By Michael Whelchel and Nancy Rosenzweig
Build mission into the founding organizational documents of a company. Consideration of mission in a company’s founding stage will serve to inoculate the company against future compromise. Companies can reinforce mission in operating agreements by setting conditions that require a two-thirds shareholder majority to vote for any change to the mission. Companies can be formed as Benefit Corporations, giving legal protection to directors and officers to consider the interests of all stakeholders, not just shareholders, when making decisions. These entities also create additional rights for shareholders to hold directors and officers accountable to considerations of social and environmental interests in addition to profit maximization.
Infuse the company’s brand with the core purpose. In purpose- driven companies, mission is often inseparable from a company’s brand. A brand built around core mission principles encourages customers or consumers to select a product or service over its competitors because of value alignment. In this strategy, values are inseparable from value proposition. For example, Plum Organics’ brand means organic, tasty baby food, accessible to all American families, grounded in values of better nutrition and equal access. Zipcar built a brand around the convenience of car ownership without the hassles. Every Zipcar takes several cars off the road, diminishing the need for car ownership, connecting Zipcar with sustainability.
OUTSIDE CAPITAL CONSIDERATIONS
Introducing outside capital happens throughout the lifecycle of a company and can include seed capital, growth equity, and later stage equity. All money is not created equal. It is imperative to find a good capital fit at every stage. There are a number of considerations important to securing an investor harmonious with a company’s mission.
Identify investors that are suitable to a company’s size and position. A venture capital fund may require too much formality for a nimble early-stage company. A high-net-worth individual may not have the capacity or appetite for the follow-on investing a growth-stage company may require.
Ensure investors’ timing constraints are aligned with the company’s timeframe. Is the investor time aligned? What is the investor’s expectation around the timing of capital return? Does the company have adequate time to meet investor expectations related to business results and returns? A fund may have three years left in its lifespan and put pressure on the company for a quick exit in order to provide returns to investors.
Determine that investors are values-aligned. Investors should be invested in the mission and purpose of the company. Does the investor’s investment thesis fit with the company’s mission? An investor may be hedging on the cost of consumer staples while the company is trying to preserve family farms. If the investor assumes a board seat, the company will want assurances that the person is mission-aligned and compatible with the existing board. Procedures should be in place to address disagreements and facilitate resolutions. It is wise to check references and speak to other CEOs in the investor’s portfolio.
Get creative in structuring the deal - there are a number of ways to ensure purpose. A few are highlighted here.
1. Alternative Payback
Staged dividend payments are variable payments linked to a percentage of revenue or cash flow that prevent an investor from exiting all at once. Payments are made over time until the investor reaches an agreed-upon return threshold. As these payments are variable, they link the timing of liquidity to the health of the enterprise and can create more patient capital.
2. Supervoting Stock
In this strategy, typically two classes of shares are created. The founders’ class carries a higher number of votes per share. This strategy allows founders to maintain control as stockholders throughout the life of the company, even as their ownership is diluted. A related strategy is supervoting at the board level. The board seats held by the common stockholders (often the founders) get a multiple (e.g., 2-5 times) on their votes. The common director designated by the common stockholders will have control over major board actions, which can include a change in mission. A final variation of this strategy allows founders to have veto power to block an exit if they believe it to be in conflict with the company’s mission.
3. Financial Returns
Founders are able to link financial returns with the impact that the company achieves. The investors’ return is directly tied to the measurable impact created by the organization, thus ensuring a focus on the core mission of the company.
4. Revenue Sharing Models
Revenue sharing agreements provide investors with a way to achieve a return without taking equity, therefore avoiding exit pressures and control conflicts. Revenue sharing allows investors to achieve a return through an agreed-upon percentage of a company’s revenue stream over a certain period of time.
At the point when a founder desires liquidity or is ready to sell the company, there are many choices to ensure the company’s purpose endures:
1. Create A Liquid Market For Private Stock
There is frequently pressure for liquidity when a founder wants to diversify his or her wealth or desires cash, when the business needs a cash injection, or when investors are becoming impatient. An exit is not the only way to address these situations. Many companies hire an investment banker to help them sell minority shares of the company at regular intervals, allowing shareholders the option of liquidity without changing control of the company. Creating a pool of mission-aligned buyers can help address the need for liquidity while bringing in new investors committed to the company’s mission.
2. Sell to a Mission-Aligned Fund
There are a growing number of impact- oriented investment firms. Be sure to speak with their portfolio companies to evaluate how the fund has furthered the company’s purpose after the acquisition.
3. Sell to a Family Office
Family offices typically have more flexibility than private funds and employ a buy-and-hold strategy versus the buy-and-sell strategy most funds utilize. A buy-and-hold strategy ensures a higher level of mission continuity over time.
4. Sell to a Strategic Partner
While there are well-known stories in which large corporations acquire and then compromise mission-driven companies, there are as many positive stories - e.g., Honest Tea, Stonyfield Farm, and Plum Organics. In some cases, the acquired company can have broad and significant influence on the mission of the acquiring company.
Though many people think of an IPO as a vehicle to achieve windfall multiples on their investments, it can also be a way to preserve a stand-alone brand. By avoiding the need to be folded into the larger portfolio of products and services of a strategic buyer, an IPO can ensure that the founding principles of the company will endure.
The good news for today’s values-based entrepreneurs is that the field of impact investing is rapidly becoming mainstream and it is increasingly feasible to find long-term, values-aligned investment partners. “For companies where purpose is part of the culture and success of the business, investment firms are evolving new models to meet these companies’ needs for values and long term capital,” said Diana Propper, Managing Director of Cranemere, Inc., an innovative investment firm in the sector. New ideas and methodologies for investors and entrepreneurs to collaborate and make a difference are being generated with increasing frequency. To connect in the field, organizations such as Conscious Capitalism or Social Venture Network provide forums through which business owners can share best practices with other CEOs. When a company considers critical financial transactions there is now an ecosystem that can support it, including law firms and investment banks that specialize in maintaining mission along with financial considerations. Indeed, with an intentional approach to preserving mission, we can shape our destiny.
Michael Whelchel is Co-Founder and Managing Partner of Big Path Capital. Leveraging one of the largest networks of impact investors globally, Big Path Capital assists purpose-driven companies ensuring mission preservation across financial transactions including acquisitions, mergers, and capital raises. Securities offered through Intellivest Securities, Member FINRA, SIPC.
Nancy Rosenzweig is a social enterprise maven, having spent the last 20 years in leadership roles scaling some of the country’s most iconic social enterprise brands. She now heads up M&A for Big Path Capital, where she helps her client companies meet their financial needs for growth while preserving their purpose.