We believe our research on the best practices for Web3 founders should be freely accessible for everyone. However, please note that we are not lawyers. We just want to get this information out there so you have a starting point before seeking legal council.
Intro
The first step in establishing a legal structure is registering an initial entity, the
Developer Company. Once the initial teams and founders have started working on the project, the development starts in a centralized development which requires an entity to for protecting the founders, collecting intellectual property, signing contracts, renting office space, and raising funds when starting a decentralized network.
This company is usually set up within the first 3-5 months of a project's development.
Purpose & Responsibilities
The main purposes of the Developer Company are:
Protection for founders
- By creating a legal entity, the founders of the project can separate their personal assets from the assets and liabilities of the business. This can provide some protection for the founders in case the project runs into legal or financial difficulties.
Start decentralized development of the protocol
- Create a work environment and operational structure
- Hire employees and pay salaries
- Own and protect rights to intellectual property
IP Development
- All intellectual property created is owned by the company
- Hold trademark rights and own assets such as graphics, etc.
- Sign NDAs / NCA agreements with employees and contractors
Fundraising
- Pre-Seed / Early Seed: Raise funds at early fundraising stages via equity + (optional: future tokens via converting equity into tokens)
- Fundraising responsibilities by the Developer Company: Fulfill due diligence for investors; IP ownership is secured, developers are employed, etc.
Development Stage Detail
- Start developing the protocol
- Start developing Tokennomics
- Initial marketing & media:
- Twitter, blog posts
- Brand building
- Develop business and revenue model
- Finalize Equity Cap Table & Token Cap Table
Testnet Launch & Validator Bootstrapping - Launching Private Testnet + Incentivized Testnet
- Bootstrapping Validators who will deploy Mainnet
Later Stage Purpose
At a later stage, after the network has launched, the developer company is intended to receive funds in the form of grants or service agreements with the foundation to execute, further develop, and maintain the protocol.
Jurisdiction / Entity Type
The jurisdiction of this entity is typically the country where the founders and the majority of the team members are based. According to the team’s location this could be a GmbH in Germany, or a SARL in France.
If the founders and team are globally spread and the company can function without a traditional bank account (for instance, if it can be paid in stable coins), then it may be feasible to establish the company in an island-based jurisdiction such as a Cayman Islands LLC or a BVI company.
Examples
The following examples give rough estimates and can vary widely based on a number of factors, including the complexity of the structure, the location of the entity, and the fees charged by service providers or lawyers. It's important to do your research and consult with a professional to determine the specific costs and timelines for your situation. But generally speaking, Since this is a "conventional company," it is relatively easy to set up in most jurisdictions, usually taking no more than 3-4 weeks. The owner(s) of this entity are usually the founders of the project.
The examples give a brief outline according to:
- Jurisdiction and entity type
European Examples
- Cost: The cost to set up a GmbH in Germany can vary depending on the complexity of the structure and whether you use a notary or a lawyer to handle the process. Expect to pay at least €1,000 to €2,000 for the notary fees, plus any additional legal fees. You'll also need to register the company with the Commercial Register, which can cost several hundred euros.
- Time: The time it takes to set up a GmbH in Germany can vary depending on the complexity of the structure and whether you use a notary or a lawyer. Expect the process to take at least a few weeks to a few months.
- Ownership: A GmbH (Gesellschaft mit beschränkter Haftung) in Germany is owned by one or more shareholders (Gesellschafter), who can be individuals or legal entities. The shareholders' liability is limited to their investment in the company.
- Location: There are no restrictions on the nationality or residency of the shareholders, and they do not need to be German citizens or residents. However, it's important to note that setting up a GmbH in Germany does require a registered office in the country, which can be provided by a local service provider.
- Taxation: German GmbHs are subject to corporate income tax (Körperschaftsteuer) on their worldwide profits. The current corporate income tax rate is 15% plus a solidarity surcharge of 5.5% on the corporate income tax amount. Additionally, trade tax (Gewerbesteuer) is levied at the local level, with rates varying based on the municipality. The effective trade tax rate can range from 7% to 17.5% depending on the location. Profits distributed to shareholders as dividends are subject to a withholding tax (Kapitalertragsteuer) of 25%, which can be reduced or exempted under certain circumstances.
- Cost: The cost to set up a SARL in France can vary depending on the complexity of the structure and whether you use a lawyer or notary to handle the process. Expect to pay at least €1,000 to €2,000 for the notary or legal fees, plus any additional registration fees. You'll also need to register the company with the French Commercial Register, which can cost several hundred euros.
- Time: The time it takes to set up a SARL in France can vary depending on the complexity of the structure and whether you use a notary or lawyer. Expect the process to take at least a few weeks to a few months.
