Calling for an end to crypto’s offshoring in “The end of the foundation era in crypto” sparked some debate. I wanted to reply to five of the most commonly asked questions around tax, public benefit corporations, the role of foundations going forward, and the limits of “foundation-only” models. As more questions come up, we’ll update this FAQ.
Offshore foundations can offer tax benefits, but there’s more risk here than many people think (and more than advisors are willing to admit). Plus, to access those benefits, U.S. projects have to introduce significant operational complexity and structural inefficiencies — like finding offshore employees and maintaining strict independence of the foundation from the development company (DevCo), among other things. Every minute spent managing these constraints is a minute not spent shipping.
Or to put it more bluntly: Founders should focus on maximizing their chance of success, not on tangential benefits that will only pay off if they succeed. Startups don’t fail because they didn’t optimize for taxes.
Most founders I talk to would, in retrospect, gladly give up the tax efficiencies they gained through offshoring to eliminate the overhead those structures create. They often say the primary justification was the hostile regulatory environment, and with that now receding, the complexity isn’t worth it. Finding product-market fit is far more important than tax planning.
Also, structured correctly, the DUNA can be tax efficient, so concerns about taxes shouldn’t be a barrier to onshoring.
No. PBCs maintain fiduciary obligations to shareholders, but they’re allowed to balance those with public benefit. This means they can operate like an ordinary company — compete, raise capital, pursue profit, and so on — including where those businesses provide ancillary benefits to the protocol and tokenholders.
Foundations, on the other hand, distort incentives and are at a competitive disadvantage. Even where commercial activity is permitted, foundations are rarely effective. And when they try to behave like companies, they often trigger the very tax, legal, and governance contradictions they were designed to avoid.
This is especially problematic for networks that need businesses built on top of them. Networks that need go-to-market efforts, engineering efforts, and marketing efforts all working in sync to attract third-party businesses. Non-profits simply aren’t built for this. And when they’re staffed by offshore lawyers, there’s no hope of competing.
There’s a reason only a few successful consumer internet products and services have been built and operated by foundations.
Definitely. The main point of my piece wasn’t “no foundations ever” — it was that we should stop using them for decentralization theater. Market structure legislation forcing that change is a good thing.
Foundations (especially domestic ones) with focused mandates — like executing grant programs and coordinating ecosystem-wide efforts — will continue to be useful. Tokenholders can provide oversight but are not well positioned to manage these functions directly. Uniswap Foundation and Compound’s new foundation proposal are good examples. It operates independently but is accountable to tokenholders through funding: If tokenholders don’t like the foundation’s decisions, they can defund it. For mature projects, foundations may also be a better place to house protocol-development work, as we’ve seen with the Ethereum Foundation.
Importantly, the proposed control-based framework in market structure legislation doesn’t just help DevCos, it also legitimizes these purpose-driven, narrow-scope foundations.
Counterintuitively, for early-stage projects, sunsetting the DevCo and relying solely on a foundation to build the ecosystem can actually undermine decentralization. Here’s why.
For a network to achieve and sustain decentralization, third parties — not just insiders — need to participate and build on that network. But third parties won’t show up unless they derive value from that participation. This has long been obvious in the context of certain network participants, like validators — no one expects them to operate at a loss indefinitely. But the same logic applies to application developers, like those who run frontends for DeFi, social media, or messaging protocols.
While foundations can facilitate credible neutrality, foundation-only models face unique challenges when it comes to cultivating a diverse and durable application layer:
For nascent projects, tight feedback loops and market signals are critical for getting from 0 to 1. Entrepreneurs need to understand — in real time — what’s working and what isn’t. Indirect or distorted signals jeopardize success.
For more mature projects with robust and diverse network participation, credible neutrality becomes a useful tool for scaling from 1 to 100. In these cases, it can make sense to shift toward a foundation-led model, despite some inefficiencies. Mature projects with established market participants and user behaviors are also better positioned to understand what incentives are necessary for participants to operate profitably and maintain a level playing field. A good recent example is Morpho’s restructuring. But even for mature projects, foregoing a direct profit motive is not without risk.
Further, projects pursuing this strategy should be careful not to transform their tokens into the functional equivalent of stock, just in a foundation. Neither existing securities laws nor market structure legislation permit tokens to function as interests in centralized organizations (including economic interests in an offchain business operated by a foundation). Network tokens represent ownership of a network, not a company or foundation.
In short, foundation-led networks have a place, but timing matters. Deployed too early, they can hinder, rather than facilitate, decentralization.
No. DUNAs are “non-profit associations,” but you shouldn’t conflate them with foundations. DUNAs are by definition targeted organizations with narrowed scope — they are just a wrapper of token governance. They are not a hierarchical organization, do not have product teams, and do not operate businesses.
Just as grant-focused foundations can avoid the incentive misalignments of nonprofits trying to build products, DUNAs avoid them too — by design. They exist to reflect governance outcomes, not manager operations.
Also, “non-profit” does not mean “tax exempt.” DUNAs can engage in for-profit activity — including revenue capture from protocol operations (like decentralized exchange fees, a decentralized social media fees — you name it). Wyoming’s DUNA statute specifically allows payment of reasonable compensation for any services provided to a DUNA’s ecosystem, including to tokenholders. And DUNAs can even be used by token-based governance for protocols that have programmatic buy-and-burn economic models. (For more information on the DUNA, read this.)
So no, DUNAs don’t inherit the structural downsides of expansive nonprofit foundations — they offer a clean, targeted legal interface for networks that want to remain onshore without compromising decentralization.
***
In short, if you’re building a network with a network token, then:
If you’re not building a network, then none of the above applies.
***
Miles Jennings is Head of Policy & General Counsel for a16z crypto, where he advises the firm and its portfolio companies on decentralization, DAOs, governance, NFTs, and state and federal securities laws.
***
The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the current or enduring accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; a16z has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets) is available at https://a16z.com/investments/.
The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information.
