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Mission and Structure

Hosted by Joy Anderson and Elizabeth McCance (January 2010)

mission & structure

Protecting Your Mission: The best legal structure

This discussion board recently hosted a discussion about hybrid non-profit/for-profit structures (The Social and Commercial Two Step). Much of that weighty discussion focused on managing where start-up capital and ongoing revenue come from.

Today I’d like to introduce a different slant on the question of what legal structures best foster social ventures. Specifically, when launching a new venture, what is the best way to protect the mission?

Social entrepreneurs tend to have strong feelings on this subject. They see themselves as the “Keepers of the Flame” who hold the vision for the venture close and who are responsible for protecting mission. But great things are rarely done by lone individuals alone. Rather they take partners, funders, investors, customers, and countless others.

Fans of for-profits like them because they can own them. “I’m the founder. It’s my company and I’ll make sure we always do what’s right.” This simple idea is certainly appealing, but as a venture grows the founder usually needs to bring in investors who now own their share of the company. Market forces and the need to turn a profit can also force decisions down the line that a founder never dreamed of making. Finally, it can be hard to resist when some big conglomerate comes knocking at the door with a multi-million dollar buyout offer, especially if you have investors to consider.

Others see non-profits as the way to go precisely because nobody owns them. We create them explicitly to serve some social purpose. Another simple and appealing idea, but as anyone who has ever been involved in fundraising knows, keeping to a clear narrow mission when someone else is paying the bills can be hard. Boards change, what’s hot this season might be passé next year.

And finally, whether you start a non-profit or a for-profit you will have to think about your exit strategy. Yes, someday you will leave your venture, whether it is from a huge buyout that makes you rich, a messenger from G-d calling you home, or just knowing that it is time to move on.

So here are some questions to get us started:

  1. What is the best legal structure for protecting your mission?
  2. Besides standard non-profits and for-profit entities, what kind of legal tools and structures can social entrepreneurs use to protect their mission?
  3. How can social entrepreneurs make sure their mission is followed when they are gone?
  4. Do we need a new structure that reflects the new reality of social and commercial missions blending?

Join Joy Anderson, Elizabeth McCance and Jackie VanderBrug, with Criterion Ventures, in the conversation.

Comments: 8

Social ownership

Posted by Jeff Mowatt at Jan 19, 2010 02:53 PM
Joy/Elizabeth,

If I may be just a little pedantic, there's a little more to the for profit approach. A cooperative, for example, widely applied to social enterprise in the UK may be considered to be owned by the people who become its members.

Until 2005, we had the legal structure of the Guarantee Company, a model with no share ownership which could be considered the property of the greater community in that should it wind up, assets have to be transferred to a like organisation. Unfortunately it had a flaw in that it could at any time be converted to a traditional share owning business. The Community Interest Company model which cam into being in 2005, plugged the flaw in Guarantee Companies to introduce the concept of an asset lock.

We're a business which began in the US, started in the UK as a guarantee company which was then migrated to a conventional share business, because there was simply no access to funding for the previous inception.

There are other aspects to protecting mission which spread beyond the ownership of funds to that of intellectual property. Can we ensure that what we design for social purpose won't be stolen and misused for personal profit. Can we protect our reputation from calumny when raising awareness of corruption and neglect.

In the past it's been necessary for us to enforce copyright of strategy plan for example, but little can be done to maintain reputation which doesn't involve costly law suits.

Jeff

Social ownership

Posted by Joy Anderson at Jan 19, 2010 09:35 PM
Since early coporations, societies struggle with questions of ownership. Clearly in the US, it is considered one of the dividing lines between for profits and non profits. And we've worked to have laws that tie public interest to ownership, assuming that private ownership does protect public good.

Lots off assumptions built into all these legal forms. It does, in the end, get worked out more in the day to day of transparent business practices, acting out of collective intent etc. And the intellectual property piece is snarly. Its where the rubber is hitting the road in so many cases. And, it raises the fine lines between public good and private property. And it all gets more complicated.

As a historian, I can point to the time period, at least in US history, where the divide between public and private became solidified. Wonky and intellectual, I know, but there were legal forms that did not make these distinctions so clearly.

Joy

A Wish and a Dream ... An integrated Legal Entity

Posted by Laurinda at Jan 20, 2010 05:43 PM
Hi Joy and Elizabeth

You asked "Do we need a new structure that reflects the new reality of social and commercial missions blending?"...

I find this an interesting question, because by now, twenty years down the line in the SE arena ... it should be a reality ... but we still debating it, it is still just in a "TALK" mode rather than an "ACTIVE/ACTION" methodology.

Why are still debating this, when all of us know fully well that it is the solution?

