When a Web3 group runs into trouble on structure during a funding round, the problem is often not that the structure was wrong. It is that the structure on the diagram is not the structure in the documents. Diligence is a verification exercise, and each failure below is something true in the deck and unevidenced on file. All four tend to surface in the same week of a data room review, and all four are cheaper to fix before that week than during it.

The Ownership Chain Does Not Close

An investor traces ownership from the entity it is buying into down to every material asset and up to every natural person controlling it. The chain fails when a link is missing.

Common versions: an intermediate holding company incorporated but never issued shares, a share transfer agreed and never executed, a founder holding through a nominee with no declaration of trust, or a subsidiary whose register cannot be verified. In each case the group can explain what was intended. Diligence records what is documented.

The consequence is rarely refusal. It is a condition precedent, a delay of weeks, and a live question about what else was not papered.

IP Sits in the Wrong Place

The valuable thing in a Web3 group is the code, the protocol design, the brand and the domain. Diligence asks who owns it, and the answer is often nobody in the group.

Contractor work without assignment. Developers engaged on freelance terms in jurisdictions where copyright does not vest in the payer by default, with no written assignment. The code was paid for and not acquired.

Founder-held repositories and domains. Registered personally before incorporation and never transferred.

Open source obligations not mapped. Dependencies whose license terms conflict with how the product is distributed.

IP in a different entity from the one investors expect. An operating subsidiary can hold IP deliberately, and often should. The problem arises where the documented or investor-approved structure says the holding vehicle owns it and the register says otherwise, or where the actual location creates liability, tax or regulatory consequences nobody intended.

Substance Does Not Match the Map

The structure asserts that decisions are made in a jurisdiction where nothing happens. Board minutes are signed elsewhere, directors are non-resident, contracts are negotiated abroad, and the entity has no premises or staff beyond a registered agent.

This is exposure on two fronts. On the tax side, a substance mismatch can open questions about tax residence, permanent establishment, profit allocation, transfer pricing and treaty access, each of which follows its own statutory tests rather than turning on substance alone. On the regulatory side, a licensed entity is expected to be genuinely managed and resourced where it is licensed. Investors raise it as a contingent liability they would be acquiring, and it is the hardest of the four to remediate quickly, because the fix is operational rather than documentary.

The Issuer Is Undocumented

Where a token has been issued, diligence asks which legal person issued it, under what terms and to whom. Groups that cannot answer all three are a recurring finding.

Recurring gaps: allocations in a spreadsheet with no underlying agreement, a sale conducted by an entity that no longer exists or was never formed, purchase terms differing between investors with no record of which prevails, and vesting reflected in a smart contract but nowhere in the documents. The last is a frequent one, and it connects to the mismatch covered in our article on token vesting and equity vesting.

A classification exposure sits behind this. If the instrument was a security in the jurisdiction it was offered into, an undocumented issuance is more than a papering gap.

Failure Mode and Consequence

The pattern across all four is the same. Each is created early, when the group was moving fast and the paperwork was deferred, and each compounds quietly until somebody looks. Our multi-jurisdiction holding structure, entity formation and token structuring work is built around getting these right while they are cheap. To review your structure before an investor does, get in touch.

Frequently Asked Questions

What do investors check in Web3 due diligence?

Ownership from the investing entity down to every material asset and up to every controlling natural person, ownership of the intellectual property, whether the group has genuine substance where it claims to operate, and the documentation behind any token issuance.

Why does IP ownership fail diligence so often?

Because early development is usually done by contractors under terms that do not assign copyright, and because founders register domains and repositories personally before the company exists. Both leave the group without title to its core asset.

What is a substance gap?

A structure asserting that an entity is managed in a jurisdiction where no real decision-making, staffing or premises exist. Depending on the jurisdictions involved it can raise tax residence, permanent establishment and transfer pricing questions, and regulatory questions where the entity holds a license.

Can these problems be fixed during a funding round?

Documentary problems usually can, at the cost of delay and negotiating leverage. Substance gaps generally cannot, because the fix requires operational change over time.

When should a Web3 group review its structure?

Before raising, and again before any token issuance. At both points the structure is examined by somebody with an incentive to find problems.

This article provides general information about structuring and due diligence and is not legal advice. Speak with qualified counsel about your specific circumstances.