"Design mode" switches the document between being used and being designed. Off, the document behaves as a template for whoever uses it; on, the instructions are visible in the text and can be edited.
Switching design mode on asks for the password of the model, unless it has already been given during this session of Microsoft Word. The model may set that password; see [[Invantive Composition for Word/Modeller/Edit Model/Model|Model]]. A model without a password lets design mode be switched on without asking.
The button shows which of the two states applies, so it is visible at a glance whether the document is being used or being built.