Show HN: Assembly – Help build a product, get a share of it
assembly.com
assembly.com
I'm 99.9% sure the law would consider this equity compensation in exchange for labor performed, since this is being positioned as "getting a share" of the company. The only difference between standard "sweat equity in exchange for labor" agreements and this is that there are "coins" that represent a certain percentage of ownership instead of a standard contractual agreement bearing stock certificates.
That opens up a whole can of worms in terms of questions:
- Can the project owner further dilute the "coins" of the project, by increasing the total coin count? (Can prior work be diluted, thus lowering earning for prior work?)
- What kind of financial reporting requirements to companies have that work through assembly? Sarbanes oxley compliance? How do you know that they're reporting accurate earnings and not short-changing developers?
- Are these just "amorphous projects with a DBA" aka an informal partnership or are they all required to be corporations or LLC's?
- How about implicit liability?
If someone were to do an amount of work equal to 10-20% of a company's ownership equity, and the company did something illegal, wouldn't the developer have implicit ownership since he was profit sharing with the company? Would this open the developer to potential liability? (disclaimer: not an attorney, and it's been a while since I looked at related laws, but I remember reading some surprising case law that implied this a while back.)
- Possibly most importantly: How does this work with the SEC and IRS regulatory landscape?
How is this viewed by the SEC? The SEC requires that any exchange of securities be subjected to extreme regulations (you must take your company public to sell shares to public investors). When I raised money for my angel round, I had to seek SEC Rule 506(d) exemption just to provide shares to my initial investor base and to sweat equity to myself and my founder.
Most SEC exemption types carry additional reporting requirements for companies that have "non-qualifed" stockholders. This means monthly financial reporting that is SOX compliant by a CPA among other things IIRC. For the record, "qualified investors" have a net worth of $1mm+ or access to internal information that allows them to make knowledgeable investing (or in this case, investment of the developer's labor). These developers won't qualify simply by developing software for the company, as they need to have access to executive-level information.
In addition, SEC exemptions need to be filed by the actual companies in question. Those exemptions have a window of time during which they're valid. Different exemptions have different maximum non-qualified investor counts before the company must go public. That may mean that there's a maximum amount of different developers that can develop and receive sweat equity on a project before it reaches a ceiling, depending on interpretation of the law.
Finally, how does this affect the developer's taxable income? If he were to receive these equity shares (whether called "coins" or not), the IRS is going to deem these coins as having some sort of a value, just like stocks do. There's a lot of case law here, and typically it's going to work out to be (company valuation / ownership percentage = effective income amount). The IRS doesn't simply have you pay on dividends received from your equity, it has you pay the value of the equity as income as well, so how about with these coins? The IRS will see this as an asset received for labor, so how will this affect the taxable income of the developer? Do you require the companies on assembly to post a credible, running, monthly valuation by a 3rd party investment bank for taxation purposes? How do you handle the possibility of phantom taxation?
I apologize if this seems negative, I think the idea is (potentially) pretty sweet. I just hope you and your founding team talked with some good attorneys before building out this business. As a startup CEO myself, there's a lot of basic regulatory issues that I see with it which would have prevented it from passing the initial "idea vetting" process.
Here’s how it works:
(I think I’ve addressed all your points here, let me know if I missed anything)
Every product is structured as a partnership (similar to the way a law firm can be a partnership). Everyone who earns App Coins in that product is a partner – which entitles them to a portion of all profits in accordance with their ownership percentage, along with access to business information and direct involvement in decision-making. Those profits are paid out as royalties, not dividends. There are other differences from securities, for example, you can't transfer ownership of Assembly products on a secondary market.
This solution is the best balance we’ve found so far.
Products built on Assembly live on Assembly (so that we can protect the interests of anyone in the community who helped build them). So, revenue is collected by Assembly, the bills are paid, and profits are distributed to all partners (all of this is fully transparent). So, Assembly takes care of financial reporting and products don't need to worry about things like LLCs and DBAs.
Dilution occurs anytime that work is awarded, and a rogue Core Team might be able to game the system to their advantage, but we have reasonable protections in place to prevent this happening to an extreme.
I’d love to chat about this more if I haven’t covered all your questions. You clearly have a good grasp of what we’re trying to do, and you asked all the right questions. I’m at austin@assembly.com if you want to chat.
[edit: added the sentence about secondary markets]
I wanted to clarify the above:
1) Though some have conceptually referred to products on Assembly like partnerships they are NOT. They are neither structured as "Partnerships" and are not housed in their own separate legal entity
2) Each product has a group of contributors that, through the rules we all agree to abide by on Assembly (https://assembly.com/terms), collectively determine the strategy and product development as well as share in any profits.
