Using Blockchain / DAO / token economics to create a pure teal startup (a practical guide)
My career has taken some wonderful twists and turns.
I’ve experienced different work relationships including freelancer, employee, entrepreneur and leader, and worked for or with many different types of organisation including startups, corporates, not-for-profit and government agencies.
Along the way have been a number of pivotal points where I learned something which has caused me to rethink and challenge the paradigm I was working in.
The first was opens source software. The idea that complex software could be created by people working collaboratively across the globe and that the source code and therefore the intellectual property was open to anybody.
Then came Agile software development and the realisation there was an alternative way to build software which could deal better with an increasingly uncertain and unpredictable world.
Just a few years ago I came across “Teal” — a new organisational model centered around self-management and evolutionary purpose outlined in Fredrick Laloux’s seminal 2016 book “Reinventing Organisations”.
And finally the blockchain, an emerging technology infrastructure allowing communities to build software implementing complex incentive structures with no central control.
What I hadn’t realised until a couple of years ago was that all of these paradigm shifts over my career are in fact steps in a bigger more fundamental change that many believe will have huge implications for our global society: the ability to create DAO’s (Decentralised Autonomous Organisations).
DAO’s are a new kind of organisation that offer decentralisation (or the lack of a central decision making and enforcing node), transparency, and autonomous governance. This means governance of the organisation is conducted by the agents in it rather than by a small, select group.
There are currently two dominant global communities (DAOStack and Aragon) which are building blockchain-based systems which will allow anybody to create their own DAO. Although immature at this stage, within these communities (open to anybody to join) we are seeing rapid experimentation with alternative decentralised governance models.
One of the reasons I’m excited about DAO’s is a realisation the current system of work (which is generally held together with legal documents such as shareholder agreements and employment agreements) is in many ways flawed.
Often the result of our current practices is a power struggle either between shareholders, or between the people who are running things and the employees. These behaviours can be subtle but are always there and can be insidious.
We’ve all seen it. Perhaps an employee asking for a pay rise as they know it would be hard to replace them. Or an employer valuing an employee less because they are easily replaceable, or a shareholder/partner resenting the fact they are adding more value than other shareholders. At its worst, we see deeply hierarchical organisations where people exhibiting psychopathic behaviour are more likely to climb the corporate ladder.
Agile practices promote the idea it is futile to try to capture a project’s detailed requirements within a contract of work at its beginning when there are so many unknowns and therefore unpredictability.
The same philosophies could be applied to the legal agreements that are set up to support traditional organisations. The outside world and our own personal situations and motivations are changing increasingly fast. This is especially true in a technology startup environment: it always amazes me how hard, and I would argue futile, it is for a group of entrepreneurs to create an initial shareholder agreement when the future is so unpredictable. However just as with Agile, if we remove legal agreements we need to replace them with something else. We need adaptable incentive mechanisms so we can work together in a fair and efficient way as the world changes around us.
I recently spent some of the summer reflecting on learnings over my career and undertaking a thought experiment: “Is it possible to use some of the emerging knowledge/practices that the DAO/blockchain/token economics world is teaching us to create a startup that was 100 per cent, no compromise, pure teal?”.
- An organisation that was leaderless, meritocratic, had human happiness baked into its business model.
- An organisation that was truly agile, had evolutionary purpose and could theoretically grow organically in any business domain.
- An organisation that could be started today by a few people with shared values and a passion to collectively grow something that makes a positive difference in the world.
First some learnings and understanding the current environment.
Before we get into the details, below are some of my key learnings over my years in business.
I make no apologies that they are generalisations (some controversial) and biased towards my personal experience which has been mostly in the technology software space.
- Legal contracts (including shareholder agreements and employment agreements) are a waste of time/effort and drastically reduce an organisation’s responsiveness to change. The world is now changing too fast — the moment you sign, stuff changes.
- It’s more fun/fulfilling/healthy to work within a group that has shared values/purpose than as an individual (contractor/freelancer). However increasing numbers of the best people are choosing not to work for others in traditional hierarchical companies. However although they may be getting financial/lifestyle benefits they often lose the benefits of working in a team.
- Protecting intellectual property (IP) is futile and the biggest source of conflict/stress and wasted time/effort. With global competition and emerging artificial intelligence (AI), product development is ultimately a “race to zero”.