- Ownership: An SARL (Société à Responsabilité Limitée) in France is owned by one or more partners (associés), who can be individuals or legal entities. The partners' liability is limited to their investment in the company. The partners (associés) of an SARL (Société à Responsabilité Limitée) in France do not need to be located in France or have an office there.
- Location: Like the GmbH in Germany, there are no residency or nationality requirements for the partners of an SARL. However, setting up an SARL in France does require a registered office in the country, which can be provided by a local service provider. It's also worth noting that non-resident partners of an SARL may be subject to certain tax obligations in France, depending on the specifics of their situation.
- Taxation: French SARLs are subject to corporate income tax (Impôt sur les Sociétés - IS) on their profits generated in France and abroad. The standard corporate income tax rate is 26.5% for annual profits up to €250,000 and 27.5% for profits exceeding that threshold. There may be additional surtaxes applicable depending on the level of profits. Dividends distributed to shareholders are generally subject to a flat-rate withholding tax (Prélèvement Forfaitaire Unique - PFU) of 30%, which includes both income tax and social contributions.
Crypto / tech friendly examples
- Cost: The cost of setting up an Estonian company can vary depending on various factors, such as the complexity of the structure and the services used. The government fees for company registration in Estonia are relatively low, typically ranging from €190 to €300. Additional costs may include legal fees and any specialized services required.
- Time: The timeline for establishing an Estonian company is generally efficient and streamlined. With the e-residency program, the process can be completed remotely. It typically takes a few days to a few weeks to complete the registration process, depending on the preparation and requirements.
- Ownership: An Estonian company (OÜ) can be owned by one or more shareholders. Shareholders can be individuals or legal entities, and they can be located anywhere globally. The ownership of the company is determined by the distribution of shares among the shareholders, which is specified in the company's articles of association.
- Location: An Estonian company does not require the shareholders to be physically located in Estonia. The company can be managed and operated remotely. The company is required to have a registered office address in Estonia, which can be fulfilled through various service providers.
- Taxation: Estonian companies operate under a unique tax system called the "Estonian Corporate Income Tax System." It allows for the taxation of profits only when they are distributed as dividends. Retained earnings are not subject to immediate corporate income tax, providing a favorable tax environment for businesses.
Isle-bases/off-shore examples (internationally distributed teams)
- Cost: The cost to set up a Cayman Islands LLC can vary depending on the complexity of the structure and whether you use a service provider or a lawyer to handle the process. Expect to pay at least $1,500 to $2,500 in government fees and legal fees, plus any additional registration fees. You'll also need to pay an annual fee to maintain the LLC, which starts at $854.
- Time: The time it takes to set up a Cayman Islands LLC can vary depending on the complexity of the structure and whether you use a service provider or a lawyer. Expect the process to take at least a few weeks to a few months.
- Ownership: A Cayman Islands LLC can have one or more members, who are the owners of the company. The members can be individuals, corporations, or other entities, and they can be located anywhere in the world.
- Location: The owners of a Cayman Islands LLC can be located anywhere in the world, and they do not need to have an office in the Cayman Islands. This is typically provided by a local service provider, who can also assist with other aspects of company formation and management.
- Taxation: Cayman Islands LLCs are typically established as tax-neutral entities, meaning they are not subject to corporate income tax on profits generated outside of the Cayman Islands. There are no capital gains, wealth, or inheritance taxes levied by the Cayman Islands government. However, the tax obligations of the members/shareholders of the Cayman LLC may depend on their respective jurisdictions of residence and applicable tax laws.
- Cost: The cost to set up a BVI company can vary depending on the complexity of the structure and whether you use a service provider or a lawyer to handle the process. Expect to pay at least $1,000 to $2,000 in government fees and legal fees, plus any additional registration fees. You'll also need to pay an annual fee to maintain the company, which starts at $350.
- Time: The time it takes to set up a BVI company can vary depending on the complexity of the structure and whether you use a service provider or a lawyer. Expect the process to take at least a few weeks to a few months.
- Ownership: A BVI (British Virgin Islands) company can have one or more shareholders, who are the owners of the company. The shareholders can be individuals or legal entities, and they can be located anywhere in the world.
- Location: The owners of a BVI (British Virgin Islands) company can be located anywhere in the world, and they do not need to have an office in the British Virgin Islands. However, in order to form a BVI company, the company must have a registered office or agent in the jurisdiction. This is typically provided by a local service provider, who can also assist with other aspects of company formation and management.
- Taxation: BVI LLCs are generally exempt from local taxes, including corporate income tax, capital gains tax, and withholding tax, on profits generated outside the British Virgin Islands. However, the tax obligations of the members/shareholders of the BVI LLC may depend on their respective jurisdictions of residence and applicable tax laws.