a16z: From Company to DAO, DUNA Could Become the Next Generation of Organizational Form

Original Title: From corporation to crowd: How organizations evolved through time and technology

Original Authors: Tim Sullivan, Robert Hackett, a16z crypto

Original Compilation: Deep Tide TechFlow

Deep Tide Introduction: From Marco Polo's family trade to the Dutch East India Company, the essence of each commercial revolution has been "how to make strangers cooperate." This article by a16z compiles the 500-year evolution of organizational forms and points out the legal dilemmas faced by DAOs—not a technical issue, but a vacuum of institutions. For practitioners contemplating how Web3 projects can operate within compliance frameworks, this is a background article worth reading thoroughly.

For centuries, the core challenge of business has remained the same: how to enable people with different roles, asymmetric information, and varying interests to collaborate towards a common goal? The answer has almost always been some form of organizational innovation—a new structure that allocates risks, rewards, and responsibilities in ways that previous generations could not achieve. Business history is also a history of collaboration.

The corporate system represents the latest great leap in organization, born for the industrial age, specifically to address (and exploit) the collaboration issues of that era. However, software and internet-native protocols are cutting down the once-inevitable costs of traditional enterprises—multi-layered centralized management, bureaucratic bloat, and intermediaries.

Existing legal structures were not designed for this new world. The only strong contender for the next organizational leap is DUNA—a relatively new entity that is the only legally recognized entity in the once-in-a-generation market structure legislation currently advancing in the U.S. Congress. It can be said to be the only structure truly built for internet-native organizations.

To understand why new organizational forms are emerging today, it is necessary to reflect on what problems the corporate system actually solved—and where we are headed.

How Merchants Manage Risk

Before corporations emerged, business was a private affair: imagine Marco Polo engaging in long-distance trade with his father and uncle. In such family businesses, they truly put their lives on the line. If a contract went wrong, personal fortunes could be completely wiped out—even lives could be at stake.

Merchants' ventures relied on two types of protection, neither of which was guaranteed. The first was geopolitical: the relative peace brought by the Mongol Empire's "Pax Mongolica." If you offended someone the Mongols favored, you were in trouble. The second was social: if you deceived someone, breached a contract, or violated the "Law Merchant" (Lex Mercatoria, a self-enforcing code of honor among merchants, around 1100-1600 AD), your reputation would be ruined, and you would be blacklisted from trade circles from Quanzhou to Timbuktu.

In the absence of strong institutions, a merchant's word was indeed worth more than gold. The Polo family had it relatively easy because they relied on blood ties. Many other business partnerships were not so fortunate.

In the absence of strong institutions, a merchant's word was indeed worth more than gold.

A major long-standing challenge in business has been the tension between principals and agents; here, it refers to the relationship between investors and merchants. The medieval "commenda" was an innovation that provided limited liability protection: investors only bore losses up to their investment amounts, and theoretically, so did the merchants. Profits were distributed according to the initial investment ratios. The commenda was spontaneously formed, predating any formal regulations. However, each venture could still be overturned by a little turbulence. This model could not scale: the commenda dissolved at the end of a voyage, bankruptcy, or death.

A further innovation was the "compagnia" of Florence—think of the Medici Bank. This form was a more durable and operationally complex legal entity than the commenda. Companies could maintain long-term business relationships among multiple parties, but still relied on the personal liability of all partners. This was the most advanced pre-corporate tool of the medieval era—the pinnacle of medieval partnership—but still exposed partners to risks. Churches and universities had long enjoyed legal personhood derived from the Roman concept of "universitas" (viewing the collective as a single legal entity), but commercial enterprises always lacked a fully independent legal identity.

These flaws were not resolved until the 17th century when early modern Europe invented something new. This innovation and its legal protections made it easier for businesses to raise capital, allocate ownership through stock issuance, and protect owners from liability—this is the corporation. The powers of these corporations were most famously granted to the Dutch East India Company (VOC: Vereenigde Oostindische Compagnie), and as people realized how great an idea corporations were, it quickly spread to other parts of Europe. (Although the British East India Company was established a few years earlier than the VOC, its system was far less mature, only raising funds for specific voyages and lacking a public offering mechanism.)

