THE WORKER-LED DAO

This page helps founders answer common questions from angels and VCs who are considering investing in worker-led DAOs for the first time.

What is a worker-led DAO?

A worker-led DAO (decentralized autonomous organization) is a company whose leadership is democratically appointed by its employees on the blockchain. Often, such a DAO is accompanied by a standard chartered corporation, with by-laws clarifying that board seats are assigned through this voting process.

What does this mean for angels and VCs? Essentially, it's similar to investing in a founder-led company like Facebook, where your shares get you rights to a portion of future dividends while Mark Zuckerberg retains control of the company. The main difference is that, instead of relying on a single founder, that power is democratically distributed among the entire workforce. The DAO is a blockchain technology that guarantees this democracy.

What are the advantages of a worker-led business?

There are four big advantages over traditional businesses:

1. Long-term focus. Like their founder-led peers, these businesses can afford to resist the immediate pressures of mainstream, non-venture finance -- and generally even more so, since founders can always aim for a one-time cash-out, while workers are too numerous for this to be practical. They need to support leadership that will provide them with steadily growing paychecks for as long as possible, which means creating a sustainable business.¹
2. Centered on values. The long-term perspective of workers allows them to make tough calls to preserve the company's values and reputation, even when it means giving up immediate opportunities. They need the business to be around and widely trusted in 20 years, even if that means a small pay cut today.
3. More efficient. Studies have consistently shown that worker-led businesses are more productive than their peers, largely because workers have more information on how to improve day-to-day processes.^{2 3}
4. Better talent. Many workers prefer companies where they have a voice in leadership.⁴ This advantage will only become more pronounced as the option becomes more common and the lack of input in traditional organizations becomes more stark.

For more details, see Why Build a DAO.

What are the advantages of the DAO structure?

There are two big advantages over other worker-led structures:

1. Better for investors. There are other worker-led structures, like the worker cooperative, which have existed since before advances in blockchain technology allowed the creation of DAOs. But because worker control cannot be guaranteed on the blockchain, these are generally hostile to outside investors; the workers can't risk gradually losing control of the company. This has historically forced them to forgo the possibility of rapid growth, lacking the capital to reach scale.⁵ DAOs are different: since worker leadership is baked into the core technology, they can offer great terms to investors without worrying about losing that guiding light. They firmly separate governance decisions (like board elections) from rights to future profits; this allows them to offer much better financial returns than traditional worker cooperatives, without giving up worker voting power. The structure we've recommended to founders here is centered on this idea.
2. Simple, settled governance. Other versions of worker-led businesses are forced to spend their precious early time and resources setting up legally and logistically complex structures for managing their core democracy.⁶ But by using standard blockchain tools to formalize these processes, DAOs can establish the rules quickly, clearly, and solidly, and then move on to the important business of finding product-market fit.

For more details, see Getting Started.

Can these companies succeed at scale?

Yes. Many traditional worker-owned businesses have achieved global scale, including Publix, WinCo, and Mondragon. But perhaps more impressive are the new wave of DAOs focused on crypto and decentralized finance, which have grown at a breakneck pace; these include Ethereum, Uniswap, and Aave.⁷ Venture capital has missed out on many of these gains, since those businesses raise money only through selling or holding their own cryptocurrency.

Worker-led DAOs use a different model, in which the core DAO structure is accompanied by a traditional corporation (instead of its own currency), allowing venture capital access to usual investment while giving workers control over corporate governance. This means potential crypto-level returns are open to more institutional investors for the first time.

Won't direct democracy make it hard for anything to get done?

DAO technology allows workers to elect a strong, representative leader, who can make tough calls without requiring input on every little decision. They're still broadly accountable to their employees, but they do not need to worry about getting votes together for everyday functions.

Who is in charge? Will I have a consistent point of contact?

Since this structure allows for a strong CEO, you'll have someone to build a relationship with and speak to about your concerns or suggestions. And you can expect stability, especially early on; the only workers will be the founders themselves, and then a small, hand-selected group of supportive employees. It's only once the company has reached a meaningfully different level of scale or encountered a novel challenge that you should expect a change in your point of contact; and obviously, those are the moments when you're likely to support a shift in leadership anyway.

How will this affect my share of future returns?

It doesn't, at least not directly. Your preferred stock will entitle you to the same share of future dividends or proceeds from an exit, relative to a traditional start-up. The difference is only in voting rights.

What's stopping workers from funneling all the profits to themselves?

Generally, workers receive a large part of their compensation in preferred stock (or restricted stock units promising such), meaning that their interests are fully aligned with yours. They need the value of that stock to increase over time.

In addition, since control is distributed rather than concentrated in a single person, they have an interest in ensuring the long-term success of the business. A CEO with absolute control could make off with an enormous one-time payday; workers are too numerous to cash out like that, so they rely on receiving a steady paycheck, hopefully growing sustainably over time. And since they need continued investment to keep the business healthy, it's in their interest to ensure that returns are as high as possible.

What's the catch? What are the risks?

There are a few, which you should absolutely keep in mind:

1. This is new technology. As with any novel investment area, it's impossible to foresee all of the potential implications; this will make many small-c conservative funders understandably nervous to take the leap. But venture capital is premised on the idea that the risks of a truly new approach (i.e., losing your investment) are far outweighed by the potential rewards (i.e., returns that are higher by several orders of magnitude). You'll have to weigh the chances for this particular business.
2. Workers will be paid more. While employees will have a strong incentive to make sure their compensation doesn't make the business unsustainable, you can expect a larger share of expenses to go toward pay and benefits. But this will be offset by the productivity gains from worker leadership and the superior attraction and retention of talent.
3. There will be short-term sacrifices. While workers want their equity grants to appreciate in value just as much as you do, they really are invested in the long-run success of the company paying their salary. They are likely to pass up some easy opportunities for extra profit in order to maintain the business's values and reputation. The whole point of this is that it does pay off, on a long enough time scale, but it will require some patience on your part.

This guide for founders was created by Trevor Pels in collaboration with the Aspen Tech Policy Hub. Trevor has founded a Y Combinator-backed start-up and worked as a product manager at Google, Facebook, Pinterest, and Lyft.