Web3 Startup: Does Becoming a Partner Mean You're an Equity Holder?
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Web3 Startup: Does Becoming a Partner Mean You're an Equity Holder?
How to prevent equity disputes in Web3 startups?
Navigating Web3 tides with focused insightsAuthor: Iris
During a recent online discussion about the Yescoin dispute, Manqin Law came across a comment that stood out: "Why doesn't building a project together count as equity ownership?"
This is actually a common issue in Web3—many people believe that if they're a core team member who has contributed their technical skills, experience, or even capital to a project, they should automatically be considered a shareholder.
Yet, in reality, even if you hold the title of co-founder and have made significant contributions, it doesn't necessarily mean you are legally recognized as a shareholder.
Why is this the case?
Equity Ownership in Traditional Startups
Before diving into this question, let’s first examine how “equity ownership” is legally defined within traditional startup frameworks.
Typically, “taking equity” means that an entrepreneur or investor contributes funds, equipment, technology, intellectual property, or other assets to establish a business. In return, they obtain formal shareholder status through incorporation or a shareholders’ agreement. This model is well-established and clearly protected under corporate laws around the world.
In traditional models, each shareholder’s rights—such as dividend rights, voting rights, information access rights, and share transfer rights—must be explicitly agreed upon. The company's articles of association or shareholders’ agreement will clearly document each party’s contribution method, equity percentage, and corresponding rights and obligations. In other words, whether your input is cash, technology, patents, or office space, it must ultimately be converted into a specific equity stake and formally recorded in official registration documents or a shareholder register.
Thanks to this clarity, during fundraising, profit distribution, or share transfers, every shareholder's rights and responsibilities are legally protected. Even in disputes, ownership relationships can be clearly determined—there's no ambiguity over whether someone "is or isn’t a shareholder."
It is precisely because of this clear legal benchmark that equity issues in Web3 appear so much more complex and ambiguous.
Equity Ownership in Web3 Startups
Unlike traditional startups, Web3 ventures often adopt more flexible and decentralized approaches. Many teams don’t rush to incorporate—or may not consider incorporation at all—instead opting for seemingly simpler setups, such as forming a core team based on verbal agreements or establishing a DAO (Decentralized Autonomous Organization).
However, under these models, can your time, technical expertise, or financial investment be clearly recognized as equity in the same way as in traditional companies?
Core Team Model
In the early stages of many Web3 projects, it's common for a small group of core members to start working together based solely on mutual trust, passion, and informal verbal commitments. Contributions aren’t always monetary—they might include technical development, operations, or industry resources. Yet, everyone assumes they’re already co-founders and expects to receive tokens or shares proportionally when the project raises funds or launches its token.
From a legal perspective, however, this seemingly simple arrangement carries significant uncertainty and potential legal risks.
Strictly speaking, informal understandings based on contributions or promises do not automatically equate to legal shareholder status—this typically requires a written agreement or formal registration procedures.
That said, it doesn’t mean you have no recourse to claim rights.
For example, under Chinese law, according to the Supreme People’s Court’s "Provisions on Several Issues Concerning the Application of the Company Law (III)," if you can provide sufficient evidence proving that you made contributions (e.g., technical development, financial investment) and actively participated in project or company management, a court may recognize you as a "nominal shareholder" (also known as a de facto or hidden shareholder).
Similarly, in jurisdictions like Delaware and California in the United States, courts have acknowledged the concept of a "de facto partnership." If founders jointly launch a venture, contribute resources, and share risks—even without formal documentation or registration—they may still be treated as actual partners, sharing profits and bearing joint liability.
Nonetheless, relying on these legal precedents shouldn’t give you false confidence. Once a project succeeds—say, after securing funding or launching a token whose value surges—the original verbal understanding often collapses under the weight of massive financial incentives: How do you prove you were a shareholder? After all, regular employees also contribute to a company. Even if your status is acknowledged, how is your contribution quantified? Worse yet, if the project fails, contributors may argue they weren’t fairly compensated despite their efforts, leading to conflicts—or even lawsuits.
DAO Model
Besides small core teams, another popular Web3 startup model is the DAO (Decentralized Autonomous Organization).
Fundamentally different from traditional companies, DAOs lack formal legal entities, articles of incorporation, or government registrations. Members usually join by contributing work or purchasing governance tokens, which grant them voting power over decisions such as fund allocation and investment choices.
From a strict legal standpoint, DAOs are designed for decentralized governance. As such, governance tokens are generally defined as tools for participation in decision-making and incentives for contribution—not equivalent to traditional corporate equity. Consequently, most legal systems do not readily classify DAO token holders as conventional "company shareholders."