By reducing operational risks and lowering coordination costs, the corporate system made large-scale, capital-intensive enterprises possible—thus creating much of the modern world.

The Cost of Scale

While corporations solved a series of real problems, they also brought new issues. Their first achievement was to make participants care about each other's outcomes: by binding shareholders, directors, and captains to the same legal entity and profit line, corporations forced parties to internalize costs that could otherwise be recklessly shifted to others. However, common interests do not equate to perfectly aligned incentives.

Take the VOC as an example; its legal form is familiar yet complex: shareholders included many Dutch citizens eager for investment returns, but they were too busy with their lives to pay attention to the VOC's daily operations or macro strategies. The board of directors, the "Heeren XVII," was responsible for planning how to make money for everyone. Captains and merchants on the front lines in Southeast Asia needed to make the best decisions for the company with limited information and resources.

In theory, this was the case. In reality, the interests of these three parties were not completely aligned; one party could sacrifice the interests of others to gain more for themselves.

Common interests do not equate to perfectly aligned incentives.

How could it be ensured that captains, far from the oversight and control of the Heeren XVII, would not plunder other ships or abscond with funds? How to prevent merchants from accepting bribes or making larger private deals for themselves? How to ensure the board made the right decisions? What if you were a group of shareholders who shared Protestant values but were dissatisfied with the VOC's sometimes predatory behavior? These questions spurred various innovations in incentive design—options, dividends, audits, oversight, and even so-called efficiency wages—along with new legal protection mechanisms, with the state ensuring fair competition. Of course, this also led to countless abuses of power.

However! The evolving corporate system remains our best tool for coordinating incentives, lowering collaboration costs, creating profits, and protecting all participants.

Shortly after the founding of the United States, special legislation authorized the recognition of the corporate form, but it was initially very rare. The First Bank of the United States, chartered by Congress in 1791, is one of the earliest and most famous cases. New York introduced its first general corporation law in 1811. By the mid-19th century, more states allowed companies to register without special acts, and the concept of "limited liability" gradually standardized across states. Subsequently, during the industrialization wave at the end of the 19th century, the number of corporations exploded, culminating in the 1899 Delaware General Corporation Law as a landmark achievement.

Cooperatives emerged as another option in the 19th century. They explored an alternative coordination scheme: member ownership and democratic governance. Farmers, consumers, workers, and credit unions utilized cooperatives to bind participant interests more directly to the organization itself. Cooperatives achieved success in certain areas, such as agriculture (e.g., Land O'Lakes), but overall remained relatively specialized. Meanwhile, the corporate form became increasingly popular.

Another option is the limited liability company, or LLC. Although LLCs have earlier predecessors like the German GmbH or the British Ltd., the LLC itself appeared relatively late: Wyoming did not write it into law until 1977. Before that, corporations offered limited liability but had rigid structures and faced double taxation, while partnerships, though flexible, exposed participants to personal risk. LLCs combined the best of both worlds—limited liability plus pass-through taxation—making them more suitable for various small businesses. Today, it has become the default form for many startups, small businesses, and investment vehicles.

Since then, a series of small variants have emerged: limited liability partnerships (LLP, 1991), low-profit limited liability companies (L3C, 2008), benefit corporations (2010), and so on. These are undoubtedly useful, refining the corporate form for specific purposes. However, every so often, technology changes the boundaries of possibility, giving rise to comparatively revolutionary new forms.

DAO and Its Dilemmas

Decentralization is such a revolutionary idea: large groups can coordinate without centralized management or trusted intermediaries.

Before the emergence of the crypto space—especially before Satoshi Nakamoto invented blockchain—this possibility was more philosophical than practical. One of the earliest great innovations in the crypto space was the DAO, or Decentralized Autonomous Organization. A DAO is an organization governed by software-coded rules and collectively managed by participants rather than a central authority. There is no centralized management team or board of directors, no Heeren XVII.

But decentralized governance is challenging. Getting token holders to vote on important issues has proven more difficult than getting individual shareholders to vote for board members—whose turnout rates are already dismally low, comparable to U.S. municipal elections. Ensuring that power does not concentrate in the hands of a few token holders is equally challenging.

