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The first Berkeley “Social Enterprise Law Symposium” took place in the first week of April 2014. The Boalt Social Enterprise Group (a student organization of UC Berkeley School of Law) and the Impact Law Forum hosted the insightful event to take a closer look at financing & exits for social enterprises. The event comprised of two panel discussions and surveyed the finance and legal structures for social enterprises from startup stages to scale– focusing more on scalable social enterprises backed by foundation or grant funding.Scroll down below for links to watch videos of the sessions.From the perspective of covering social enterprise law in various posts on Innov8Social about the introduction and passage of benefit corporation legislation in California and beyond; hybrid corporate forms including L3C, CA flexible purpose corporation, and others; the merit of tandem structures (i.e. for-profit + nonprofit combinations); potential of crowdfunding for equity; and impact financing possibilities and constraints—-the panel talks validated some overall trends that have been emerging and brought to light interesting nuances by active legal practitioners in the space, social entrepreneurs, funders, returns-focused venture capital, and policy experts.

Below is a photo essay from the talk, along with a few notes about notable quotes and points raised. You can also read literature handed out at the Symposium on the Impact Law Forum website.

Attorney Gene Takagi also posted about about the session in his blog post, “Financing Social Enterprises: From Start-up Through Exit”.

Social Enterprise Law Symposium

The panel talks afforded legal practitioners continuing legal education credit and brought together a diverse group of individuals engaged or curious about the social enterprise space.

Panel 1: Early Stage Financing and Mission Preservation

Social Enterprise Law Symposium

Panel 1 included (from the left): Rick Moss (Founder and Managing Director of Better Ventures); Ayesha Wagle (President of KOMAZA, a social enterprise); Will Fitzpatrick (General Counsel and Secretary of the Board of Omidyar Network); and Susan Mac Cormac (Partner at Morrison & Foerester’s Clean Technology Group & PRivate Equity and Venture Investment Practice, and Co-Chair of the Working Group for the Flexible Purpose Corporation). The panel discussion was moderated by Berkeley law student, Jen Barnette (extreme right)

 

Social Enterprise Law Symposium
To put the social enterprise sector into context, Susan Mac Cormac (center) noted that social enterprises represent less than 1% of the total capital market. She also framed the stage of development and reporting of the infrastructure for social enterprises, in her reflection that “if hybrid structures are in the the ‘1st grade’ of development, impact measurement is in ‘kindergarten.'”
In addressing his perspective on hybrid legal structures, Will Fitzpatrick (left in photo) of Omidyar referenced a quote by famous Silicon Valley venture capitalist Marc Andreesen, likening hybrid structures to a “houseboat” because, in Andreesen’s view, “they are neither a good house, nor a good boat.” He also emphasized the weight Omidyar Network places on the scalability of the social enterprises and nonprofits it funds and supports.
Moderator Jen Barnette (right) covered questions surround legal structure options as well as ways social enterprises can avoid “mission drift” and the impact of legal structures and channels of funding.
Social Enterprise Law Symposium
Ayesha Wagle (right) discussed the emerging view of social enterprises as a new asset class in investing. She also reflected on social enterprises pursuing funding, noting the importance of choosing funding types wisely, based on risk tolerance and ability to bear debt or give equity.
Rick Moss (left) brought up an interesting point that his venture fund prefers social enterprises to come in for funding with no legal form rather than an overly-complex of “bad” legal structure.


Social Enterprise Law Symposium
Social Enterprise Law Symposium

 

Panel 2: Exits

 

Social Enterprise Law Symposium

Panel 2 included (from the left) Mark Perutz (partner at DBL Investors & Board member of Revolution Foods); Kendall Baker (CFO at Revolution Foods); Jan Piotrowski (Head of Venture Coverage at Credit Suisse); and Eric Talley (Berkeley Law professor and co-director of Berkeley Center for Law, Business, and the Economy). The panel was moderated by Berkeley JD/MBA candidate, Libby Hadzima.

Social Enterprise Law Symposium
Jan Piotrowski (left) noted that while we haven’t seen big exits in the social enterprise space yet, the time is coming.
Professor Eric Tully (center) expanded on the case of Ben & Jerry’s as a “zeitgeist” of social enterprise M&A and expanded on the implications of the legal case Revlon and “teeth” that new legal structure provide in preserving a social enterprise’s mission in exists.
Moderator Libby Hadzima (right) posed questions framing typical exits for social enterprises, what venture capital firms seek when engaging with social enterprises, and ways social enterprises can pursue mission even in exit scenarios.

 

Social Enterprise Law Symposium

Mark Perutz (left) emphasized that DBL Investors seeks big returns so as to be making “absolutely no sacrifice on financial return” when investing in social enterprises.


Kendall Baker (right) shared Revolution Foods’ mission to become the first mission-based company to go public and expounded on the “halo effect” of health/wellness companies trading higher than companies not dedicated to those goals in similarly situated companies in their class. (i.e. Annie’s brand).

