Hi @dontbeevil,
Thanks for your question:
Since the question of non-profit status was raised by the Zcash Foundation last August, and frequently mentioned by various community members ever since, ECC has been researching pros and cons as well as consulting with legal counsel about the legal implications, and with the owners (shareholders or “units holders”) of ECC about whether they would support it.
It’s crucial to understand that such a change is not up to the management of ECC (me and my leadership team and the ECC Board of Directors), it is up to the owners of ECC. Any change like this is effectively the owners of ECC donating their property (their share of the ECC company) to the community, so it requires their approval. As part of our research we’ve spoken with a number of them about this possibility, and the ones we’ve talked to have been very encouraging about it. Based on what they’ve said, they believe in the mission and in the value of Zcash, so if there are good reasons why this change would support those, then the units holders we’ve talked to have said they will support it.
The particular model we’ve been focusing our research on is the “corporate/non-profit hybrid” model in which there is a company (Electric Coin Co) which is the wholly-owned subsidiary of a new non-profit org. That model means that the management and organization of ECC doesn’t change, but the ownership is donated by the current owners to a new non-profit charity which serves the public interest. This structure seems to mitigate some of the risks and downsides listed in the Cons section below. Crucially, an uncapped (ZEC-denominated, not USD-denominated) Dev Fund would be necessary to mitigate some of the Cons.
As it stands, we see the following potential pros and cons of ECC converting from a for-profit company to a non-profit organization.
Pros:
Incentive alignment: Moving to this structure would better align Zcash holder and ECC incentives by eliminating the potential for the owners and the community to start competing with each other for the ECC’s resources — including the time and attention of the ECC employees. Throughout the Dev Fund process, the community has clearly articulated a desire to ensure that ECC shareholders are not able to extract any of the Dev Funds for their own profit. The transparency that ECC has always practiced, combined with the transparency and accountability requirements in ZIP 1014, plus the ability for the community to update the consensus rules would — we think — prove sufficient to ensure that. However, donating ECC to a new non-profit would add a layer of legal enforcement, making it so that the (former) owners do not have any remaining legal standing to claim a portion of the Dev Fund. In addition, donating ECC to a new non-profit would go above and beyond simply ensuring that Dev Fund money cannot be redirected, by additionally ensuring that no other misalignment between owners and community could potentially arise in the future. The incentives of ECC would — in that scenario — be solely aligned with the community and with all coin-holders.
A clean slate: Donating ECC to the community would be an act of charitable contribution by the owners to the public good, after which they would no longer be owners. This would eliminate a lot of legal ties between the owners and ECC (think tax reporting and compliance, as just one example). It would disentangle the reputation of ECC from the reputations of the owners. Most of all it would make it clear to all that the (now former) owners do not have any ongoing control over or any responsibility for the future actions of ECC under its new ownership.
Optics: A lot of people around the world — including people who know almost nothing about Zcash or its history and are hearing about it for the first time — may assume that a company means greed and exploitation and that a non-profit means virtue and public service. It is unfortunately not true that a legal structure can guarantee good behavior. If you look closely you’ll find out that in practice non-profits succumb to corruption and mismanagement at least as often as for-profits do, and that strong transparency and accountability mechanisms are still essential, regardless of the legal status of the organization. But by converting ECC to a non-profit we would at least be accurately signaling to people who have a simplistic understanding of these things (which is most people) that the intent of ECC is to serve the mission and the public good.
Tax improvements: ECC and/or its owners currently pay taxes to the U.S. government as a for-profit company. While converting to a non-profit wouldn’t eliminate tax requirements, it may lessen the burden, leaving more ZEC available to fuel the mission. (It could also radically simplify the process of complying with tax requirements, which is currently very complex and is a major time-suck.)
Cons:
Time and money and our execution bandwidth: Changing the structure would take time and money to accomplish, and during the transition process it would detract from our capacity to push forward other initiatives in support of Zcash. We have already been paying a cost in this way since last August, in order to determine what the options are and what the legal, taxation, and organizational consequences would be. If we continue down this path it will continue to use some of our organizational bandwidth. We are unsure if it would be possible to complete the transition before NU4, which is when the next dev fund would activate. We think there’s a good chance it could be completed by then, which would simplify matters if the transition were already complete before any new dev fund kicks in.
Potential for inefficiency: Often non-profits do not perform as well as for-profit entities. This may be due to their funding relying on donors and all that entails, but there could be a number of factors involved. The “corporate/non-profit hybrid” structure in which there is a traditional execution-oriented company (the wholly-owned subsidiary) could potentially mitigate this risk.
Recruiting and retention: The competition for top talent is fierce and we need to be able to recruit and retain top talent. Normally startups will use equity incentives, something not available to us in a non-profit model. An uncapped (ZEC-denominated) dev fund would potentially mitigate this risk by allowing ECC to use ZEC as a substitute for equity incentives.
Optics: Just as there are a lot of people who think “non-profit” inherently means “virtuous and trustworthy”, there are a lot of people who think “non-profit” inherently means “inefficient and doomed to stagnation”. Hearing that “ECC is a non-profit” could make people incorrectly think that ECC is incapable of generating revenue from its own products or services, or of entering into commercial partnerships in pursuit of its mission. These would be misunderstandings that would inhibit ECC’s ability to execute. These misunderstandings may be mitigated by the “corporate/non-profit hybrid” model, in which the wholly-owned corporate subsidiary could present a traditional corporate face to the world, can generate revenue through its own products and services, and can enter into revenue-generating commercial agreements with business partners. It’s just that none of the revenue generated by such activities can be fed back to any profit-taking owners, because there are no owners, just the non-profit charity, which directs all funds to the furtherance of the mission in the service of the public.
Conclusion: We are still actively exploring a non-profit structure. Further work may reveal that some of what we’ve already learned (above) turns out to be wrong, or might turn up other important considerations. I hope this helps.