Recently, I consulted with a client who represented members of a DAO facing an important challenge. The DAO was considering distributing a substantial amount of funds to a third party in exchange for services, but members were concerned about ensuring those funds would be used as promised. They wanted accountability, transparency, and clarity and consulted with me about how to do that in the decentralized world of DAOs.
I suggested creating a DAO Fund Distribution Agreement (DFDA)—a tailored agreement to ensure accountability and proper use of funds. Here are several provisions I believe are necessary in these types of documents:
- Purpose Clause- This outlined the specific purpose of the funds and the exact deliverables or services the third party was expected to provide.
- Monthly Accounting Requirement- The agreement required the third party to provide detailed, itemized financial reports every month, along with supporting documentation such as receipts, invoices, and contracts.
- Audit Rights- The DAO was granted the right to conduct independent audits of the third party’s records related to the use of the funds, ensuring transparency and compliance.
- Reporting Standards- We specified that all financial reports must follow established standards like GAAP or IFRS to maintain consistency and clarity.
- Milestones and Deliverables- Payments were tied to specific milestones, ensuring that the third party met tangible deliverables before receiving additional funds.
- Transparency Clause- The third party was required to make information about fund usage available to DAO members—or even publicly if needed—fostering trust.
- Remedy and Reimbursement Clause- If the funds were misused or reports weren’t provided, the DAO could demand repayment or suspend future payments.
- Dispute Resolution- A clear process for resolving disputes was outlined, including options like mediation or arbitration to address any disagreements in an inexpensive and efficient manner.
- Termination for Cause- The DAO had the right to terminate the agreement if the third party failed to comply with reporting or accountability requirements.
- Governing Law and Jurisdiction- The agreement specified the governing law and jurisdiction to ensure it was enforceable in case of any legal disputes.
- Indemnity and Hold Harmless Clause- This provision protected the DAO by stating that it would not be held responsible for any actions, decisions, or liabilities arising from the third party’s performance or misuse of funds. It required the third party to indemnify (compensate) and hold the DAO harmless from any claims, losses, or damages caused by their actions. This ensured that the DAO’s members were shielded from legal or financial repercussions unrelated to their governance.
On a final note, it’s worth mentioning that even before Web3 and decentralized transactions, it was essential to document the terms and conditions of any business transaction in writing.
Written documentation and agreements have always been the cornerstone of accountability and clarity. But today, with DAOs and other decentralized business interactions, it’s never been more critical. Proper documentation is a best practice and it’s necessary for protecting all parties, fostering trust, and ensuring the long-term sustainability of projects.
Mitch Jackson | https://linktr.ee/mitchjackson