially marked as having economic benefits, some jurisdictions (such as the United States) may still regard the governance tokens of the DAO as de facto securities or equity, and view the participants of the DAO 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 regulators determined 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, in the DAO model, whether members belong to "equity participation" cannot be simply determined by whether a company is registered or whether there is a formal shareholder agreement; rather, it requires a comprehensive assessment of whether there are clear investment decision-making and profit distribution activities.

Traditional Company Model

Even though some Web3 projects now choose to register as companies and adopt traditional equity structures to regulate operations, the boundaries between equity and token rights remain easy to blur, especially in cases involving token financing, which may even lead to legal disputes.

Web3 projects often involve not only traditional equity financing but also token financing. Although token holders may not necessarily be shareholders of the company, in many cases, they might 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 the participants in cryptocurrency 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 used solely for governance and ecological incentives, investors are typically not regarded as shareholders. However, if the tokens have dividend rights, income rights, or if the investors participate in key decision-making of the project, they may be recognized as "de facto shareholders" or "partners" in some jurisdictions.

Secondly, do the governance rights of token holders constitute shareholder status?

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

How to Prevent Equity Disputes?

Regardless of the type of entrepreneurial model, the most likely source of disputes often does not stem from "the project not being able to succeed" itself, but rather from the issue of equity ownership becoming problematic after the project has grown, which was previously ambiguous. So, how can we prevent equity disputes in Web3 entrepreneurship?

Therefore, Lawyer Mankun suggests starting with the following key points.

First, under the core team model, it is necessary to clarify the contribution relationships and sign a written agreement as early as possible.

In a core team model, entrepreneurial members often default to considering themselves as "partners," but without clear legal documents, this default relationship often lacks legal validity. To avoid potential conflicts of interest later on, team members should sign a written "Contributor Agreement" or "Equity Structure Agreement" early in the project to clarify the types of contributions, the method of realizing future rights and interests, exit mechanisms, and decision-making powers.

Ultimately, while trust is good, clear agreements are the cornerstone of protecting everyone's legal rights. Once there is a written agreement, even in future project financing or token issuance, the rights and obligations of all parties can be clearly defined, preventing legal disputes arising from expectation gaps.

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

The equity disputes under the DAO model mainly stem 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 precautionary measures in advance:

• In token design, clearly distinguish between governance tokens and equity tokens.
• Avoid whale manipulation and maintain decentralized characteristics through measures such as voting power limits, time-weighted voting mechanisms, and delegated voting.
• Establish participant agreements to clarify roles and legal responsibilities.

Thirdly, under the traditional company 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 startup teams need to clarify 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 are managed through another independent governance framework; on the other hand, it should be clarified that tokens do not constitute traditional shares of the company, and token holders do not automatically become de facto or nominal shareholders of the company.

Fourth, keep good records and archives, and introduce professional legal advisors to prevent potential issues.

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

Additionally, in Attorney Mankun's professional experience, it is often found that many Web3 startup teams tend to focus on technology and the market while neglecting legal issues, such as equity structure. Therefore, it is highly recommended to involve legal counsel during the project development process, especially in the early stages, and conduct regular reviews to ensure stable compliance operations for the project.