- Traditional work structures (shareholder/employer/manager versus employee/worker) often result in bad patterns that negatively impact the individual and the business. Fundamentally it’s a power play and the people who can play the game the best, win.
- In today’s business world there is too much emphasis on strong leadership. There is no doubt that strong/effective leaders can help a company get so far but there are a number of challenges: It doesn’t scale well, there can be a hidden toll on other parts of the leader’s life (home, family, physical and mental health) and it can create an inherent fragility/key person risk.
- New management paradigms such as teal and holacracy are really hard to implement within the traditional legal system (for example, limited liability company, directors, shareholders, employment agreements). You are always fighting or working around “the system”.
- Blockchain can allow us to create complex, yet easily managed, incentive structures. And more importantly these incentive structures are governed by decentralised communities who don’t have traditional business trust relationships or legal protection.
The value of a business in today’s world
So to start this thought experiment we need to go back to first principles.
What is the value of a business?
This value is typically related to the IP created by the business over time. However IP causes many problems and in the digital age is very difficult to protect.
So let’s assume we’re not creating IP (and build such non-creation into our constitution).
So if we’re not creating IP, at its very simplest level, then the value of the business centres around three components:
- The knowledge and skills within the individuals adding value to the business
- The ability (incentive structure) to keep those individuals contributing to the business
- The brand.
Values are part of the glue that holds the people together in a business and guides decision making. Typically they would be created/evolved by the team, but let’s outline a few values as a starting point:
Trust and integrity over contracts and legal protection
As will become clear below, what we are creating is something which at its heart will be initially held together by a group of people of who have a high degree of integrity. They trust each other, as opposed to relying on the traditional legal mechanisms (for example, shareholder agreements/employment agreements and so on) which most traditional businesses rely on.
Meritocracy and fairness over seniority and longstanding service
Our business value is created by individual people or teams adding value. This value must be assessed purely on its merits and all other factors ignored.
Health and happiness over wealth and fame
The well documented keys to happiness are:
- Having purpose
- Having strong social networks
- Looking after mental and physical health
- Helping others.
Everybody wants to be happy. So if the core value of the business is in its people and the ability to hold those people together — then we have a fundamental business incentive to invest in happiness.
Extreme agility over planning and certainty
In a world of increasing change and therefore unpredictability it is vital that we maintain our ability to adapt to changing market conditions and new opportunities. In practice this will mean less planning/strategy and more taking risks, trying stuff, failing fast and having smaller autonomous groups.
Instead of a traditional hierarchy of leaders/managers, we would focus on levels of commitment to give some structure to the business.
The reality is there will be different levels of commitment to suit individuals’ life situations and these situations will change over time.
These commitment levels would be well defined but fluid in that people can move between them easily (and is completely divorced from remuneration). In order of high to low:
Navigators. These individuals are selected by existing Navigators and who have the current intention of a long-term commitment to growing the value of the business and making a significant ongoing contribution. It is fully accepted that life situations change and a navigator may have to step down if they are not able to make this commitment/contribution later on. Navigators make all key decisions (via an agreed teal decision-making process) that are in the best interests of the business. This would include:
- Evolving the purpose/values/constitution/token economics
- Strategy and authorising the work that needs to be done
- Control of cash/token issuance.
Navigators would meet for a weekly “tactical” meeting and monthly governance/strategy meeting. There would be clearly defined rules around how new people could join/leave the group and the conditions for staying. Navigators are “paid” in tokens.
Contributors. These are people or companies who add value in exchange for new tokens. If they are a company then they must have one individual decision maker who represents the company. Potential contributors would be invited by navigators based on their ability to add value and values alignment.
Service providers. These are people or companies who provide value adding services and are paid in dollars. The navigators will strive to get the best value for money from them. We may have a short-term relationship (while they provide value) or they may over time move to being a contributor.
The constitution is a set of foundation principles driven by our values. The navigators will evolve the constitution (and organisational purpose) over time. For example, these might start off as:
- We will not create significant intellectual property.
- We will never take ideas from others and portray them as ours.
- We will operate in an environment of 100 per cent trust and transparency within the navigators/contributors.
- We will discard anything (within the law) that reduces our agility (our ability to adapt/respond quickly to situations/opportunities).
- No contracts over “X” per cent (say, 20 per cent) of the value of the business will be undertaken. Bigger opportunities can be broken down.
