IIP-149: Incorporate Index Coop

IIP: 149
Title: Incorporate Index Coop
Status: Proposed
Author: @Matthew_Graham @ElliottWatts @Metfanmike
Gov Review: @sixtykeys
Created: 11th April 2022

Simple Summary

This proposal puts forward an opportunity for the community to engage with a law firm to set up a corporate structure. This corporate structure is designed to solve for a number of issues that DAOs face in general and Index Cooperative faces in particular.


Based upon Index Coop’s needs, Fried Frank has recommended a Cayman foundation structure that will likely have a British Virgin Islands (BVI) subsidiary in anticipation of any future Treasury diversifications. This approach has been vetted by a third party legal expert.

There are both upfront and ongoing costs if the community decides to move forward. The estimated Year 1 cost ranges between $107k and $204k, with yearly ongoing costs ranging from $30,500 to $67,500. We expect the corporate structure to take as little as 3-4 weeks to create and for Index Coop to use Fried Frank to do so.


As the Index Cooperative grows, we should pivot towards a formal organizational structure that is compliant and easier to work with. Top DeFi projects and protocols have gone down the path of formal incorporation. We argue that Index Cooperative should do the same. Having no corporate structure leaves us collectively more open to risks.

Incorporating Index Cooperative would have multiple benefits:

  • Creating limited liability protection for contributors. Our current structure creates unnecessary risks that we should move immediately to mitigate or outright eliminate
  • Opening the door to more partnerships and off-chain activity with organizations that will only enter into a contract or engage with an actual legal entity
  • Compliance with applicable tax laws

We have explored various incorporation options with the law firm Fried Frank to arrive at a recommended structure that serves Index Cooperative’s specific organizational needs and business model.

Prior to moving this IIP to vote, we intend to facilitate an open discussion with the broader community on this forum thread.


Creating the proposed structure has both an upfront and ongoing cost. If the community decides to move forward, the estimated Year 1 cost ranges between $107k and $204k with an ongoing cost ranging from $30,500 to $67,500. A full breakdown of these anticipated costs can be found here.

Do note that some of the estimated costs may not be required (and are earmarked as such) or may be satisfied in ways that do not incur the listed cost, so the overall costs may be lower. That said, it’s best to analyze the merits of this proposal assuming the high-end of the range.

Creating the corporate structure is anticipated to take around 3-4 weeks to set up. This will benefit all at the Index Coop through mitigating potential but unknown risks, protecting its members from personal liability. It also allows the Index Coop to become a compliant entity that is safer and easier for third parties to work and engage with.



DO create a corporate structure. And engage with Fried Frank.


DO NOT create a corporate structure.


Copyright and related rights waived via CC0.

  1. Who would the Director/s be?
  2. Which Articles would the Foundation Company use?
  3. Is it our intent to transfer holdingsto the FC?
  4. What control would the IC DAO have over the FC?

Thanks, @JosephKnecht.

I’m going to respond as best I can to these questions based on our discussions thus far with FF. We are going to set up the point person at FF (Jason) with a forum account so he can weigh in (and clarify anything I get wrong here). Based on the volume of questions, we may opt instead to set up a community call so community members can go back and forth on a topic, as this topic can be fairly nuanced.

The general idea is that the foundation will have ownership of the multi-sig and passively execute the directives of the DAO, as voted on by community members. The DAO is in control. As far as the director requirement, FF listed the cost for a local director, but there is a path by which a community member can serve this role (obviating the need to spend on the local director). If we go down this path, we’ll have a formal community vote for this individual and any individuals on the multi-sig.

  1. Ok. It would be useful to see the Director composition of other DAO FCs. For example, I see that Gitcoin went with 1 DAO Director and 2 local Directors for their FC.
  2. Still open
  3. Still open
  4. So would the DAO’s control over the FC be in the FC articles?
  1. FF will outline the possible options on director composition, and we can weigh/consider our preferred path.
  2. My assumption is that articles of incorporation for a Cayman foundation contain mostly boilerplate language with added language about who drives the decisions and actions of the foundation (in this case, the DAO).
  3. My understanding is that the foundation would have formal control over the multi-sig, so believe this question is answered.
  4. This is my understanding, yes.
  1. OK
  2. OK. The Articles will need to specify how the DAO can direct the FC, eg, only IIP, or also contributor vote, Council resolution, etc.
  3. There are 2 separate levels: FC and BVI subsidiary control over the multi-sigs. I suspect the BVI subsidiary will need its own Director/s particularly if it’s controlling assets.
  4. OK
  1. The articles indeed will spell this out. That said, Index Coop doesn’t commit to spending based on ICC resolution or contributor votes. We do sometimes have sentiment checks on the forum as a pre-cursor to a vote, but ultimately, budgets and one-off spending go through IIP for a community vote.
  2. The BVI subsidiary will need its own director(s) (cost is included in the breakdown). However, I can’t speak to whether the sub will be controlling assets (at least in the sense we think of it). This is a question for FF as to whether there would be a separate multi-sig here.

