| I'm curious how this works with the legal landscape of US regulation. I'm 99.9% sure the law would consider this equity compensation in exchange for labor performed, since this is being positioned as "getting a share" of the company. The only difference between standard "sweat equity in exchange for labor" agreements and this is that there are "coins" that represent a certain percentage of ownership instead of a standard contractual agreement bearing stock certificates. That opens up a whole can of worms in terms of questions: - Can the project owner further dilute the "coins" of the project, by increasing the total coin count? (Can prior work be diluted, thus lowering earning for prior work?) - What kind of financial reporting requirements to companies have that work through assembly? Sarbanes oxley compliance? How do you know that they're reporting accurate earnings and not short-changing developers? - Are these just "amorphous projects with a DBA" aka an informal partnership or are they all required to be corporations or LLC's? - How about implicit liability? If someone were to do an amount of work equal to 10-20% of a company's ownership equity, and the company did something illegal, wouldn't the developer have implicit ownership since he was profit sharing with the company? Would this open the developer to potential liability? (disclaimer: not an attorney, and it's been a while since I looked at related laws, but I remember reading some surprising case law that implied this a while back.) - Possibly most importantly: How does this work with the SEC and IRS regulatory landscape? How is this viewed by the SEC? The SEC requires that any exchange of securities be subjected to extreme regulations (you must take your company public to sell shares to public investors). When I raised money for my angel round, I had to seek SEC Rule 506(d) exemption just to provide shares to my initial investor base and to sweat equity to myself and my founder. Most SEC exemption types carry additional reporting requirements for companies that have "non-qualifed" stockholders. This means monthly financial reporting that is SOX compliant by a CPA among other things IIRC. For the record, "qualified investors" have a net worth of $1mm+ or access to internal information that allows them to make knowledgeable investing (or in this case, investment of the developer's labor). These developers won't qualify simply by developing software for the company, as they need to have access to executive-level information. In addition, SEC exemptions need to be filed by the actual companies in question. Those exemptions have a window of time during which they're valid. Different exemptions have different maximum non-qualified investor counts before the company must go public. That may mean that there's a maximum amount of different developers that can develop and receive sweat equity on a project before it reaches a ceiling, depending on interpretation of the law. Finally, how does this affect the developer's taxable income? If he were to receive these equity shares (whether called "coins" or not), the IRS is going to deem these coins as having some sort of a value, just like stocks do. There's a lot of case law here, and typically it's going to work out to be (company valuation / ownership percentage = effective income amount). The IRS doesn't simply have you pay on dividends received from your equity, it has you pay the value of the equity as income as well, so how about with these coins? The IRS will see this as an asset received for labor, so how will this affect the taxable income of the developer? Do you require the companies on assembly to post a credible, running, monthly valuation by a 3rd party investment bank for taxation purposes? How do you handle the possibility of phantom taxation? I apologize if this seems negative, I think the idea is (potentially) pretty sweet. I just hope you and your founding team talked with some good attorneys before building out this business. As a startup CEO myself, there's a lot of basic regulatory issues that I see with it which would have prevented it from passing the initial "idea vetting" process. |
Here’s how it works:
(I think I’ve addressed all your points here, let me know if I missed anything)
Every product is structured as a partnership (similar to the way a law firm can be a partnership). Everyone who earns App Coins in that product is a partner – which entitles them to a portion of all profits in accordance with their ownership percentage, along with access to business information and direct involvement in decision-making. Those profits are paid out as royalties, not dividends. There are other differences from securities, for example, you can't transfer ownership of Assembly products on a secondary market.
This solution is the best balance we’ve found so far.
Products built on Assembly live on Assembly (so that we can protect the interests of anyone in the community who helped build them). So, revenue is collected by Assembly, the bills are paid, and profits are distributed to all partners (all of this is fully transparent). So, Assembly takes care of financial reporting and products don't need to worry about things like LLCs and DBAs.
Dilution occurs anytime that work is awarded, and a rogue Core Team might be able to game the system to their advantage, but we have reasonable protections in place to prevent this happening to an extreme.
I’d love to chat about this more if I haven’t covered all your questions. You clearly have a good grasp of what we’re trying to do, and you asked all the right questions. I’m at austin@assembly.com if you want to chat.
[edit: added the sentence about secondary markets]