In recent years, the legal environment has exacerbated these challenges. Unfortunately, the previous administration's SEC refused to provide clear rules for crypto projects while weaponizing this ambiguity through aggressive enforcement actions against the industry. Entrepreneurship struggles to grow in uncertainty; even with clear rules, operating is already difficult.

Entrepreneurship struggles to grow in uncertainty; even with clear rules, operating is already difficult.

At the core of the legitimacy issue is one of the three criteria of the so-called "Howey Test"—used by the SEC to determine whether a tool constitutes a security: (1) investment of money; (2) common enterprise; (3) profits derived solely from the efforts of others. For publicly traded companies, "the efforts of others" include the management of the company. For crypto projects and their DAOs, the SEC believes that the ongoing development of the protocol—even if carried out by a group of unrelated individuals who may or may not hold tokens—would subject the relevant tokens to securities laws, making broad participation and on-chain transactions impossible.

Equally important is that, since DAOs are not formally recognized by the state, project owners cannot obtain any of the aforementioned protections, such as limited liability. In other words, DAO members may face unlimited personal liability, which legally brings crypto governance almost back to medieval levels.

Thus, crypto projects act on the advice of lawyers. They establish foundations overseas as independent entities to oversee the ongoing development of the protocol, thereby severing the connection between that work and U.S. operations. Or they set up operational entities directly outside the U.S. Both of these "solutions" undermine U.S. innovation, as well as American jobs and tax revenue.

Overseas crypto foundations, to put it nicely, are a workaround. These lawyer-crafted loopholes shift power and ongoing development work to an "independent" entity in hopes of evading securities regulation. This strategy is understandable in an era of hostile regulation, but it also exposes deep flaws: the incentive coordination mechanisms of foundations are weak, their ability to drive growth is limited, and they inevitably tend to consolidate control.

But when projects are caught between "being sued by the SEC" and "building a strange organizational structure that creates incentive misalignment," what choices do they have?

This is why DUNA—a Decentralized Unincorporated Nonprofit Association—is so important. It draws on the long history of business structures and governance designs, pursuing the common goal of all enterprises: efficiently coordinating crowds around a shared purpose. But it achieves this without relying on centralized management control, thereby reducing the principal-agent problems and information asymmetries common in traditional companies. For this reason, DUNA deviates from a core assumption of the Howey Test: participants do not rely on the managerial efforts of others to create value.³

The Crowd Gains Its Legal Form

Before the emergence of DUNA, there were only three options for organizing and governing around crypto projects: DAOs lacked legal recognition, and members faced potentially devastating liability risks; traditional corporate entities forced projects into unsuitable hierarchical structures while facing SEC enforcement actions; offshore foundations were legally and operationally cumbersome, pushing much of the industry overseas.

Until recently, there was no clear way for a group of users to govern a decentralized network while enjoying some protection of a corporation—this organizational form was only made possible by blockchain technology. Now there is.

Simply put, DUNA turns a group of people into a legal entity. Currently, three states—Alabama, West Virginia, and Wyoming—have authorized this new business structure through legislation. It combines the legal advantages of existing organizational forms with the ability for decentralized control, distinctly different from traditional corporations and something no previous entity has truly achieved.

Simply put, DUNA turns a group of people into a legal entity.

What protections does DUNA specifically provide? Its powers include legal personality, limited liability, perpetual existence, and recognition by state governments—these are also the core elements that allow modern corporations to operate. Recognizing the "legal personality" of the group enables the entity to enter into contracts on behalf of participants; limited liability ensures that members do not bear personal responsibility for the organization's obligations. Together, these features allow large, loosely connected crowds to collaborate—raising capital, holding assets, hiring managers, paying taxes, and making transactions—without exposing members to excessive risk or facing devastating liability.

Organizational forms do not take root overnight; they spread gradually as states compete, lawyers become familiar, and entrepreneurs begin to trust. Before Delaware became the preferred state for corporate registration, New Jersey was the leader;⁴ today, Texas and Nevada are catching up. LLCs were initially approved in Wyoming, and after the tax treatment was clarified, by 1997 they had spread to all fifty states. As for DUNA, Wyoming is once again taking the lead, with legislation set for March 2024. Crypto protocols and communities, including Uniswap Governance and Nouns DAO, have already adopted it.