Ok. I’m generally in favor of incorporating. One major benefit is being able to sign agreements with marketing/branding partners which we’re not able to do currently.

I appreciate there are a lot of questions about what happens post-incorporation, eg, who can sign which agreements and on what authority, election of Director/s, do contributors need agreements with the FC, etc?

Would you like the current discussion to focus only on whether and how to incorporate? Or also the downstream questions? I recommend the former in order to prevent the scope from getting out of hand.


I agree with that viewpoint. Let’s focus principally on whether or not to incorporate. I can’t imagine that one of those post-incorporation considerations will outweigh the current risks of doing nothing. That said, those post-incorporation questions are nonetheless important so please take note of any as you think of them. If we do a community call with FF, we could address burning questions in that forum.


What risks, exactly?


I’d like to see a legal opinion as well speaking to the specific risks and benefits we’re looking to address and achieve. Imo the large initial and ongoing capital outlay is worth the diligence.


This looks like a really good step forward. In looking at the estimated costs, I don’t see any allocation for DAO resources. Is the creation of the entity an off-the-shelf-solution that requires very little time from the DAO, or do we need to include some kind of project FTEs to cover DAO human capital?
Related, do you expect any significant procedural / reporting requirements that will have to be absorbed by the DAO? Here I am thinking any new HR policies that will need to be written, standard disclosures developed, financial disclosures etc?
Also, I recognize it might just be too early to tell, but as long as we have these details for Season 2 proposal prep, that should be sufficient.


Another question for FF to be sure, but I don’t believe there are extra policies required specifically for pursuing this structure. We may nonetheless opt to put such policies in place because it’s good practice, but this is likely not a requirement like having a secretary for the Cayman entity is.

According to counsel, Index Coop could be deemed the opposite of a limited liability structure. There are unattractive implications, particularly in the US, for that. DM me if this isn’t clear.

Pursuing this incorporation path, as opposed to doing nothing, is the consistent recommendation of every legal counsel we’ve encountered that hears how this organization is operating. Are you saying you would like a formal legal opinion on top of that?

Yeah, and perhaps I lack the vocabulary here to express the sentiment, but “incorporation” is a multifaceted term and the path to same is unclear for DAOs, presently. I think what I’d like to see is a problem statement along the lines of, "Index Coop at present cannot . . . " and then how incorporating solves that . . .

Don’t take this the wrong way, but of course lawyers that are used to interfacing with corporations are going to suggest that we incorporate, but the rubber needs to hit the road before we take to the streets on this and I just don’t see how this clearly solves a problem in the whole-org sense (I want a lawyer to put pen to paper, they think differently when they do typically). I really want to know exactly what we’re trying to accomplish here, what the options are (outside of incorporation) and what the exact plan of attack is. As I see it incorporating may highlight more risk and provide a lightening rod to regulators, so I want to be sure that it’s done responsibly given the desired outcomes.

Sure - we’ll have FF weigh in.


This is Jason Schwartz, tax partner at Fried Frank. Thank you for these thoughtful questions. Before I begin responding to comments here, I want to clarify for everyone’s benefit that Fried Frank is not yet retained by Index Coop, so I am not speaking as attorney for the Coop, and am not your attorney either. That said, I am happy to speak generically about some legal considerations for DAOs in my capacity as a community member and as a US tax expert. I’m also happy to do a Twitter Spaces or the like if there is a desire for that.

I. GENERAL. Apart from US tax law considerations, I believe there are two primary reasons you might want to wrap a DAO in a juridical entity. First, wrapping creates an entity that can execute off-chain actions on behalf of the DAO. Without a legal entity to do this, you need to appoint a community member, who might have trouble convincing off-chain counterparties that they act on behalf of the DAO and could be personally liable for the actions they take on behalf of the DAO. Second, more generally, wrapping can help mitigate the risk to $INDEX holders of being personally liable for claims against the DAO. This could be of particular relevance to Index Coop in light of the financial products that it helps develop and the broad reach of those products.

II. US TAX LAW. Under US tax law, joint ventures for profit are treated as entities. What kind of entity depends a lot on facts and circumstances. Without a legal entity structure, the IRS typically has more discretion to determine a DAO’s tax treatment. The most obvious treatments could, frankly, be very bad. For example:

  • Partnership. Under this characterization: (1) each deemed “partner” would be required to include in income their share of the DAO’s income and gain (possibly calculated without giving effect to deductions), whether or not distributed; (2) the DAO could be liable for failing to file partnership tax returns and failing to withhold on non-US partners; (3) non-US partners could be required to file US tax returns and pay tax just like US persons; and (4) each partner could be personally liable for any liability assessed against the DAO. It is unclear who would be deemed partners under this characterization. One possibility is that it would only be the multisigs. Another possibility is that it would be all $INDEX holders.

  • Foreign corporation. Under this characterization: (1) if the DAO is deemed engaged in a US trade or business, it could be subject to 21% corporate-level tax, plus possibly a 30% branch profits tax on the after-tax amount (i.e., 44.7% aggregate federal tax liability), plus possibly state and local taxes as well. If the DAO is not engaged in a US trade or business, US shareholders could nevertheless be subject to very onerous tax consequences upon a sale of their shares under the so-called “passive foreign investment company” rules. Again, it is unclear whether the shareholders would be the multisigs or all $INDEX holders.

