5 ms·

While I've personally incorporated an LLC for dealing with institutions that don't like doing business with individuals, I'm starting to think that anyone start

While I've personally incorporated an LLC for dealing with institutions that don't like doing business with individuals, I'm starting to think that anyone starting a new business should seriously consider making it a Public-benefit Corporation. It lets you define alternative motives for the company besides pure profit, essentially writing the flowery "mission statements" that most companies espouse right into the company charter. It's much harder for an activist investor to demand more profits RIGHT NOW if you can point to your charter and say that you're focusing on your corporation's stated goals - maybe in Medium's case, that could be something like 'supporting quality citizen journalism throughout the world.' I guess that might make your startup less appealing to VC initially, but I'm sure SV will happily put its money where its idealistic mouth is, right?

dandare 10y ago
What is SV?
- thesehands 10y ago
  Silicon Valley
lj3 10y ago
Can't the VCs change the charter after they get a sizable chunk of ownership?
- jrochkind1 10y ago
  If you are incorporated as a 'public benefit corporation', you can't just change the charter to no longer be so, it's part of your incorporation. But it's unclear to me if 'public benefit corporation' is actually anything more than marketting, I don't know if it really constrains your corporation in any way.
  - basseq 10y ago
    Externally, it's mainly marketing: the stated mission of a nonprofit with the equity and operating ability of a C-Corp (and the taxation that goes along with the latter). Internally, being a PBC adds "protection" of the mission in two ways: 1. Directors are protected from shareholders (e.g., VCs). Since shareholders are not primary to stakeholders in a PBC, directors can make business decisions that may not be in the "best interests" of shareholders and be protected from lawsuits. 2. Shareholders are protected from directors doing the same. Shareholders are able to demand external auditing of the mission and bring lawsuits alleging breach of the mission. There are a ton of details depending on the state of incorporation.
  - lgas 10y ago
    There's always some way to get around this kind of thing. If nothing else you could start a C corp and sell off the "profitable division" of the PBC to the C corp, etc.
  - allenz 10y ago
    To the contrary, you can generally file a certificate of amendment to change the corporation however you like, as long as you have a shareholder majority. E.g. in New York: "An existing benefit corporation may terminate its status as a benefit corporation by amending its certificate of incorporation" https://www.dos.ny.gov/corps/benefit_corporation_formation.html https://www.dos.ny.gov/corps/benefit_corporation_formation.h...
ggame 10y ago
Investors know this and won't invest. At least as won't invest at as high of a valuation. My preference is bootstrap, that way I can make my own mistakes and not someone elses, which is what happens when investors meddle.
deleted 10y ago
[deleted]
Declanomous 10y ago
I've never heard of a public-benefit corporation, but that's really interesting. I work in the non-profit sector, and I've noticed a few areas where every non-profit feels like they need help. I've basically automated a way to solve these issues for my organization, and I think it would be cool to use my experience to build a product that other NPOs could use. The structure of the company has been driving me nuts though, because there are a lot of ways the company could be modified to be substantially similar to the one I'm envisioning, but fail to help. A Public-Benefit Corporation seems like it might be the solution, even if it does make the company less appealing to VC.
- mikeyouse 10y ago
  May I ask what area you're targeting? I'm at a nonprofit as well and the systems / support for the whole industry are terrible. Though, companies like Fluxx (https://www.crunchbase.com/organization/fluxx#/entity https://www.crunchbase.com/organization/fluxx#/entity) seem to be navigating a useful path for investment and building a good product.
  - Declanomous 10y ago
    Annual fundraising. The entire industry is definitely a mess, but the big players are well established. There are a few companies that focus on online fundraising for small organizations, but it seems like most of the companies that handle traditional fundraising are targeting large institutions like schools and hospitals.
mikeyouse 10y ago
I don't think that would have much of an impact. The focus on profits from VCs/investors isn't due to the corporate structure of the company, but the VC Firm's internal metrics -- the 10-year fund lifecycle, LP demands, etc. Also the mechanism of leverage isn't the fiduciary duty that's placed on LLC / C-Corp management -- the idea that businesses are legally bound to chase profits is misguided. Company management must act in the best interest of shareholders, but have an incredible amount of leeway when doing so. The leverage from VCs comes from their ownership of significant chunks of the company and board representation. They can replace the management team if they don't acquiesce to VC demands. Changing the corporate mission statement won't mitigate these problems.
- leggomylibro 10y ago
  That's a good point; I guess it wouldn't really help much in the startup phase, but if the company does get established and IPO'd, then it would make a difference with the looming threat of minority shareholder lawsuits.

