Digital Firms for the Net

A prediction for the near future: One of the great disruptions of Web 3.0 technologies will be to unleash unprecedented powers of collective action. Information asymmetries between enterprises and their customers, between governments and their citizens, and between the credentialed and the uncredentialed will be dramatically realigned. Not just asymmetries in access to information, but asymmetries in coordinative capacities, and the ability to capture and direct personal and group agency. We first got a sense of this with the onset of “smart mobs,” “swarms,” “asymmetric warfare,” the “wisdom of the crowds,” the miracle of wikipedia, and the promise of peer production. It is simply amazing what supposedly dumb “mobs” and “non experts” can achieve given the ability to self-organize. My bet is it will not be long before “they” will want some form of legal organization to express themselves, and direct their collective agency to reap the rewards of their newfound powers.

The legal organizational form they will want will be very different from the ones available to them today. Smart mobs - wise crowds - are empowered because they are digital. They could not succeed otherwise. Hence, the organizational and legal forms that they require will inherently be digital. The old roles of enterprises - board members, officers, treasurers, managers and their attendant authority and reward structures - are based upon a world in which the transfer of information and the exercise of authority was inherently physical, making it slow, costly, opaque and error prone-not to mention subject to physical intimidation and obfuscation. Hence, we have the principle-agent problem of having privileged and fixed roles: “stockholders” vs. “officers,” “management” vs. “workers,” and “order givers” vs. “order takers”.  In short, asymmetries exist in the access to and use of information. In the physical world, the time and costs of making decisions, marshaling resources, allocating rewards and dispersing proceeds were sufficiently high to warrant such structured roles. Not anymore.

This is the case even in the Web 2.0 world. People outside a formal organization can show up on an ad hoc basis and make tremendous contributions, and yet receive no compensation. Indeed, in their early stages, AOL and Amazon counted on the goodwill of such volunteers. Rather than being passive consumers, people are becoming active consumers and producers in a multitude of contexts. They are peer producers, creating products and services that rival the “experts”. The rise of “Witkeys,” Amazon’s Mechanical Turk, Jump Ball, Top Coder, and many other open outsourcing and bidding services are indicative of the range and quality of skills available outside formal organizations. In time, they will want to be organized, have legal standing, get a voice, get their just rewards, and like the guilds of the 14th century, assert and protect their interests. By being digital, they can be more open, innovative and adaptive than traditional, physically bound organizations.

In anticipation of this trend, myself and Oliver Goodenough at the Berkman Center at Harvard Law School worked with some of our colleagues to figure out how it might be possible to have a digital firm that was not just formed digitally, but was actually governed and managed digitally - not just by a few members, but by an entire community of millions of potential members. The impetus for this notion originally grew from a number of conversations I had with Cory Ondrejka, then CTO of Second Life, and David Johnson, a retired partner of Wilmer Hale and a faculty member of New York Law School. Cory thought that a number of people within Second Life would like to form and run companies in their own virtual worlds. Then Oliver Goodenough, who is also a professor at Vermont Law School, noted that, given his work within the Vermont legislature, he thought he might get a law enacted in Vermont to allow for the digital formation, governance and management of a digital LLC. Through the work of himself, David Johnson, Allison Clarkson, a Vermont legislator, and others in Vermont, a law was passed, (“Digital Corporate Transactions” (H.0458)” making Vermont the first state in the country to legalize digital firms. Some of the key aspects of this digital LLC are the following: members do not necessarily need capital to form a digital LLC, as they can pool their attention and effort to create units of redeemable value; the LLC has the ability to own property (including the intellectual property members create together), open a bank account and contract with third parties; and members can govern their own affairs, rather than relying on a Board of Directors or Officers or other forms of top down management.

With the support of the Ewing Marion Kauffman Foundation, The Law Lab at the Berkman Center at Harvard University is undertaking a project to provide a hosting service for the registration and governance of a digital LLC within Vermont, and to form experimental LLCs to explore new types of operating agreements and models of management and governance. We are actively seeking partners in the form of entrepreneurs, banks, legal scholars and researchers.