C-Corp’s, LLC’s, PBC’s, and All That Jazz
Deciding how to legally organize your company is a big decision. If you’re a world positive business, here’s a list of questions to help determine which path you might take. (For a glossary of terms, check out part one in the series.)
While the traditional corporate form — most commonly a Delaware corporation — already allows for the integration of many mission protective provisions, investors and entrepreneurs might prefer incorporating as one of the new corporate forms in order to (1) bind the company to its social or environmental mission as tightly as possible, (2) signal this commitment to workers, consumers, and other important stakeholders, and (3) communicate intention to create long-term, shared value. Management, board, and investors alike can feel constrained by current forms (particularly the Delaware corporation) because of many factors, including duties to shareholders, risk of litigation, particularly when share prices drop, quarterly reporting, and equity-based compensation that can drive short-term decision making.
New Startup, New Team…New Structure Too?
If you are a startup and introducing an innovative new product with a new management team, the new corporate form may be one “new” too many. If you and your board really want to try one of the new forms, you can wait 6–18 months after incorporation, possibly asking your investors to agree to convert to a new form (conversion is easy) after certain milestones are met.
High Profits + High Social/Environmental Return = Easier Choice
If the good or service that your company produces has a positive social or environmental impact in and of itself (e.g. solar, education, healthy school lunches), there is much less risk associated with the “weighting” issue described in our B Corp post, and therefore incorporation/conversion into a new form. For these companies, there is often no trade-off between high profits and high positive social/environmental impact.
High Profits + Agnostic Output = Tougher Choice
If the good or service that you produce is output agnostic (e.g. social media application, coffee tables, baseball bats), then you must consider the interplay between the public purpose and your profitability before you convert. This does not necessarily mean there is a trade-off. A positive commitment to stakeholders and focus on ESG goals could increase profitability for the maker of baseball bats that emphasizes employee relations and contributes financially to the building of little league parks in underserved communities.
Whatever You Do, Get the Investors and Board on Board
In all of the cases above, it is critical that you not only get your board to embrace the new form, fully understanding the risks and rewards (not just the latest PR spin), but that your investors are fully comfortable as well. In the early stages, commitment to convert ahead of investor support can significantly increase the likelihood that your venture will fail.
What This Means for Exits
Your board and investors will need to understand not only the impact of the new fiduciary duties on daily operations but also exits — IPOs and sale transactions (although there are more alternative forms of exits being utilized by social enterprises). We do not yet know how the market will price these new entities (although we are waiting forconcrete examples — Laureate Education, Sungevity, and a subsidiary of Danone/WhiteWave). There is some evidence that the market will view the public purpose as a net positive, specifically for companies where the product or service produced is good for the environment, community, or society. However, this belief faces strong headwinds from mainstream capital markets that have long held that “impact” or focus on social/environmental purpose will generate lower returns.
For The Corporate Folk
Finally, if your company — with board and shareholder support — is serious about embracing a public purpose and having a positive impact, as described above, there are many very effective tools to implement such goals for traditional corporations.
For more, check out Part One and Part Three in the series:
