PART I. Our Vision for OtoCo: From Product to Platform
OtoCo is almost a year old. We've learned a lot from our users and the wider community since we launched OtoCo last summer as an onchain company formation tool. Here's where we want to take it next.
We need containers to hold things, from drink cans and grocery bags to wallets and trusts.
Code is held in repositories. Organizations too can exists just in code, as Decentralized Autonomous Organizations.
Most projects however look for a limited liability shield. Though we believe limited liability is in essence contractual and can hence be smartcontractified, this remains untested.
As a result, the limited liability company is likely to remain the main legal wrapper for most of our economic activity, from starting a venture to pooling capital to holding investments.
For this reason, about a year ago we launched OtoCo, a company formation tool that lets users instantly spin-up a Delaware or Wyoming limited liability company (LLC) using their Ethereum wallet.
OtoCo started more as a hobby, a fork of otonomos.com, but we believe that the idea of putting companies on blockchain may do what shipping containers did for global trade: create pre-assembled, standardized units to stow value of any kind, powered by smart contracts and transportable on a decentralized ledger.
More recently, we started to add onchain “kits” such as an easy ERC20 token foundry, the ability to add a multi-sig cryptoasset company wallet with an ENS wallet address, onchain encrypted messaging, and more.
And since last month, OtoCo users can pay for our services in all major crypto, as well as with card and Apple Pay, via a simple unified checkout.
These new features hint at where OtoCo is going: towards building an automated assembly line for onchain entities that lets you add the components you need for your blockchain project, no matter where you are around the world.
In what follows, we first want to talk about why we started with company formation, to then explain how we plan to transition from product to platform.
1. The Anachronism of Analog Company Formation
Every year, over 5.5 million new companies are formed in the world’s major jurisdictions, and billions are spent just to maintain them.
However, companies still sit on analog rails. This affects users in 3 major ways:
The way companies are formed is still largely analog, involving form filling, filing agents (with faxes!), and clunky Government registries.
The process of incorporating companies is very much stuck in the past and largely untouched by technology.
In civil law jurisdictions, it typically involves the mediation of a notary and substantial paid-up capital mandated under the law.
In most common law countries too, the process remains heavily gated by Governments who maintain company registries and limit user access to licensed intermediaries.
This is a world that more often than not still uses Official Gazettes to announce major corporate events, or wax seals and wet signatures to authenticate documents...
Despite the high degree of standardization of available corporate structures, end users often feel uninitiated and therefore intimidated to take the step to form a company. This puts a break on entrepreneurial spontaneity.
In addition, the entire process of raising capital, from term sheet to closing, is a painful, analogue and expensive lawyer-mediated process.
It is painful as it just takes too long. Founders often find themselves in perpetual fund-raising mode, unable to focus on execution. There is no “faucet” that drips funds under the right terms, if and when required.
And whilst negotiation inevitably requires human coordination, documentation of agreed terms remains too paper-heavy and their execution too manual.
Finally, the lack of automation in the process means continued involvement from expensive lawyers.
Finally, once a company is formed, corporate actions and boardroom governance quickly cause legal entropy.
Directors have few tools to help automate routine governance. Shareholders are alienated and risk being oppressed by a lack of easy means for direct involvement.
The above pain points are particularly acute when using multiple entities or going cross-border.
INTERLUDIUM - A REAL-LIFE EXAMPLE OF LEGAL ENTROPY (OR: WHEN BUSINESS CENTERS AT HOTELS CLOSE FOR THE NIGHT)
Alice wants to be closely involved with the companies she invests in.
When asked, she’s also happy to take a Board seat. As a result, she sits on the Board of 3 of her total 7 portfolio companies where she is main shareholder.
It always strikes her how analogue the whole boardroom process remains. Even though bylaws typically lay down a strict cascade of notifications and resolutions, which should lend itself to a high degree of automation, it seems tech hasn’t reached this space yet.
The other day for instance she was required to sign a share transfer form for one of her portfolio companies in Hong Kong. Bizarrely, a wet signature was required - digital signing was not acceptable on the “Buy and Sell” note.
She received an email from its CEO with the note attached as she landed late from an overnight flight.
By the time she checked in to her hotel, its business centre was closed. The only way to get the form printed was to email it to the concierge.
After about 20 minutes, the hardcopy of the resolution was brought up to her room. She signed it, took a pic and emailed it, but had to go down to the concierge and arrange for a RUSH Fedex document courier since the original form was required.
It was well past 1 a.m. by the time she was done. By that time, people on the other side of the world arrived at their desks.
Just before putting down her phone to sleep, she received an URGENT email that the resolution was not valid and had to be signed again. The lawyer (or most likely his junior) who had prepared it had made a typo in the date.
Alice cursed trough her teeth, checked the hotel directory for the opening times of the Business Centre and turned off the lights.
By the time she woke up and re-printed and re-signed the form (oh what fun connecting to the printer at the hotel Business Centre!), Asia had gone home.
With the other main shareholder traveling too, it took a week to gather all signatures required for the share transfer to be lodged, manually, at Companies Registry in Hong Kong. All along she was copied on the increasingly desperate chaser emails reminding her of the deadline.
