Originally published in Forum Magazine
By Joseph Raczynski
Could decentralized autonomous organizations (DAOs) revolutionize how law firm partnerships are going to be structured in the near future?
Imagine a fully decentralized law firm. What might that look like? What if every attorney who opted in became a partner from Day 1, equitably sharing the benefits and firm profits? Gone is the elongated timeline to reach ownership, prestige and profit potential. Further, what if I said this could be built now with computer code that provided full transparency into rules, roles, profit sharing, voting, governance, and that even creates a sense of clarity and community – all out of the box?
Welcome to LawFirmDAO, a hypothetical but now feasible entity created within a decentralized autonomous organization (DAO).
Mind you, I know of no one who has written or talked about this, but this LawFirmDAO concept is something that could be the future of law firm structure. The reason? The lack of transparency within some law firms on occasion has been their undoing. Howrey and LeClairRyan both were victims of a few partners making decisions sometimes in a vacuum, without a wider participation of the firm’s attorneys; this ended up costing the firms dearly.
For some perspective, let’s unpack the essence of what a DAO means. DAOs are essentially entities built on code, leveraging smart contracts and tokens that permit token holders (attorneys) to vote on decisions the organization (the law firm) is considering. Fundamentally, a DAO is a blockchain structure – think of it as a safe database – that anyone can leverage to self-govern through participation. The entity is authored by rules that are baked into the code, permitting voting through digital tokens, sort of like cryptocurrency – all while leveraging smart contracts.
So, what does this mean? A DAO is a newer governance structure that humans (for now) are creating, which has a stated purpose and a plan to execute decisions via code. Let’s explore how this would work for LawFirmDAO.
Decision-making and profit-taking in LawFirmDAO
As a component of Web3, the next generation of asset tokenization, DAOs create a structure of governance. (Currently, most of the successful DAOs are built on the Ethereum blockchain.) Participants are essential to this structure, and they are directly linked to that organization in a verifiable and provable way.
This is accomplished via a digital wallet, linked to a blockchain that contains your assets, money, non-fungible tokens (NFTs), deeds and your DAO tokens – the latter proving you are a part of that organization. Think of it as your digital identity card to partake in the governance of the DAO. Each attorney would have a wallet with the LawFirmDAO tokens inside permitting them to connect to the DAO, create proposals and vote. The intent is to move away from a top-down model, and inherently a DAO structure enables this.
A well-written DAO drives community, fostering the creation of guilds within it to create new opportunities; the DAO then rewards people based on their individual participation.
In this vision of LawFirmDAO, a founder, for the purpose of creation, sets forth a plan to create the firm with all the typical rules of governance, but in full transparency and outlined in code, which is stored on a blockchain. After its creation, the founder withdraws as the leader to be an equal partner with all other participants, i.e., attorneys. The DAO is created, and tokens (shares) are issued. Prospective attorneys coming on board interact with the code via a friendly app or website, connecting in a digital wallet.
Compensation and work matters could be doled out simply as well. For example, attorneys could choose Option A and be rewarded for every client they bring in at 80% of those fees; or Option B and they are rewarded 10% of client fees because they did not bring in the client but worked the matter. In this way, attorneys could shift from one type of work matter to another by choice, simply by reassigning themselves and the code verifying it’s acceptable. Virtually every nuance of a firm governance structure could be pushed into this paradigm via code, verifiable via the blockchain.
Profits for the equity partners would be calculated by fees and automatically generated with their direct success via smart contracts. Rewarding structures are innumerable. Proposals from anyone in the LawFirmDAO would be offered via an online voting mechanism, verifying the person by their token in the DAO, and allowing them to put something to a vote – such as the creation of a new practice area in the next week, opening an office in Lagos or voting to change the profit structure. In this way, a DAO offers full transparency, equity, innovation, incentives, all of which are auditable and viewable in code. No one group or individual is dictating the direction, rather it is a verifiable way to be inclusive and egalitarian in its authorship and action – again, all via code.
An additional advantage to a DAO is the incentivized benefits aligned to the structure created within it. A well-written DAO drives community, fostering the creation of guilds within it to create new opportunities; the DAO then rewards people based on their individual participation. While a guild harkens back to the age of people forming groups of like-minded and skilled individuals, attorneys can do the same inside their LawFirmDAO. As a flat organization, everyone can propose ideas for vote, and if selected, chosen for action.
Legal DAO generator
Separate from this new partnership model created with a DAO, we will likely see DAOs created by law firms for their clients, which would allow for a coupling of current legal tech tools and blockchain. Issuance of a DAO could be done through an application like a contract automation tool; and for any company that wanted to create a DAO, the law firm would populate all applicable parameters – the name of the company and the token, number of tokens available, etc. – and then the firm could create the DAO, and, if necessary, file the business license with the appropriate state. (At the moment, only Wyoming has created laws around DAOs.)
Once this DAO has been created, another connected piece would be the voting mechanism. In this world, DAO participants would leverage their Web3 wallet to connect into the proposal and voting site. Once on the site, members would be able to vote on current ideas or propose actionable matters themselves. Each of these actions is stored on a blockchain that is inherently provable and verifiable.
The LawFirmDAO could be the future direction of equitable, democratic, transparent law firms that all parties can buy into through a Web3 DAO token. The fostering of community and innovation that this structure will birth could be transformative.