dandare 10y ago

What is SV?

thesehands 10y ago
Silicon Valley

lj3 10y ago

Can't the VCs change the charter after they get a sizable chunk of ownership?

jrochkind1 10y ago
If you are incorporated as a 'public benefit corporation', you can't just change the charter to no longer be so, it's part of your incorporation. But it's unclear to me if 'public benefit corporation' is actually anything more than marketting, I don't know if it really constrains your corporation in any way.
- basseq 10y ago
  Externally, it's mainly marketing: the stated mission of a nonprofit with the equity and operating ability of a C-Corp (and the taxation that goes along with the latter). Internally, being a PBC adds "protection" of the mission in two ways: 1. Directors are protected from shareholders (e.g., VCs). Since shareholders are not primary to stakeholders in a PBC, directors can make business decisions that may not be in the "best interests" of shareholders and be protected from lawsuits. 2. Shareholders are protected from directors doing the same. Shareholders are able to demand external auditing of the mission and bring lawsuits alleging breach of the mission. There are a ton of details depending on the state of incorporation.
- lgas 10y ago
  There's always some way to get around this kind of thing. If nothing else you could start a C corp and sell off the "profitable division" of the PBC to the C corp, etc.
- allenz 10y ago
  To the contrary, you can generally file a certificate of amendment to change the corporation however you like, as long as you have a shareholder majority. E.g. in New York: "An existing benefit corporation may terminate its status as a benefit corporation by amending its certificate of incorporation" https://www.dos.ny.gov/corps/benefit_corporation_formation.html https://www.dos.ny.gov/corps/benefit_corporation_formation.h...

ggame 10y ago

Investors know this and won't invest. At least as won't invest at as high of a valuation. My preference is bootstrap, that way I can make my own mistakes and not someone elses, which is what happens when investors meddle.

deleted 10y ago

[deleted]

Declanomous 10y ago

I've never heard of a public-benefit corporation, but that's really interesting. I work in the non-profit sector, and I've noticed a few areas where every non-profit feels like they need help. I've basically automated a way to solve these issues for my organization, and I think it would be cool to use my experience to build a product that other NPOs could use. The structure of the company has been driving me nuts though, because there are a lot of ways the company could be modified to be substantially similar to the one I'm envisioning, but fail to help. A Public-Benefit Corporation seems like it might be the solution, even if it does make the company less appealing to VC.

mikeyouse 10y ago
May I ask what area you're targeting? I'm at a nonprofit as well and the systems / support for the whole industry are terrible. Though, companies like Fluxx (https://www.crunchbase.com/organization/fluxx#/entity https://www.crunchbase.com/organization/fluxx#/entity) seem to be navigating a useful path for investment and building a good product.
- Declanomous 10y ago
  Annual fundraising. The entire industry is definitely a mess, but the big players are well established. There are a few companies that focus on online fundraising for small organizations, but it seems like most of the companies that handle traditional fundraising are targeting large institutions like schools and hospitals.

mikeyouse 10y ago

I don't think that would have much of an impact. The focus on profits from VCs/investors isn't due to the corporate structure of the company, but the VC Firm's internal metrics -- the 10-year fund lifecycle, LP demands, etc. Also the mechanism of leverage isn't the fiduciary duty that's placed on LLC / C-Corp management -- the idea that businesses are legally bound to chase profits is misguided. Company management must act in the best interest of shareholders, but have an incredible amount of leeway when doing so. The leverage from VCs comes from their ownership of significant chunks of the company and board representation. They can replace the management team if they don't acquiesce to VC demands. Changing the corporate mission statement won't mitigate these problems.

leggomylibro 10y ago
That's a good point; I guess it wouldn't really help much in the startup phase, but if the company does get established and IPO'd, then it would make a difference with the looming threat of minority shareholder lawsuits.