Why this entropy from being involved with companies? Everything from how they’re formed to how they raise capital to director and shareholder involvement struck Alice as being hopelessly anachronistic.
A Wordpress for companies?
Experiencing this analog friction every day at Otonomos.com, which helps the crypto and blockchain community form companies in all major jurisdictions around the world, we started to wonder why companies could not be spun up in the same way WordPress lets you launch a website and add plug-ins.1
Another analogy we used was an IKEA-type company assembler that lets users buy “flat-packed” companies which can be activated with very few variables.
From here, in summer 2020, we built OtoCo almost as a hobby project, just to see if it could be done. We documented our design and less than a year later, over 200 users now own experimental onchain LLCs in Wyoming and Delaware using their Ethereum wallet as first Member and Manager.
OtoCo is now researching how to make its company formation tool work also in other jurisdictions and for pre-packaged structures such as a BVI crypto hedge fund, a cheap and cheerful offshore single purpose vehicle, or even a Trust or a Foundation. Expect an announcement on this in late summer.
Why is nobody doing this?
A legitimate question in this context is why has the IT revolution and the democratization of software tools over the last decades, which has radically transformed major areas of economic life such as manufacturing and e-commerce, largely by-passed the company formation and governance space?
One possible answer is that with the advent of blockchains, only now is the technology available to build a 10 times better solution, and not just a 2x better solution.
Another factor is the inertia resulting from Governments invariably owning company registries as the “ledger of truth” of who owns and directs companies in their territory.
Consequently, the only way an independent software solution could achieve legal validity for transactions it hosts is by “syncing” such transactions with the registries.
However, with few exceptions, these Government registries are clunky:
Some registries don’t allow for electronic fling and require manual, paper submissions;
Those that do have a dedicated online portal often force users to enter data manually, which defeats the purpose of digitalization;
User rights to official Government registries are commonly restricted to local filing agents who are subject to licensing requirements;
Whilst some of the more modern registries have APIs that allow transactions to be piped in directly, use of such APIs is commonly restricted to locally licensed filing agents.2
Blockchains are generally recognized as superior ledgers for recording transactions in a tamperproof and traceable way. Smart contracts add to legal certainty by giving those transactions finality and by adding extra authentication.
Nonetheless, despite declarations of intent, no Government is currently using blockchains for their Company Registry or has embarked on a project that looks to do so.
Consequently, any blockchain service provider in the company formation and corporate secretarial space can only ever duplicate, rather than replace, existing processes: any transaction that originates on blockchains will eventually need mirroring on an official ledger.3
Only recently did certain States in the United States, most prominently Wyoming and Delaware, pass legislation that recognizes “decentralized ledger technologies” as the ledger of truth of a company’s records and actions, subject to a number of State requirements as to the contents of the smart contracts to safeguard compatibility with State Registry requirements.
This allows for companies in these States to be formed natively on blockchain, with shares as tokens: basic or advanced smart contracts that let users transact with legal validity in the real world, without the need for wholesale syncing with State Registries.
It is primarily for these reasons that OtoCo started with the Delaware and Wyoming LLC as its first product, but we’re looking at some other States and also examining if we can make this work outside the US.
2. From Product to Platform: An Onchain Venture Building Marketplace
Part II talks about our proposed design for the OtoCo token. It explains why we’ve come gone from the ”indefensible to the indispensable” in our analysis of the need for a native token.
Much has to do with OtoCo wanting to go from product to platform in the next phase of its growth: an open marketplace with components and add-ons written by third-party developers bolted on to a core solution provided by OtoCo.
We think this approach is superior to a walled-garden, proprietary approach from a business model, commercial and technology perspective:
The business case: Attract more users by solving more use cases
From a business model point of view, a unified shopfront integrated within OtoCo’s Dashpanel and stocked with goods manufactured by outside developers may be the only way to give end-users the widest choice of solutions for their needs.
We expect the shopfront to offer a crop of early smart contract plug-ins, for instance:
A fund admin module such as enzyme.finance that is integrated with a “flat-packed” crypto hedge fund legal wrapper;
A plug-in written by an outside crypto custodian firm to keep a company’s Treasury wallets secure;
Smart-contractified Employee Stock Option Plans (ESOPs) for more traditional companies;
SAFE/SAFT/SAFT-Es legal plugins and Reg D/S offering wizards
INTERLUDIUM - Smart contracts in action: Self-enforcing governance
Bob founded a company and raised money from a handful of angels via a Simple Agreement for Tokens or Equity (SAFT/E), followed by a Seed Round lead by a VC and 2 institutional investors.
After spinning up his LLC on otoco.io, he installed the SAFT/E plug-in written by Dooley’s, one of the Valley’s leading law firms. All he had to do was slot in the discount and the cap and connect to an accredited investor whitelist engine available in OtoCo’s store. At the stage of the actual Seed Round, those who contributed were automatically allocated their corresponding number of tokens.