3) App Coins determine a contributors share of any profits and are awarded by the product's Core Team made up from the community. App Coins aren’t transferable, and aren’t exchangeable for other currencies. You can learn more on how App Coins and profits work here (https://assembly.com/help/revenue)
We have spent a lot of time thinking about some of the structural issues raised here. They are the kinds of issues that we see many companies working through as they try to fit new business models into existing rules and regulatory schemes. We’ve done our best to create a structure that addresses regulatory concerns while also maintaining the core principles on which we’ve founded Assembly.
My only question remaining is how you guys handle shareholder liability since there's no corporate veil for partnerships. Is there some sort of general liability policy requirements, or is that kind of up to the people running the partnership?
For example, I picked Coderwall, which is the 2nd project listed on the discover page. There are 11 tasks right now, with a total coin bounty of about 25k. Looking at the ownership, there are about 14.3 million coins allocated, owned primarily by one guy. SO, if I clear out ALL of the tasks for Coderwall, I will receive coins worth ~0.0017% of the project. If 100% of the stated $30k revenue is distributed to coin holders (which it won't be.. gotta pay for servers, etc), I will receive about $50/month for clearing out all of their tasks.. I understand that revenue might grow, but that's a very small amount nonetheless.
Maybe I'm missing something? Is that about how it works?
I'm all in on assembly, my current startups on there are: http://assembly.com/startl http://assembly.com/bootswap http://assembly.com/chatbotify-me http://assembly.com/authorsimple http://assembly.com/brytn
products I did not start but am active on: http://assembly.com/cliq http://assembly.com/dawn http://assembly.com/okvaper
Startup ideas laying around I plan to put up there once I've got the ball rolling on my current ones: http://transtartup.blogspot.com
Assembly will prove valuable if people create value for the ideas put there on the risk that it will pay off, and the smaller the team when the dev gets in, the bigger of an impact and stake they can have/be rewarded.
Thanks marbemac! Thats mostly true but there are a couple things to note:
* That math is based last month's earnings. If next month the earnings go up or expenses go down, the payouts would increase. Here is the break down of September: https://assembly.com/coderwall/posts/september-finances
* The proceeds are paid out every month for the life of Coderwall. Several contributors earned over $500-1,000+ for previous contributions even though they didn't contribute much this last month.
* Everyone can participate in determining the value of bounty, if you feel its too low, you can bump it up and additionally discuss it the thread.
* There are a lot of products that don't earn as much stable revenue and therefore bounty values are more aligned with risks and opportunities.
https://github.com/assemblymade/coderwall/pulse/monthly
And in this case the guy gets a much smaller piece of the pie than a founder would.
Too Little incentive for the kind of people you need in a startup.
A startup founder is (in many cases) looking for a massive payoff by placing a bet in the equity bubble lottery, with a acquihire fallback.
Assembly doesn't address the same use-case as founding a company, and while it's ostensibly aimed at potential "founders", I doubt many people will conflate collaborating via Assembly and a creating a startup.
Its a community effort so some people have more time then others in a month and products on Assembly each have their own ebb and flow. It does look like just3ws did alot in October but those are probably mostly merge commits (just3ws is on the Core Team). All the partners still shared in last month's proceeds for their previous contributions though.
Disclosure: I work on Assembly
This has always been true - in corporations, in teams within corporations and in startups.
I think you should evolve your product to reflect and incentivize this rather than fight it. Give the core guys the most equity - figure out a good way to calculate who those people are. Its a problem that mankind has been trying to solve forever.
Instead of focussing on community, focus on creating a system that is secure for someone to start working immediately with the core-team. With deep git integration you could have somethign worthwhile there.
Is community not part of the answer to that problem?
I read through the "Our Story" page, but I still couldn't figure out whether Assembly is organized as a true cooperative (100% member-owned). I see a "Shared Ownership" bullet point, but there's nothing explicit about it being a co-op.
The choice of name isn't bad but at first I was confused for a moment and thought it was about something at the demoparty of the same name: http://www.assembly.org/
- "Work together" is not a selling point. I just want to make things, I'm not interested in yet-another-social-network.
- "Community" is not a selling point. There are no such thing as community, there are individual men and women.
- "Focus on what you like" is a lie. I bet all I can do on this platform is communication, nothing more.
- "Keep your share", oversell?