The DAO launches in around 24 hours so what should DTH’s look for in proposals? They need to do due diligence.

I’ve renamed myself sillytuna-black-hat on The DAO’s slack because I realised I’m spending my time critiquing proposals. I’m doing that because I’ve experienced all this before and was one of many who got burned, usually by ineptness and sometimes outright fraud. It was a great, if painful, learning experience. So I want to go through a few simple things to look out for.

The DAO is going to be asked to support start-ups and newish businesses. They are all likely to be unprofitable at this point and funded purely by angel funding or The DAO. This is important because they see The DAO as a source of income which they basically don’t have yet. The DAO is perhaps their first client.

The DAO, meanwhile, is either investing in start-ups for a return or commissioning businesses to do a task. What’s critical is for DTH’s to step outside of the crypto world and work like an angel investor in the first instance, or a business owner in the second.

Startups

Angel investors look for a number of things, including the team, the value proposition, the plan, and the financials. Importantly, ideas are cheap, it’s the execution that’s difficult.

DAO proposals should be treated like any other start-up. It’s time we stopped those in the crypto world getting off lightly. They should be doing a full, detailed pitch and providing proper financial information.

If they can’t do that, how are they supposed to run a business? I’ve spoken to endless people now who want to pitch to The DAO and they don’t know the first thing about business. These people see it as free money for their cool idea which they’d never get commissioned elsewhere.

Others are seeing it as an easy way to get a great deal of money from investors who aren’t savvy enough to see a bad deal.

Are the team even capable of doing it in their sector? What is their track record? If they are going up against Uber or car makers then they better bloody well have a good plan, including raising $100s of millions of VC funding.

There are numerous articles out there to advise both angels and start-ups so take the time to understand what you should be looking for.

Commissions

Where The DAO are asked to commission work on behalf of The DAO, ask yourself why is a company pitching this as something The DAO need?

How much should this cost to create?

What does the proposer get out of it and why are they pitching this?

What is their profit margin and contingency ? If someone says it’s confidential then tell them to GTFO. The DAO can request this information just as any business can. Moreover, The DAO doesn’t have legal standing so it’s taking a great deal more risk.

There is no contract of work involved so The DAO must have higher standards than real businesses.

Where are the detailed accounts providing the cost breakdown and deliverables?

I’ve seen some proposals already which give The DAO a terrible deal and all the risk, while the proposer stands to gain financially and PR wise whilst not having aligned incentives. For example, if the DAO funded $5m for a project but the proposer’s income and business did depend on the result of that $5m, the incentives are not aligned. The proposer wins anyway and The DAO have no useful legal recourse. Even if the proposer did their job fine, their business doesn’t depend on the result. Yet if it was the proposer’s idea, their future should absolutely depend on the result, certainly if significant money is involved.

Almost All Startups Fail

90%+ of tech start-ups fail. The successes may not be profitable for many years. In the blockchain space, there’s barely any startups who aren’t running on investor money. It’s a long game with few quick or even medium term wins.

Startups should be pushed through multiple rounds, not given a big wedge of funding for their first proposal. Whilst The DAO can block funding at any milestone, the overall value should still reflect the stage and experience of the company. The proposer has to work for their money and not just expect it. I assure you, they’ll pay lip service to that and give all manner of reasons they need commitment from The DAO and it’s paid in milestones anyway but I’m telling you that it’s a sales job. I’d do the same thing, but on other side of the table you need to make a judgement call and not buy into the sales patter.

Advisors

Don’t let advisors, consultants or well known accountancy/law firms fool you. They are irrelevant to how the business runs and often are used to validate the business. Just ask Andreas, who was caught out like that with Neo & Bee.

You want to see suitable advisors and professional associations but as a norm, not as a bonus and definitely not as a validation of the business.

Money

This is your money.

If someone came to you and asked for $1.5m as the Slock security proposal did, you should expect a huge amount of detail and professional financials before handing it over. I’ve written enough about that proposal already but suffice to say it was misleading, including the justifications that came out in response to my post, as well as being a ludicrous amount of money.

Regardless, even if I agreed in principle and with the amount then a proposal for such a large amount of money should be providing the same information any investor or commissioner would expect. The fact that we’re in cryptoland doesn’t change business fundamentals. When work is commissioned, especially for larger amounts, there are lots of hoops to jump through and most of them are there for good reason.

Timing

I’m dubious of (larger) proposals pitched into The DAO contract at the same time as the full business proposal appears in public. I feel this puts undue pressure on The DAO, and doesn’t allow sufficient time for competition. Whilst there is a voting period, there should have been detailed discussion and refinement beforehand. The DAO does not benefit from being pushed into quick decisions, whether it votes Yes or No.

Moreover, larger amounts of funding need larger amounts of discussion. A few weeks just isn’t enough. More time is needed with the finished (give or take) proposal.

Exchange Rate

I’ve said this time and again but the business should not be taking exchange rate risk. I’m absolutely staunch in my view that businesses should charge in USD. An easy work around the lack of USD oracles right now is to allow contingency but only get paid the USD value at each milestone. Any funds remaining at project completion are returned to The DAO. If the exchange rate dropped beyond the contingency amount, they can always submit an emergency proposal. If the project is good then they’ll get the money. Proposals should be absolutely clear about this.

I’m tired of seeing The DAO being taken for a ride in that sense before it’s even started. I know exactly why this is happening — because we all know that if The DAO or Ethereum works then the value goes up and the business is quids in. So I’m going to less than politely ask business to stop being so fucking deceptive. It should only be The DAO taking the exchange rate risk, or The DAO should have that option.

Moreover, the business should be required to convert to fiat upon receipt and any form of exchange rate gambling should see the contract terminated.

Step Back and Smell the Coffee

I’m ending on this because it’s the most important recommendation I have.

You’re essentially investing in businesses and it’s important to look at them critically. You are not supporters of the projects being proposed, you are members of The DAO. You must take a critical stance at all times. Sure, you can love a project idea or a team, but your job is to do what’s best for The DAO. Proposals are not the finished article and you are the one with the power because you are controlling the money. Tell the proposer to improve their business proposition if it’s not good enough.

Sometimes it’s useful to step back, listen to what others are saying, and force yourself to critique a project even if you like it.

The DAO starts trading tomorrow. Proposals will go in tomorrow. Enjoy the ride, it’ll be bumpy!