The below is not legal advice, and is provided for general informational purposes – your mileage may vary. I share this as I see these issues crop up again and again in my practice, and they’re issues you may wish to discuss with your lawyer(s) as you prepare to take the plunge.

On the eve of a raft of spot Bitcoin ETF approvals and what appears to many to be the dawn of a new crypto bull market, young entrepreneurs without access to large GPU clusters will doubtlessly begin to consider, after a year flirting with generative A.I., whether cryptocurrency is a worthy subject of their attention once again. 

The answer to that question is: of course it is! Cryptocurrency is the future of money and it is still very, very early days. Before taking the plunge, however, know that many entrepreneurs have done so before you, myself included. Below are a number of perennial issues which crop up with new crypto founders, who in their haste to get ahead of the bull sometimes forget to cover the basics.  

1. Did I get the basics right, and did I get them in writing?

The absolute most important thing is to make sure that all commercial understandings between you, your co-founders, and your employees are (a) not a bad deal for you and (b) agreed in SIGNED and DATED writing. If I had a Bitcoin for the number of times I’ve had to fix a problem based on arrangements that started with a handshake and a smile, or an exchange of unsigned PDFs, that later went sour, I would be sipping margaritas on a beach in Tahiti instead of working as a partner in a law firm. 

All matters pertaining to equity and salary compensation, shareholder rights, token grants, and code ownership should be agreed before anyone starts working at the company or joins its cap table. Preferably you prepare these with the assistance of lawyers so that you don’t negotiate a bad deal that’s hard to extricate yourself from later on. Nobody should receive a company email address, get access to the company Slack, be promised a single token or share, contribute a single line of code, or develop a single cent of business until everything with that person is agreed in writing.

If a contract is not signed and dated by everyone, for all practical purposes it doesn’t exist. Don’t put it off, don’t leave it till the last minute, don’t agree that you’ll fix it later. Do it now.

Also, for the love of God, don’t give your Day 1 cofounders equity that isn’t subject to a vesting agreement. Otherwise, you’ll wake up in a year when your requirements have changed and you’ll find a huge chunk of your cap table spoken for by talent you no longer need.

2. Is my idea regulated? If so, where and how? If not, why not?

“Do you want to run a software services company or a financial services company?” There is a difference, and this is the first question I normally ask a new founder looking for guidance. Unlike, say, 2013 or 2017, there are well-defined rulebooks for crypto this cycle, and there are regulators who are fully geared up to enforce them. As such, complying with those rulebooks – rather than “seeking forgiveness and not permission” – is likely a sounder growth strategy in this cycle than it might have been in previous ones.

Crypto is mature enough as an asset class that many jurisdictions, such as the E.U., United Kingdom, and multiple U.S. states including New York, California, Vermont, and Wyoming, have state-specific legal rulebooks for crypto. If the U.S. or a particular U.S. state isn’t the right jurisdiction to operate your business, you might be able to incorporate a subsidiary in a country that is. 

Other governmental entities lacking fit-for-purpose cryptolaw, such as the U.S. federal government, have nonetheless published years worth of guidance and enforcement precedent – particularly in the money transmission and securities law arenas – which new companies should consider when deciding what kind of business they’re planning to offer and how they’re going to offer it. 

3. Is structuring my business to avoid the United States more trouble than it’s worth?

One consequence of recent U.S. enforcement action has been U.S. developers seeking friendlier climes offshore, particularly in the British Virgin Islands or the Cayman Islands. 

I am not sure this is a good strategy. First, if you break U.S. law from overseas, and you’re a U.S. person, you are what we in the legal industry would refer to as “being easy to get hold of” from a regulator’s point of view. Second, owning shares in offshore firms creates tax reporting requirements for you and the firm, and possible tax liability for you. Just because your technical cofounder in Mauritius thinks that a Cayman incorporation works for him, which it might, doesn’t mean it is going to work for you or the business. 

So it might be better to just set up shop here at home. It’s on you to do the tax structuring diligence to make sure you find out the answer ahead of time, so you don’t have any nasty surprises down the road.

Same thing goes for complex structures involving multiple companies in multiple jurisdictions: on Day 1, unless there are very compelling tax reasons to do otherwise, you should have one company, and that company should generally be incorporated and have its headquarters in the country where the management resides, can physically present themselves to the company’s bank, and can receive mail. 

4. Does decentralized technology require a decentralized team?

Many cryptocurrency companies have chosen to eat their own dog food, so to speak, by adopting decentralized management and operational structures to match the globe-spanning consensus technologies with which they work. 

While admirable, operating a “decentralized team” can also be a complete pain in the neck, particularly for early-stage businesses with tight budgets. Generally speaking, payroll and tax filing complications and associated expense rises sharply as you add employees and operations in new jurisdictions, not only across state borders but especially across international ones. Sometimes teams choose to apply a bandage to these problems by hiring full time employees as independent contractors. This can work, for a time, but if the jurisdiction on the other side decides that your “contractors” were actually “employees” at a later date, getting back into compliance with the tax authorities can be expensive and painful. 

Team communication is also more difficult, particularly where communications are asynchronous. Choosing to spread out your team might help you get good talent. Bringing your team to you might help you utilize that talent better and at a lower cost. 

5. Have I done something weird and unconventional that plays well with degens in my Discord, but is going to scare the hell out of U.S. investors?

Although this is less true now than it was in the past, as a general rule, U.S. venture funds are set up to invest in U.S. companies, and by “U.S. companies” we really mean “Delaware corporations.” Most startup charters and investment documents are drafted to deal with Delaware law and setting up in another jurisdiction or using another entity, such as a Wyoming DAO LLC, can have unexpected complications.

Wyoming, for example, has been desperate to attract new corporations, and in particular, crypto corporations. For this reason Wyoming enacted a gimmicky “DAO LLC” law which, without going into too much detail here, doesn’t really add a whole lot of value over a regular LLC and strikes me as a marketing exercise to get the state more exposure to the Ethereum ecosystem. Each state’s laws are different, though, and uniquely in Wyoming’s case, LLCs include a default statutory obligation to refrain from competing with the company, which can lead to disputes when co-founders break up. Similar issues arise with e.g. Estonian “e-residency” and setting up foreign vehicles in ostensibly tech-friendly offshore jurisdictions which might not gybe with the way we do things here in the U.S. This is why most corporate lawyers on the East Coast will be reluctant to recommend a Wyoming or other funky-jurisdiction incorporation.

Similarly, other weird things one sometimes sees in crypto are things like pseudonymous co-founders, weird community ownership DAO structures, decentralized management, etc. While of course I can appreciate novel experiments using cryptography to create new forms of governance, if you want an easier path to a SAFE or a term sheet, stick with a Delaware corporation and don’t do anything too weird. At least not to start.

And below here’s the new twitter thumbnail because Twitter doesn’t do link previews anymore. Licensed under the Pixabay license.