 

Social Enterprise Law Symposium

 

Reception

After the panel discussions, speakers and attendees gathered on the patio—continuing conversations and sharing insights from diverse perspectives and experiences in the social enterprise space.

Social Enterprise Law Symposium

 

Social Enterprise Law Symposium

 

Social enterprise Law Symposium 2014

Watch the Videos

PANEL 1: EARLY-STAGE FINANCING & MISSION PRESERVATION
PANEL 2: EXIT

California holds a special place in the story of new legal structures for social enterprise. Not only was it the 6th state to pass benefit corporation legislation, it was also the first state to pass flexible purpose legislation—-in the same legislative term.

Meet Attorney Todd Johnson

One of the thought leaders in social enterprise law in California, and co-author of the FPC (flexible purpose corporation) law is R.Todd Johnson Todd Johnson. Todd is a Partner at Jones Day and is the Practice Leader of the Energy group of the firm where he focuses on Renewable Energy and Sustainability.

Todd has had a lengthy career serving social entrepreneurs, having represented companies such as SunPower, Embrace Technologies, GoodGuide, LaborFair.com, as well as Grameen Trust, and advising companies like Good Capital, Global Giving, and B Labs during his 25 year career at Jones Day. He also blogs at Business for Good.

Innov8Social had a chance to speak with Todd Johnson about his vision for the intersection of law, policy, and social enterprise; as well as the story behind California’s flexible purpose corporation.

Read the Interview

Q1 | Innov8Social:  How do you define social entrepreneurship?

A1 | R. Todd Johnson, Partner at Jones Day:

 Social entrepreneurship is applying the best tools of entrepreneurship to tackle some of the world’s toughest problems, in a way that people and the planet can flourish.

Q2 | Innov8Social:  Can you share the history of the flexible purpose corporation?

A2 | Todd Johnson :

In the late 1990’s as I started working with social entrepreneurs I noticed some dysfunction in the way the legal community thought about legal structures for social enterprises. The thinking was bifurcated…there was a 1 or 0 mentality on the subject, and there wasn’t much middle ground. Entrepreneurs were forced to choose between being a “for-profit” or a “not-for-profit,” terms loaded with baggage of what entities should and should not do.
Then, a shift started happening. Companies such as Salesforce championed a 1-1-1 model and other corporations, often spurred by institutional investors, adopted strong environmental, social and corporate governance (ESG) measures. These innovations moved the for-profit model more toward a company doing good rather than merely minimizing harm.
Even these initial steps were cautiously taken. Companies like Google already had standing mottos of doing the least harm (i.e. “don’t be evil”) and certain sin stock filters on portfolios excluded vice-products such as tobacco, alcohol, etc.
I began working with the social enterprise PureVida Coffee in the late 1990’s, whose founders had new questions. For example, they wanted to know if you want to do something that is fully blended, what legal structure should you adopt?
As I started thinking about these issues, I met Jay Cohen Gilbert and others social enterprise thinkers at the Aspen Institute. He and B Corporation co-founders were beginning to develop the B Lab and B Corporation concepts.
In working closely on issues of social enterprise law, I saw a huge flaw in many corporate statutes. In California, for example, a social enterprise couldn’t even file Articles of Incorporation with a mission/impact driven statement of purpose. The fact that founders could not write in a purpose for their corporations was a major issue.
In 2005-2006 I did a study on constituency statutes for B Lab. Constituency statutes can be effective tools in legal tool kit; however, they don’t necessarily create transparency around stakeholder empowerment. And in all 31 states with constituency statutes, it is elective (i.e. Boards can abide, but are not required to).
In 2008, B Lab proposed a California constituency statute applying a “shall” requirement—to apply to all corporations. While I supported the idea that the market should allow for social enterprise, I was wary of forcing it on every corporation. A few entities, including the State Bar Association opposed the proposed law. 2008 was also the first year of major budget battles in CA (i.e. there were 99 bills that Gov. Schwarzenegger allowed to lapse, and vetoed by default). The governor didn’t comment on any of the vetoes, except for this one—he told the bill’s sponsor that he wanted a better bill, and wanted CA to be a leader.
I convened a meeting at our SF offices in Fall 2008. The robust discussions resulted in a working group of 10 lawyers including attorneys from large firms, smaller firms law firm, academics, nonprofit attorneys, and foundation attorneys who kicked off a multi-year effort to create a new statute for social enterprise.
In 2009, we published a draft of a new law and distributed it to 300 social entrepreneurs, organizations, thought leaders, and incubators, and received comments from many. In response, we made changes to the proposed legislation and prepared an FAQ to explain the changes made and those that were not made in response to comments. That FAQ remains available to this date, providing transparency in the trade-offs made in drafting the legislation. In 2010, California state senator DeSaulnier sponsored the bill. Unfortunately it was another budget battle bill year, and the bill didn’t proceed very far. In 2010, B Lab also ended up introducing their own legislation in MD and VT, and in 2011, introduced a version in California.
In 2011, both the benefit corporation and flexible purpose corporation legislation passed into law in CA. Since that time, fifteen states have adopted either a benefit corporation or social enterprise legislation that resembles FPC. And just two weeks ago, Delaware (the grand-daddy of all corporate laws), introduced legislation that is a hybrid between the benefit corporation and the flexible purpose corporation.

