Many see technological innovation as the way to expand the frontiers of blockchain projects. In actuality, organizational and legal innovations can have as profound an effect. YouNow, the company behinds Props, is trailblazing the use of a corporate legal structure to align itself with its ecosystem. YouNow plans to transition to a Delaware Public Benefit Corporation (PBC) with a mission to benefit the token holders of its project. In order to understand the magnitude of this change we need to examine the status quo.

The Limitations of Self-Interest

Any analysis of the blockchain space is a study of incentives. The functional and economic outcome of a project arises from an interplay between the desires and behaviors of self-interested actors, often with opposing positions. In today’s market of outsized raises and broadening investor demand, the actor whose incentives are often underexamined may be the most important one: the team or founding entity creating the technology, conducting the token sale, receiving the sale proceeds and retaining a large token allocation (often referred to as its “holdback” or “preallocation”).

Beyond the team’s reputation, the holdback creates a strong incentive to act in a way that increases token value, but the extent to which this truly aligns the team’s interests with those of the ecosystem depends in part on the structure of the project. In projects where the founding entity becomes a service provider or a competing participant on the network, for instance, it may be more profitable to direct resources at boosting this business rather than building software and integrations for the benefit of participants that help the network grow. The alignment can also be weakened by a drop in token value following a successful raise, which devalues the holdback. More generally, token holders have no effective levers for ensuring sale proceeds and the company holdback are used in alignment with their interests.

Legally, corporate directors in the US and most other jurisdictions have an affirmative duty to maximize shareholder value. While boards of directors in the US have broad latitude in determining what is in the shareholders’ best interests through the “business judgment rule”, any actions that harm the bottom line can only be defended on the basis that they promote shareholder interests in the long run.

Aligning Interests

The blockchain space has been waiting for a fully decentralized governance or organizational model that democratizes all decisions about directing resources. However, so far, this has not been adopted or achieved at scale. Many teams structure the founding entity as a nonprofit foundation with a charter that requires it to act for the benefit of its ecosystem. If implemented correctly, this can set a good structure for how the sale proceeds and any company supply allocation will be administered, especially if the founders only receive personal token allocations over time.

But what is the right framework for an existing company seeking to concurrently become the network’s founding entity, initial consortium member, and service provider?

YouNow is using traditional legal technology to innovate on the right incentive structure that aligns it with its ecosystem. The established venture-backed corporation is transforming its business from a single live streaming video application to a decentralized network of video applications called Props and a many-to-many video platform called Rize, which will be the token’s first adopter. YouNow has taken a sophisticated and thoughtful approach to aligning itself with the Props ecosystem. In order to avoid conflicts of interest in overseeing an ecosystem it also participates in, the Props ecosystem will be governed by a nonprofit Swiss foundation, the Decentralized Media Foundation, which will distribute a large reward pool to ecosystem partners and value contributors. However, YouNow’s biggest innovation on governance is its decision to become a Certified B-Corp, which is a commitment to transform the company from a C-Corp to a Delaware Public Benefit Corporation (PBC), with a mission of benefiting all Props token holders.

B-Corp certification will be a laudable step in its own right, as it requires the company to operate in a socially responsible manner with accountability and transparency in its governance. Importantly, the certification carries an obligation to transform the corporate entity to a PBC through a change in its charter that shifts its incentives in an important way, particularly for the founding entity of a blockchain project. A PBC must be managed in a way that balances stockholder interests with the best interests of those materially affected by the corporation’s actions and its specific public benefit mission. In YouNow’s example the company’s specific public benefit mission will be aimed at furthering the interests of all holders of Props. Adherence to these obligations must be demonstrated in detailed reports.

Today, every blockchain project and founding team promises to work hard to build its network and act in the interests of its community, yet YouNow is cementing this promise directly into its DNA and organizational charter.

The blockchain space is in need of new legal and technical paradigms to fully align incentives by granting new rights to token holders. The PBC is not a flawless solution, as boards of PBCs are still protected by the permissive business judgment rule, and only shareholders can bring suits alleging breach of fiduciary duty in departing from the public benefit mission. Still, it is an important step that sets the company on the correct course that guides and protects the board in working to benefit outside constituencies. By committing to aligning itself with Props holders directly in its charter, YouNow is breaking new ground in using legal structures to create the proper incentives for itself as a key actor in its ecosystem. This innovation allows a founding entity to align itself with the public ecosystem it creates and it should set the standard for future projects.

To learn more about Props, visit the Props Project website and join the discussion on Telegram.