Core Token economics
So let’s imagine we start with a small group of people (between three and five) based on actual “real world” trust, respect and shared values.
We agree on a set of initial token economic incentives and a process for evolving them to ensure they are in line with our values/purpose.
The token transaction history (and therefore who owns tokens) would be created, for now, not on a blockchain but in a shared Google spreadsheet controlled by the navigators and transparent to all token holders. The token economic “rules” are created not as smart contract code but in a shared Google document. There is no shareholder agreement, no employment contracts, no directors or board.
- The business is tokenised. Therefore, the total dollar value of the company is the number of tokens multiplied by a token’s price in dollars. For example, 1000 tokens at NZ$10 per token equates to a company value of NZ$10,000. The company starts with no tokens and therefore no value. We nominally set a value of NZ$10 per token to get started.
- The spreadsheet will contain a chronological list of all transactions and token price. From this list we can instantly derive the value of the company and token ownership.
- Tokens are “minted” and exchanged for anything that the navigators feel add value to the business.
- Tokens are “burned” whenever value is taken out of the business (for example, as cash).
- All tokens must be owned by navigators/contributors (nobody else and not the business itself).
- Navigators must contribute at least $”X” worth of value per quarter otherwise they must step down and become a contributor.
- If a token holder’s value contribution falls below a certain amount, after a three month period, 5 per cent of their tokens will be burned every month.
- No individual must own more than 24 per cent of the total tokens.
- Cash reserves kept to minimum (default to less than 5 per cent of company value unless there’s a business reason for more).
- Navigators reserve the right to evolve the rules as long as changes are in line with the values and purpose.
Token value and trading
Tokens can be considered security tokens, and represent a share in the value the company. All token holders are therefore incentivised to increase the dollar value of the tokens over time.
One of the biggest problems and causes of conflict/tension with traditional share ownership of non publicly listed/tradable companies is setting the token/share price.
This would be solved in a simple way; every month, within predefined rules/constraints, all token holders can trade (buy/sell for cash) tokens between themselves (not external parties) thus setting the token price in dollars.
Trades would fall into three types:
- Purchasing tokens between token holders. For example, a token holder announces they wish to purchase some tokens from another token holder. They find the best $/token deal they can.
- Taking dollars out of the business. Each month the navigators would decide if there was excess cash in the business and any token holders could offer to burn their tokens in exchange for cash. This would be a competitive bidding situation (“Hey everyone, we have $10,000 in the bank, we only need $5000 so who will burn the most tokens for it.”)
- Putting dollars into the business. If the business needs extra cash (to pay service providers/rent and the like) then existing token holders would be incentivised to put money in, in return for new tokens (to stop the value of the token/business from reducing because we get a reputation for not paying bills). The best token/$ rate offered would be accepted (“Hey everyone, we need a cash injection this month of $5000 to pay some rent and a service provider, what is the smallest number of tokens you would want to give us $5000 cash?”)
Some of the trading rules/constraints might include:
- All trading negotiation must be done transparently via stack channel open to all token holders (nobody external).
- Trading can only be done on the first day of each month.
- All trading must be authorised by the navigators (who reserved the right to change the rules if they turn out to not be in the best interest of the company).
- No trade can be more than 8 per cent of the company value.
So this system of transparent “trading” between token holders and the business should in theory set the dollar value of the token each month (and therefore the value the company).
How to add value to the business
Value can be added in many different ways, for example:
This is individual human time that is devoted to increasing the value of the business. This will typically be an hourly rate or fixed cost to achieve some pre-agreed objective.
For example, if I would like to set up and manage our social media. I might estimate 10 hours for an initial bit of work then an ongoing two hours per week. My hourly rate for this work would be $50 per hour. Or, for example, my role might be to deliver on a certain project as a senior consultant, at a rate of $90 per hour.
New business opportunity
Help us win new business by passing on leads that may result in new business. The reward could be a percentage of the resulting revenue generated in a certain amount of time.
For example, if I have a great relationship I believe could result in significant new business, I might say I would like to work with others to help convert this. I won’t charge for my time but would like 6 per cent of the revenue generated from this lead in the first year if it converts. Or, I might have a contact that could result in work. I would say I am happy to share details if somebody else can follow up and convert. I would like 3 per cent of the revenue generated from this lead in the first year if it converts.