The goal with wrapping the DAO in a juridical entity would be to try to minimize the risk of the above characterizations. Very generally, the intended approach would be to: (1) isolate profits in a juridical entity (typically a foundation organized in the Cayman Islands, which do not impose corporate tax); (2) treat the DAO as a voting arrangement that does not share in profits, but instead advises the juridical entity on how to deploy those profits, so that $INDEX holders are not treated as shareholders of the juridical entity; and (3) take measures to ensure that the juridical entity is not engaged in a US trade or business for US tax purposes and thus is not subject to US corporate tax. Of course, any such structural solution also needs to ensure that the juridical entity implements the wishes of the DAO to the maximum extent possible. Cayman Islands corporate law generally allows this.

You seem to already appreciate that this structure is itself not free from recharacterization risk. For example, the IRS could assert that the DAO members are in fact shareholders of the Cayman foundation, and/or that the Cayman foundation is engaged in a US trade or business. However, we believe that a carefully considered structure that comports with other structures being used by similarly situated DAOs should put Index Coop in a better place to contest any attempt at such recharacterization.

Hope this helps.


Hi @CryptoTaxGuy.ETH,

Thank you so much for coming onto the forum and providing valuable insights here.
Would you be able to provide further colour on the following points ?

We are over 18 months old now and have not filed any tax returns. If incorporated in the Caymans, what implications could this have ?

It appears that an individual contributor (not an LLC) is probably one of the worse approaches here.
Are you able to share any thoughts on how a DAO (bunch of random on the internet) approach / think about signers on the multisigs ?

A more broad question, do we need to made aware of any potential considerations relating to an overly concentrated token distribution ?
Around one third of the DAO token distribution is controlled by a single entity.

With respect to organisational structures, if there was a CEO or board of directors ie: Council, are there any considerations we should take onboard when consider mirrors a corporate board and incentive construct ?

Thank you for taking the time to engage with Index Coop and especially on the forum in such an open arena. We very much appreciate you sharing your thoughts with us.


Hi @Matthew_Graham - Sure thing. In response to your questions:

Unfortunately, there isn’t a clear or easy answer to this. I think the position the multisig signers would likely take is that they were acting as mere agents for a to-be-formed Cayman foundation, and thus were not in fact partners, although this position is not insusceptible to a challenge. Happy to further discuss this live.

Typically, under the structure I’ve described, the multisig is held by or on behalf of the Cayman foundation (e.g., director(s) and possibly officer(s)). With that in mind, I think there are two big considerations embedded in your question.

  1. NEXUS RISK. The existence of US directors could potentially cause the Cayman foundation to be engaged in a US trade or business. I understand there is a similar “nexus” risk for other onshore (i.e., non-Cayman, non-BVI, etc.) jurisdictions, although I practice only US tax law.

Nexus risk typically is mitigated by trying to ensure that the “mind and management” of the Cayman foundation is offshore. The most common approaches that we’ve seen are (a) one independent Cayman director, with DAO oversight built into the foundation’s organizational documents, or (b) two independent Cayman directors with one DAO member as a third director so that the majority of the board isn’t onshore. Option (b) is more expensive. Another option would be to ensure that directorial meetings take place, and material governance decisions are made, offshore, although this might be more difficult to accomplish if one or more US directors are also active participants in the DAO. We can discuss these options live and tailor a solution to the DAO’s preferences and risk tolerance.

  1. PERSONAL RISK. Our understanding is that Cayman law generally protects directors from personal liability with respect to the actions they take for a foundation so long as they don’t breach their fiduciary duties to the foundation. That said, we have seen US officers and directors use LLCs as further liability protection. It also is not uncommon for US developers who are to be compensated by the foundation to each form their own LLC, or to jointly act through a single LLC, to mitigate the potential for personal liability if, e.g., someone asserts that they were harmed by their actions.

There is a legal answer and a practical answer to this question. The legal answer is that token concentration shouldn’t make a difference if the DAO is structured properly. The practical answer is that a more diluted concentration arguably makes it easier for the Cayman foundation to assert that it is not being de facto managed by people in any one country such that it has a nexus there.

I hope this is helpful.


Hi Jason, It’s great to see you engaging with the community on these issues! I’m a NY attorney, but use it more so in my current Web3 business activities than to represent clients. Many colleagues resist speaking up in ways that would be so helpful to DAO communities simply because there is no client that can retain them. I would love to attend a Twitter Space on this topic!! Thanks for your comments. ~ Kianga Daverington


Thanks, @CryptoTaxGuy.ETH, for weighing in on the community’s various questions on this topic.

I believe we’re at the point to move forward with a vote. Tagging @JosephKnecht, @shawn16400, @0xModene, @Matthew_Graham, and @mel.eth in particular, for any additional comments before formally calling for a vote. Will give it another 24 hours.