In this guide, our key goals are to show you how DAOs structure their fundraising rounds and explore the role that the DAO Constitution and Token Foundation play in the process.

We start by comparing the key differences between Web2 and Web3 venture deals plus examining the investors’ perspectives in both. Then, we dive into multiple aspects of DAO Constitutions like token holder voting, treasury management and implementing DAO decisions. And next, we’ll cover Token Foundations and how these entities are detrimental to attracting liquidity to the project in later investment stages. 

We’ll also give you our free DAO Constitution template which is purpose-built for DAO Constitutions. You can download it by filling out the form on this page.

If you’re interested in learning more about fundraising for the earlier stages of a Web3 business, check out our guides on pre-seed fundraising with token warrants and token side letters, seed fundraising with SAFT and Round A fundraising with token sale agreements.

The key differences between Web2 and Web3 venture deals 

Specifics of structuring any Web2 venture agreement can be reduced to two key points: share ownership and control over the company. Both are critical for the investor, as they directly affect when they can make an exit, how much profit they can get from it, and how they could protect their interests should things go south.

The difference between Web2 and Web3 fundraising is two-fold. First, the ownership of investors’ stakes in the project are affirmed not by shares, but by tokens. Additionally, instead of a seat on the board of directors, investors usually get the right to participate in decentralized governance on an equal basis with other token holders.

You had my curiosity but now you have my attention: investors’ points of interest in Web2 and Web3 fundraising

The above differences in turn affect how the investor’s interests are protected, namely, how issues of ownership and control are structured in venture agreements used by Web3 projects. To be more specific, the two distinctive features are as follows:

1. The ownership of tokens is normally not stipulated in a share agreement and affirmed by share certificates—as it would be in Web2 fundraising—but instead is set out by smart contracts. The latter are launched at the time the tokens are first issued to enforce lock-ups and structure token vestings. In this case, tokens are unlocked either synchronously with a new era of the Proof-of-Stake blockchain network, or in a time-dependent manner.

2. The way the project is governed (managed) is prescribed not by the Articles of Association or Bylaws (depending on the jurisdiction of Web2 ventures), but by the governance protocol. According to that protocol, all decisions within the project are made via decentralized on-chain voting, while its rules are described in a DAO Constitution.

As for the ownership of tokens, which directly affects the Web3 investor’s exit strategy, as soon as the DAO is launched and the tokens are allocated, the latter usually become liquid / transferable (subject to token lock-ups and vesting schedule). Often, at this stage of the project’s development, they are already available for sale on secondary markets, CEXs and DEXs. From that moment on, the investor independently decides how and when to dispose of their tokens.

It is, however, far from being so simple when it comes to governance matters. Investors’ participation in the decentralized governance, as well as the governance of the DAO itself, is a fairly new concept, still not fully institutionalized in law. It is likely you have heard about the Merit Circle DAO voting on removing their initial investor by canceling SAFT; or a16z using their governance rights to vote against the proposal to deploy Uniswap using the Wormhole bridge, all while being a large investor in Wormhole's competitor. To shed some light on the issues of decentralized governance and its legal structuring, we will focus specifically on DAO governance and the Constitution that formalizes it.

Terms and conditions but make it ✨Blockchain✨, aka DAO constitutions in a nutshell

The DAO Constitution is a document that describes how an underlying blockchain protocol is governed. In other words, it defines who and on what conditions can join the DAO as a member, how proposals regarding protocol development are published, and how decentralized voting is organized.

DAO Constitutions are, in fact, a sort of “Terms & Conditions” but for governance protocols. All ecosystem participants joining the network by staking the native token of the project’s main protocol automatically accept the DAO Constitution “as-is”.

Here are a couple of examples of DAO Constitutions of running DAOs: 

• Bankless DAO Constitution
• ENS DAO Constitution

Blockchain-native constitutionalism: adoption of DAO Constitutions

The first members of the DAO usually include:

• its founders;
• core contributors who have developed and published the open source code of the decentralized protocol; and
• the network’s validators, who deployed the code of the protocol in the blockchain network’s mainnet.