Just as the corporate system provided the first native form for large-scale enterprises, DUNA is granting a legal form to open, internet-scale decentralized networks.

A New Era of Organizational Design

Think of DUNA as a legal shell that allows the governance mechanisms of decentralized networks to conduct business without introducing traditional centralized management. It is built on the foundation of Unincorporated Nonprofit Associations (UNA)—a legal framework adopted by 17 states and Washington D.C. that helps groups like owner associations, civic associations, recreational sports leagues, religious congregations, and interest clubs organize legally. UNA provides lightweight governance without the heavy structures of corporations or LLCs, allowing these groups to hold property, enter contracts, and sue (or be sued) in the name of the entity.⁵

Just as the corporate system did not replace all partnerships, DUNA will not replace everything that existed before.

DUNA is similar in that it allows a group of token holders or contributors to govern through on-chain rules or token-based voting without relying on a board of directors or management team. Members enjoy limited liability protection, separating the entity's obligations from personal assets; the organization can also be understood and interacted with by courts, regulators, and counterparties.

However, DUNA cannot solve all problems. It cannot eliminate governance challenges, guarantee decentralization (though to qualify for DUNA, a DAO must have at least 100 active members), nor can it magically circumvent securities laws. What it truly accomplishes is filling a specific gap: making decentralized organizations legally recognized entities.

From informal merchant networks to partnerships, to corporations, to LLCs, and now to DAOs, each new organizational technology has emerged when people needed new coordination models. DUNA may mark the beginning of a new era in the evolution of organizational design. But just as the corporate system did not replace all partnerships, DUNA will not replace everything that existed before. It simply expands the options menu. Moreover, it is the first time decentralized networks can be represented by fully identifiable legal entities.

For much of human history, scaling organizations—even small ones—meant taking on enormous personal risks. Bold entrepreneurs like the Polo family relied on family, reputation, and fragile customs to hold everything together, always at risk of being ruined by a shipwreck.⁶ The corporate system changed this equation, separating the fate of entrepreneurship from the fates of those behind it. DUNA extends this separation into a new realm: community governance of blockchain-based decentralized networks.

Now, even a group of loosely organized strangers on the internet can act as a single entity—entering agreements, holding assets, and taking risks—without any participant having to stake their livelihood. In this sense, it is a new answer to one of the oldest questions in business history.

Acknowledgments: Thanks to Aiden Slavin, Alejandro Flores, Miles Jennings, Scott Duke Kominers, Sonal Chokshi, and Steph Zinn for their valuable feedback and edits. Any errors in the text are the author's responsibility.

Cooperatives seem to align well in spirit with internet-native organizations like DAOs, but cooperatives presuppose a relatively stable, identifiable member group and hierarchical leadership structure, which many decentralized networks do not possess.

Interestingly, another significant American contribution—the corporate bankruptcy law—was not widely adopted globally for quite some time. This set of laws codifies the idea that "a person can take risks, fail, reorganize, and try again," serving as an engine of American vitality.

Wyoming attempted to address this issue in 2021, allowing DAOs to organize as LLCs. However, LLCs still assume a clear membership list, K-1 tax filings, and profit motives. While it fits some small investment clubs, it is quite awkward for a network driven by a nonprofit mission, requiring no permissions, and with anonymous members, offering little help in resolving the Howey issue—whether member rights themselves constitute securities.

That is to say, it was not until then-New Jersey Governor Woodrow Wilson suppressed the state's business-friendly registration laws that he inadvertently did Delaware a huge favor.

Trusts may superficially seem like a natural vehicle for decentralized groups, but they are not suitable. Trusts are designed around identifiable relationships between trustees and beneficiaries, making them an awkward choice for organizations deliberately pursuing decentralized governance.

By the way, Marco Polo once commanded a Venetian warship in a war between rival trading powers, was captured and imprisoned in Genoa, and it was in prison that he dictated his famous travelogue.