However, the key issue arises with investment-focused DAOs, where members vote collectively to invest funds into specific projects or assets and later distribute profits according to token holdings or contribution levels. This operational model closely resembles traditional investment partnerships or shareholder structures. In such cases, the profit-sharing mechanism tied to governance tokens begins to exhibit characteristics of traditional dividends or profit distributions.
Under these circumstances, even if a DAO’s token wasn’t initially labeled as having economic benefits, certain jurisdictions—like the United States—may still treat the governance token as a de facto security or equity instrument, and DAO participants as "de facto partners" or "hidden shareholders." The U.S. Commodity Futures Trading Commission (CFTC) enforcement action against Ooki DAO serves as a landmark example. In that case, regulators argued that DAO members, through voting, effectively performed managerial or partner-like functions and thus should bear legal responsibility for the DAO’s unlawful activities.
Therefore, determining whether someone has "taken equity" in a DAO cannot rely solely on the presence of a registered entity or formal shareholder agreement. Instead, it requires a comprehensive assessment of whether there are clear investment decisions and profit-sharing mechanisms in place.
Traditional Corporate Structure
Even when some Web3 projects choose to incorporate and use traditional equity structures for formal operations, the boundary between token-based rights ("token rights") and equity rights can still become blurred—potentially triggering legal disputes.
Web3 projects often go beyond standard equity financing and also conduct token-based fundraising. While token holders may not technically be shareholders, in practice, they might participate in governance, receive economic benefits, or influence project decisions. This overlap between "token rights" and "equity rights" creates two major legal challenges:
First, could token investors be classified as shareholders?
In Web3 fundraising, some investors acquire project tokens without holding any corporate equity. Whether they qualify as shareholders depends on the legal nature of the token. If the token is purely for governance and ecosystem incentives, investors are typically not seen as shareholders. However, if the token includes profit-sharing rights, revenue entitlements, or grants involvement in key project decisions, certain jurisdictions (such as the U.S.) may classify these investors as "de facto shareholders" or "partners."
Second, does holding governance rights via tokens constitute shareholder status?
In some Web3 projects, teams grant token holders governance rights—for instance, allowing community votes on proposals and fund usage. When token holders—especially large holders ("whales")—exert substantial influence over core business decisions, regulators in certain jurisdictions (like the U.S.) may determine that these individuals perform functions similar to shareholders. Applying the "substance over form" principle, they could then be deemed de facto shareholders or general partners.
How to Prevent Equity Disputes?
Regardless of the startup model, the most common source of conflict isn’t failure—it’s success. When a project scales up, previously vague assumptions about equity ownership suddenly become contentious. So, how can Web3 entrepreneurs prevent equity disputes?
Manqin Law recommends focusing on the following key measures:
1. In Core Team Models: Clarify Contribution Terms Early with Written Agreements
Team members in core groups often assume they’re "co-founders," but without formal legal documentation, such assumptions lack enforceability. To avoid future disputes, founding members should sign written Contributor Agreements or Equity Framework Agreements early on, clearly outlining types of contributions, methods of equity vesting, exit mechanisms, and decision-making authority.
Ultimately, while trust is valuable, clear contractual terms are the foundation for protecting everyone’s legitimate rights. With a written agreement in place, even after fundraising or token issuance, all parties’ rights and obligations remain transparent, reducing the risk of legal conflict due to mismatched expectations.
2. In DAO Models: Clarify Token Legal Status—Governance vs. De Facto Equity
The main cause of equity disputes in DAOs lies in unclear legal definitions of governance tokens and the influence of token holders in decision-making. To prevent future legal controversies, DAO project teams should take proactive steps:
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Clearly distinguish between governance tokens and equity-linked tokens in design.
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Implement vote caps, time-weighted voting, or delegated voting to prevent whale dominance and preserve decentralization.
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Create participant agreements defining roles and legal boundaries.
3. In Traditional Corporate Structures: Maintain Clear Boundaries Between Equity and Token Rights
To avoid conflicts arising from mixing equity and token rights, Web3 teams should clearly separate the two from the outset. On one hand, shareholder rights should be clearly defined in the company’s charter and shareholders’ agreement. On the other, token holder rights should be governed by a separate, independent framework. It should also be explicitly stated that tokens do not represent traditional company shares, and token holders are not automatically considered de facto or nominal shareholders of the company.
4. Document Everything and Engage Legal Counsel Proactively
All contributions, equity allocations, and agreements should be properly documented and archived to ensure evidence is available in case of future disputes. This supports both internal governance and external compliance, especially during fundraising or litigation.
Moreover, based on Manqin Law’s experience, many Web3 startup teams focus heavily on technology and markets while overlooking legal aspects like equity structuring. Therefore, we strongly recommend involving legal counsel early—ideally from the project’s inception—and conducting regular reviews to ensure stable and compliant operations.
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