The question should instead be, WHAT OR WHO is preventing this from happening and why?

Laurinda Seabra
Empowerment Gateway Group
Portugal





  

A Wish and a Dream ... An integrated Legal Entity

Posted by Jeff Mowatt at Jan 21, 2010 05:21 AM
Laurinda,

Let me echo your frustration at the amount of debate on "new structures". Like yourself, we've argued the case for a new economic model and got on with applying it.

Not log ago here, I found myself attempting to participate in another discussion in which the host seemed determined not to engage on this same question.

http://www.socialedge.org/[…]/the-social-and-commercial-two-step

Jeff

A Wish and a Dream ... An integrated Legal Entity

Posted by Joy Anderson at Jan 21, 2010 08:14 AM
There are two types of action necessary, it seems. The first, and the one that I spend most of my days engaged in, is working within the existing legal structures to be able to create organizations that shape the practices of the market. I think Good Capital, for example, used existing legal forms, with relative ease, to create an investment fund that created new possibilities for our LP's and the companies we invested in. We were able to use existing tools ensure mission protection. In perpetuity, perhaps not, but more secure than before. In each of the companies Criterion has participated in over the last 8 years we have thought hard about the tools that would ensure mission and create an environment for good business.

The second action is the work happening in multiple states on the legislative front. I think these efforts are incredibly worthwhile. They are not creating the perfect legal form but they are setting precedents and building a path to broader corporate reform.

I'm not sure, to be bold, that we will ever achieve a perfect legal form. US law (and I'm not a lawyer so stepping out on the edge) is an amalgamation of precedents and interpretations. In researching for the tools conveyed in our Structure Labs, I was stunned by the sheer volume of legal forms that do exist and their varied applications. Since corporate forms are a means to an end for me, I want to uncover all the tools available so I can get to the work of the business.

Joy Anderson
President and Founder, Criterion Ventures

A Wish and a Dream ... An integrated Legal Entity

Posted by Jeff Mowatt at Jan 21, 2010 12:30 PM
Before a legal entity, I believe one needs a model. For us, explained simply, this was the theoretical concept of a business investing at least 50% of profit in social purpose and a permanent trust fund which would seed new businesses of the same kind. It would be established by agreement of the directors, that this was the primary objective of the business and written into the company charter. A social investment trust fund was suggested to seed new 'profit-for-purpose' business.

http://www.p-ced.com/1/about/history/

This idea was placed in the public domain in 1997, with the aim of seeding a meme and in 1999 it was first used to source a development initiative in Russia.

Later in 2005, much the same concept was delivered here as a formal legal entity in the community interest company model. So far, though there have been some instances of social investment trust funds, no sign of this being aligned with 'profit-for-purpose' revenue sources.

Jeff
    

Models and Tools

Posted by Jackie VanderBrug at Jan 26, 2010 08:27 AM
Jeff -

Thanks for the connection back to models. I totally agree with you here - it is the starting place! Cathy Clarke (CASE) is doing some very interesting research about social entrepreneurs and how their business models shift over time. She presented some of it at SOCAP, and I'm looking forward hearing more from her.

On the topic of co-ops - I find them fascinating. We did some work with CCA Global Partners - a $11B cooperatives in New Hampshire. They themselves are not a social enterprise (although their objective - to keep independantly owned neighborhood businesses flourishing could surely be argued as essential to the social and economic fabric of the US). But their model and infrustructure enables really interesting possibilies in particular social areas such as childcare and performing arts. I am curious if others have examples of new deployments of cooperatives for social good?

And a someone seperate topic - tools for governance. We like the flexibility of Stewards Councils as a way to preserve mission. Giving a respected group of individuals who have limited economic interests in the venture power over key mission related decisions creates a powerful tool to telegraph committment to mission from the outset. Have others found this - or other governance tools to be effective?

Jackie

When to spin off?

Posted by Joy Anderson at Jan 28, 2010 08:03 PM
One of the questions we face constantly at Criterion is when to create a separate structure. We are a for profit, LLC, technically. We can do much of our work under that umbrella but recently I've been struggling with the question of when to spin off our projects/ventures of Criterion into separate structures. In conversations with our lawyer and our accountant looking for simplicity and seeking to manage a broad set of relationships, expectations, actvities and capital.

We're finding these questions throughout our Structure Labs. Non profits or for profits that are in growth and differentiating their business are coming to work through whether a separate form is needed and what that would entail.

My own answer to the question is consistantly about relationships and risk. When one needs to hold different levels of risk across multiple partnerships a new corporate form (more than just a contract) becomes beneficial. Would welcome thoughts from those wiser than me?