Validators and core contributors are the first to introduce the DAO Constitution and organize the first vote. Later, the Constitution can be changed by a vote of the DAO itself.

The regulatory scope of DAO Constitutions

To reiterate, DAO Constitutions are a kind of Terms and Conditions for governance protocols. It is important to note that the governance itself is regulated in an autonomous way by a special protocol underlying the DAO. This makes the DAO Constitution, to a greater extent, a textual description of the rules of operation of that governance protocol.

Given that each governance protocol has its own rules for joining the DAO, as well as the decision-making process (voting) within it, DAO Constitutions are thus centered around two key issues. The two centerpieces of any DAO Constitution are the chapters focusing on:

1. the process of new members joining the DAO, be that by staking the native token of the protocol or in another way; and

2. participation in the DAO’s decentralized governance, and the procedure for implementing decisions made by the DAO.

Put simply, whatever is embedded in the governance protocol as on-chain rules, has to then be reflected in the DAO Constitution in an off-chain format and formalized in the protocol’s constitutional text.

My UI is up here: interfaces for DAO management

In parallel with the preparation for the launch of the governance protocol and publication of the DAO Constitution, core contributors and validators also have to choose a platform for the DAO. It has to be a convenient interface, as it will be used to deploy the DAO dashboard, collect proposals from the members, and monitor the results of on-chain voting.

These platforms are usually either interfaces for on-chain voting that display proposals and voting results for each of them (like Snapshot and Tally), or additionally offer tools for building governance protocols.

Get in token holder, we are going voting: decisions made by the DAO

Usually, the DAO Constitution does not limit the DAO with a list of decisions that can be put to a general vote. Among the decisions that the DAO can take are the likes of:

• deciding on the structure of the DAO’s management bodies, as well as giving mandates to participants;
• setting utilities attached to the native token of the protocol;
• allocating tokens and creating different token pools; or
• making changes to the DAO Constitution, etc.

Rather than coming up with an exhaustive list, it is much more important to define which decisions can negatively influence the DAO and the ecosystem of the protocol as a whole. Those could include, for example, selling a large number of tokens free of lock-ups, engaging in speculation or other risky endeavors. Depending on the specifics of the project, it might be best to list criteria for qualifying some decisions as potentially harmful or appointing a supervisory body, such as a Board or a Guardian to monitor the DAO’s governance compliance.

📚 Read more: Designing a Governance System for DAO: a Checklist for Web3 Founders

Off-chain and On-chain implementation of DAO’s decisions

Decisions made by the DAO, depending on how they are implemented, can be either decentralized or centralized. In the first case, when the decisions are implemented in a decentralized way, the will of the DAO is enforced through implementing the results of on-chain DAO voting in an automatic and autonomous way by a smart contract specifically created for this purpose. For example, a decision to issue an ecosystem grant is autonomously executed by a smart contract that controls the grant fund by holding it in a non-custodial escrow, and which sends a portion of the fund to the selected project.

At the same time, since not all processes can be predicted in advance, not all decisions made by the DAO can be executed in an autonomous decentralized way. The executive body of the DAO, normally its Council elected through voting, is usually responsible for the manual (centralized) execution of those decisions. To create a system of checks and balances within the DAO, the Guardian, whom we have already mentioned, is often tasked to prevent the abuse of power by the Council by ensuring that all decisions of the DAO are carried out by the Council in the best interests of the DAO.

Treasure? You don’t say! How the DAO manages its Treasury

Another significant part of the DAO governance model is putting forth the rules on how to manage the Treasury. As mentioned above, the DAO Treasury is managed in a mixed way: in part by autonomous smart contracts, and partially by the executive body. A key point to remember is that most DAOs often need to interact with the outside (off-chain) world, attract liquidity in fiat currencies, and also attract new venture capital.