This is where value is added by an individual agreeing to associate their personal brand with the business. For example, if I’m not able to significantly contribute time to the business but happy to mention the company in my presentations where I have my brand associated (such as a picture on website/update LinkedIn and so on). I would charge $500 per month.
This is more of an edge case but there could be situations (for example, we have to legally have directors for liability and so on) where individuals should be paid for having to take risk.
Miscellaneous fixed value.
This is typically a fixed cost that adds value to the business:
- A client paying an invoice in $ for our services
- A navigator/contributor putting cash into the business (in order to pay service providers)
- Or, something like: “I’m happy for my apartment to be used by out of town staff for a cost of $80 per night.”
(Note all cost are in $.)
Contributors/navigators would be paid in tokens at the current exchange rate (potentially reset every month). Anybody who wants to add value would make a proposal to the navigator group (including outcomes, estimated time needed, and $ costs) who would authorise or negotiate.
Pulling vs Pushing work
One of the fundamental differences is that in a traditional company work is generally pushed down. Typically Board > Leadership/Management team > Employee.
This new approach proposes that work is “pulled”, so an individual or group put together a proposal for doing something that will add value and is aligned with strategy (as a Trello card into a backlog list).
The navigators prioritise, authorise, and monitor that work (and issue tokens when complete). In the case of a navigator doing the work, the other navigators would have to authorise.
Note that the cost (in $) is also specified.
A few key points:
- The navigators in their monthly meeting define strategies and communicate these to all contributors. Work proposals that are not in line with these strategies are unlikely to be selected. So given that people only get paid if their proposals are accepted they are incentivised to come up with proposals that are in line with strategies, are competitively priced, and align with their competency/passion.
- In any business there is the fun, career enhancing work and there is the other stuff. So how do we ensure that the less attractive work is also done? Well, this should happen automatically in that people can set their own rates. Anybody can propose a higher rate that should get accepted if there are no other options.
- This system gives the “worker” complete autonomy. They can do as much or as little as they want.
For most organisations, the idea that some of their staff will leave and set up in competition (taking IP, staff, and clients with them) is a very real threat which can have a huge negative impact. Even if it doesn’t happen, the threat of it happening can drive negative behaviour.
In the crypto/blockchain world however the concept of “forking” a chain is an accepted and healthy part of the ecosystem.
Forking occurs when there is either disagreement within the community and/or a subset of the community believe there is benefit/opportunity in going in a new direction.
The “chain” or organisation then splits in two with all the same token holders now holding two sets of tokens (the market value of each token adjusting quickly after the split). The two chains go off in their own directions (typically the majority of people go with one of the chains).
It means rules would be agreed that would allow (and even encourage) forking. The argument is it is better for everybody in certain situations (such as significant in-house disagreement or new opportunities) if forking occurs.
It also keeps the entire system more agile and responsive to change (you could even build in a rule that forces a fork when you get to a certain size). When a fork occurs everybody could decide which organisation (or both) to align with (remembering that they would own equal tokens in both at the point of split). One entity might atrophy (as everybody contributes to the new one and their token value will gradually reduce) or they might both continue and thrive.
I believe that we are on the cusp of a major societal shift from a centralised society to a new global decentralised society.
That journey is just starting and nobody can predict how quickly this will occur and what the impact will be of the intersection of other exponential technologies such as nanotech and AI.
The emerging platforms like DAOstack and Aragon start to give us a glimpse of a possible future where DAO’s can exist at global scale potentially involving millions of people collectively holding more power than the mega-corporations or super power governments of today.
I’m the first to admit the thought experiment is far from perfect and there are many areas that need more exploration/experimentation. For example, I haven’t touched on the challenges of:
- fitting into the current legal/tax systems (although this is being worked on by many others within in the global DAO communities)
- ensuring diversity within teams
- incentivising positive social impact
I also realise that I’m privileged to live in a country, New Zealand, that (due in part to its size and geographic isolation) has a relatively high level of trust within its communities.
I do however believe that all these challenges can be solved and what I have outlined could be a practical, low-friction way to start something that could be iterated/improved very quickly. More importantly, it could create an entity that is well placed to scale once the decentralised technology layers mature.
I’m going to start this experiment. I’d love to get feedback and hear from others who are running similar experiments.