Exit to Community Calculators: a framework and tool to help organizations assess their E2C readiness

This post by Tara Merk describes work-in-progress by Tara, Joshua Tan, and Seth Frey to build a set of calculators for E2C and (later) open-source software governance transitions.

When it comes to startups, exit refers to “the process whereby founders of [or investors in] privately-held firms… remove themselves from the primary ownership and decision-making structures of the firm” (Collewaert, 2012). In essence, any exit process is thus characterized by the transition of both ownership and governance rights. Popular types of company exits include acquisitions, where another organization (or set of stakeholders) acquires the company fully or partially by buying equity from the previous owners. Another popular type of exit are Initial Public Offerings (IPOs) during which a company converts their equity into shares which are then listed and sold on an exchange to the public market.

There are various different personal, organizational or strategic goals that founders and investors may be pursuing by exiting a company. How successful a company, founder or investor is in ultimately achieving these goals through exit, crucially depends on both the internal and external conditions of the organization at the time. For example, external market sentiment and conditions matter during the price negotiations of a company getting acquired. Conversely, the transparency around a company’s internal reporting and accountability structure may significantly affect its ability to go public.

Vast frameworks, tools and whole industries of consultants exist to help companies evaluate if they are ready to pursue popular exit routes such as mergers and acquisitions (see here or google M&A consulting + any large business consultancy name) or IPOs (there’s guides, scanners, academic books on the decision and clearly defined regulatory requirements). This is not the case in a novel, significantly less well known type of company exit: the Exit to Community (E2C). First coined by Nathan Schneider in 2019, E2C describes the process from exiting privately-held founder and investor-led startups into community ownership and governance, typically inspired by cooperative principles and values. In this sense, E2C is similar to an IPO in that it usually means diluting ownership and giving governance rights to a new, larger group of owners. E2Cs are different from IPOs in that they want to transition ownership and governance to their stewards, rather than a group of shareholders. Stewards, in our context, are the people connected to a project or product, who are affected by it, use it in their daily lives or have a particular sense of care for its future. In contrast, shareholders can also include actors who are wholly detached from the organization, its goals, products and operations, and primarily hold shares for speculative reasons. This key difference makes E2C fundamentally different from other types of exit strategies and necessitates developing new tools and frameworks to help organizations anchor their own decision to E2C and assess their readiness to do so. While attempts to fill this gap have been started by industry (e.g. see the Purpose Toolkit, Exit to Community Primer, Variant Fund’s Decentralization Playbook or a16z’s Progressive Decentralization Playbook) no comprehensive, focused and academically grounded tool exists to help organizations assess their E2C readiness today.

With the ambition to begin filling this gap we ask:

• RQ1: what does exit readiness entail in the E2C context? How does it converge with and depart from existing IPO readiness frameworks?
• RQ2: Which unique aspects should projects looking to E2C take into account in their decision to exit? How do different aspects affect each other?

To answer our questions, we begin by drawing on existing frameworks developed for other exit scenarios, particularly IPOs, mentioned above. We contrast the high level areas established in these framework with the specific needs identified across the existing E2C literature and related writing on cooperative conversions, steward ownership conversions and transitions towards Decentralized Autonomous Organizations in Web3. Through this exercise we hope to establish a basic framework covering the core areas to assess in understanding E2C readiness.

We aim to operationalize this framework by formulating accessible questions for each section which organizations can answer to help them assess the their own E2C readiness. We model this process on the IPO readiness scanner developed by Deloitte, in both the process of gathering data and outcome of the assessment. A prototype of this E2C calculator will be implemented in a low code environment and made available open source for testing and further iteration.

Acknowledgments: we are grateful for the support of the National Science Foundation and the Digital Infrastructure Insights Fund (Ford, Sloan, Omidyar, Open Society Foundations, Mozilla, and Open Collective).