Those needs are very difficult to implement with a purely on-chain Treasury and on-chain voting, as these two alone will normally not be sufficient to interact with the outside (off-chain) world. To solve this off/on-chain puzzle and marry the two worlds, it is necessary to create a “bridge” between on-chain and off-chain realms, for which DAOs often create Token Foundations.

Fantastic Token Foundations and where to found them

A Token Foundation is a trust structure through which DAOs with their own on-chain Treasury can interact with the off-chain world. It is most convenient to view it as a legal bridge that allows the DAO to interact with the off-chain world, attract fiat liquidity, raise new rounds of investments, and list tokens on new platforms, etc.

The Token Foundation is an ownerless (ownership-free) structure. In other words, it has no shareholders or other type of owners, but instead holds a pool of tokens in trust and manages them for the benefit of the principal beneficiary, that being the DAO, and the ecosystem as a whole.

Token Foundations are registered in the form of foundations or foundation companies in crypto-friendly jurisdictions, such as Switzerland, Liechtenstein, Cayman Islands, or Panama. They do have centralized management in the form of the board of directors, a compliance officer, and, as a result, have the ability to interact with real (off-chain) structures in a compliant way. Those structures can pass verification and KYC processes, sign documents, open fiat accounts, etc. 

And get this DAO a shield: other companies registered by DAOs

In addition to Token Foundations that are used to attract fiat liquidity into the ecosystem, as well as issue grants and support community members, a number of DAOs also opt to create legal entities for the DAO itself. This is because an unregistered DAO can qualify as an unregistered general partnership (as in the CFTC vs Ooki DAO case). In this way, each member of such a DAO has unlimited liability for all actions of the decentralized organization and is exposed to unnecessary legal risks.

In order to shield the DAO members from unwanted risks, as well as to limit (restrict) their liability, some DAOs vote to create a legal wrapper for themselves. Such a DAO legal wrapper is created in the form of associations, foundations or DAO LLC and serves as a “legal shield” for DAO members. You can read more about the best countries and entities for a DAO legal wrapper in our guide. 

📚 Read more: The Ultimate Legal Structuring Guide for Founders of dApps 

Summary and a DAO Constitution template

Well, it was a nice dive into the intricacies of DAOs, their constitutions, and Token Foundations, specifically in relation to fundraising rounds and governance. We’ve covered that:

• The key distinctions between Web2 and Web3 venture deals center around share ownership, control, and the affirmation of investors' stakes by tokens instead of shares.
• To protect ecosystem's interests, Web3 projects rely on smart contracts and decentralized on-chain voting. 
• DAO constitutions serve as the governance protocols' terms and conditions, outlining membership processes, and decentralized voting organization. 
• The adoption and modification of DAO constitutions are driven by the DAO's core members and voting processes. 
• Treasury management in DAOs incorporates both autonomous smart contracts and an executive body for off-chain interactions. 
• Token Foundations act as legal bridges for DAOs to engage with the off-chain world, secure fiat liquidity, and facilitate new investment rounds. 
• Finally, some DAOs establish legal entities as a protective measure, shielding members from unwanted risks and limiting their liability.

To help DAOs create compliant decentralized structures we’ve put together a template of a DAO Constitution, which you can download and use for free by filling out the form on this page. 

When using our DAO Constitution template, remember that it has to reflect a number of specific rules on your protocol governance. In particular, your DAO Constitution has to cover:

• how token holders can participate in the DAO governance: by staking the native token or in another way;
• some information about tokenholding;
• who validates transactions and what are the rewards for it;
• the structure of managing bodies and their competences;
• what DAO token pools are there and how the Treasury is managed;
• the requirements for submitting proposals to amend the DAO Constitution, classification of proposals based on their importance and/or risk appetite, as well as a quorum and a required number of votes for each of them;
• the process for creating legal entities for the DAO.

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