The Seed Round too was a non-event compared to the months’ long investor parades earlier in his career: via OtoCo’s Dashpanel, Bob opened the round by simply specifying the amount he was seeking to raise. Immediately, a simple offering document (reflecting best Valley terms) was populated and blasted out to accredited investors using a solution built by Realpublic which he found in OtoCo’s dAppstore. As investor payments came in, tokens representing equity automatically went out. All equity tokens had the governance rules of his company embedded as a smart contract. The captable updated automatically and within a week 4 million dollar was raised.
Closer to Bob’s A-round, some of the original SAFT/E holders were looking to sell as they could not follow-on and would hence further dilute. The lead Seed VC, a smallish fund, was also not in a position to follow-on and was looking to buy shares from one of the SAFT/E holders on the cheap to prevent itself from diluting too much.
However, when the original SAFT/E holder was entering his private key to transfer the shares to the Seed VC, the smart contract triggered the other shareholders’ right of first refusal. All other shareholders got a notification that an existing shareholder had attempted to transfer shares without them waiving their pre-emption rights.
Bob as Founder and majority shareholder didn’t feel good about an existing investor looking to sell at a price significantly below what he was pricing the company at in the A-round discussions. Since the company’s governance smart contract did not receive his blockchain signature waiving the share transfer, it remained blocked.
Later, Bob reflected how this would have played-out in the real world. The only way to repair a wilful circumvention of investors’ right of first refusal would have been by suing the Seed VC, bringing significant uncertainty. Thanks to his company living on blockchain, smart contract had enforced pre-factum what would have taken the courts much longer to repair post-factum.
The commercials: A token economy
From a commercial point of view, the token economics (see Part II) that result from having a marketplace where users and developers meet and multiple rewards are available should lead to better incentives for both outside developers and users, compared to the traditional app store revenue sharing model.
These token economics dynamics may lead us to unexpected places and even result in the gamification of venture building (see From the Founder).
The technology argument: Open-sourced development efforts
Finally, there is a strong and well-rehearsed argument in favor of non-proprietary, grassroots technology development over top-down solutions pushed by an in-house development team.
Tech companies start out by focusing on solving a single, large problem better than anyone else. However, these advantages are short lived and they will need to innovate faster than the competition in order to sustain growth.
By taking the open-source approach, instead of letting its internal coders duel with outside talent, OtoCo can focus its technology efforts on curating the store itself and make it easy for users to purchase and install third-party solutions.
Walk With Us on the Road to OtoCo
If you want to see OtoCo built the way we envision it, have a say in OtoCo matters you feel strongly about, and be part of our growth, you’ll soon have a way to stake us and receive tokens in the project.
Join our Road to OtoCo telegram group for all announcements.
WordPress could be improved on a lot hence the analogy is risqué: It is slow, as it uses PHP which is currently the slowest mainstream CMS. It is not really easy to use with some alternatives that are much simpler like Light, Surreal and Bolt. So, if WordPress is not in any appreciable way better than its competitors, how is it that it powers 20% of the web and is still gaining market share? We believe because it has over 40,000 plugins developed by a community that was, at first, looking to solve their own problems. Arguably, people don’t chose WordPress because it’s a good product, but because the plugins solve their specific needs. Want a starer e-commerce website with a Forum, Social Network, Photo Gallery and Scheduling System? Easy, just use WordPress!
For a quick overview:
Outside the US, analogue registries can typically be found in smaller jurisdictions, such as Gibraltar or Malta, and also some of the most commonly used offshore jurisdictions, where restrictions on who is authorized to file are often a local employment scheme. Surprisingly, Japan’s registry is still largely analogue with mandatory use of the “chop” or wax seal.
Singapore too seems to favor local employment over efficiency by restricting access to its company registry, maintained by its Government’s Accounting and Regulatory Authority (“ACRA”), to licensed Filing Agents who employ local (i.e. Singaporean Nationals or Permanent Residents) “Qualified Individuals” (“QIs”). Once linked to a local company, these QI’s or their authorized representatives would then manually enter required data via an online ACRA-hosted website, which despite a recent update is almost comical in its user unfriendliness. Even the most basic APIs, despite Singapore claims of being a “Smart Nation”, are absent.
Hong Kong is in many aspects easier and cheaper than Singapore to setup and maintain a local company, as anybody can incorporate and look after their own company online. It has some APIs for use by locally licensed filing agents but still insists on paper fling for some processes such as share transfers in private companies, which need a manual stamp by the Inland Revenue Department before they can be lodged with Companies Registry.
New Zealand and Abu Dhabi (which used the same technology vendor for its registry) have modern APIs so most transactions performed on blockchain would automatically sync with the registry.
The UK too lets anybody who it considers a credible filing agent API into its official registry at Companies House in Cardiff.
Finally, in the US corporate formation and filing is a State matter hence the requirements differ from State to State. All are fairly low-tech and some are non-tech, with paper filing via courier still the most-used method.
Common to all Registries is that they essentially remain passive recorders of data: they do not verify that due process was followed in any corporate action (e.g. did a sufficient number of Directors sign the resolution that is being lodged?), nor do they authenticate if those who signed have the authority to sign or are who they claim to be. Smart contracts represent a very significant improvement on this and show how they have the potential to increase legal certainty by preventing litigation, whilst traditional process typically deal with conflicts post-factum via the court system.