Q3 | Innov8Social:  What have you seen from the front lines of being part of social enterprise legislation?

A3 | Todd Johnson:

The structuring of social enterprise is in its infancy. We are in the rapid prototyping phase, and we should realize there will be failures. I think it is key to apply design theory in determining legal structure for social enterprise.
For me, the real test for these new legal forms will be whether they attract capital. Today, the jury is still out on that point. Most of the B Corporations that have institutional investor funding are traditional Delaware corporations or they are companies like Patagonia – owned and controlled by a founder with a passion around anchoring the mission. The key will be when capital flows freely into companies that are organized affirmatively to achieve blended value or the triple-bottom line and are structured to make that institutional, rather than subject to the will of the founder (which is always at risk of death, divorce or a change of heart).

Q4 | Innov8Social:  How do you help social enterprises determine the right structure for their business?

A4 | Todd Johnson:

When I discuss legal structure options with social entrepreneurs, I walk them through a “design tree” of options. It helps to evaluate the traits of each form against the needs of a particular business.
I personally don’t find tandem structures (using both a for-profit and a non-profit corporation) to be a good option, except in the situation of a “corner case”. Look, a startup is hard to launch on its own—without a social mission. Nine out of ten startups fail in the first two years. And social entrepreneurs aren’t just doing a start-up, but they are also trying to tackle some of the world’s hardest problems.Tandem structures lead to social enterprises doing all of that while living with the worst of both worlds—i.e. having to adhere to strict accountability of corporate law as well as IRS regulations.
However, some social enterprises have chosen a tandem model because tax deductible contributions are key to the business model. For example, Global Giving adopted a tandem structure; although I’m sure that Mari and Dennis could give founders an earful about the challenges of establishing and operating such a structure. In contrast, there seems to be a movement for social entrepreneurs to consider starting in a non-profit as a way to cover the soft costs of start-up, and then morphing into a for-profit once a product or business idea is fully baked. This is challenging and not for the faint of heart, even if it is possible. Embrace Technologies did something like this, but not without receiving hundreds of pro bono hours from a law firm to navigate the challenges. Also, it can be difficult and costly to move assets between entities–a business and nonprofit (i.e. you need 2 law firms, and huge transaction cost are major). At the end of the day, I think the administrative and operational costs of pursuing this route make it extremely unwise, except in the rarest of circumstances.

Q5 | Innov8Social:  Should CA still pursue a constituency statute?

A5 | Todd Johnson:

No, that’s crazy!
In mid-1980’s states introduced constituency statutes to be able to look at other interests besides maximizing shareholder value. So 31 states have passed them, but they were essentially anti-takeover tools. The idea of using them for social enterprises as a way to anchor the mission is no longer necessary in most cases, now that B Lab has been successful in getting alternative legislation adopted in so many states.
And we need to remember, no courts have ever looked at using constituency statutes as a way to anchor the social mission of a social enterprise. There is a risk that a constituency statute might not be effective to protect a corporation’s mission.

Q6 | Innov8Social:  What are your thoughts on how social enterprises should measure impact?

A6 | Todd Johnson:

First, let’s be clear. Social enterprise is not a sector! A social enterprise is a business deploying capital to solve problems/do good. Organizations that are making money and doing good are social enterprises. At its essence, social entrepreneurship is a “way” of doing business, rather than a type of business.
But that means that measuring impact depends on the type of business of a social enterprise. We can’t think of impact in a uniform way. For example, Change.org can measure impact by successful petitions. Embrace can measure the number of babies lives saved by the number of inexpensive infant incubators distributed. The folks at d.light can estimate the amount of kerosene not used in favor of their solar-powered LED lights and the health and environmental benefits.
It’s incumbent on the social enterprises to develop an impact strategy and a means for measuring and reporting that impact. Of course, as my examples note, this will be different for a base of the economic pyramid company than for a Western-focused technology company. And it will be hard for companies with a mission around personal transformation. But social enterprises need to own this issue as part of their business plan, and it must include looking and thinking about the unintended negative consequences.Bottom line: If social entrepreneurs want to attract impact investing money, then they need to have a well-developed impact story, developed using the same type of empathic design thinking they used to develop their service or product.

Q7 | Innov8Social:  What inspires your commitment to the social enterprise movement?

A7 | Todd Johnson:

My parents have always been very active in their communities and always modeled giving back. From the very beginning of my legal career I have sought out ways to give back.
At Jones Day, I run the renewable energy and sustainability practice—and that fits well with my passions.
But ultimately, I feel like that part of my responsibility–and others of us who are more established in the field (or just older)— to help build an ecosystem for the young lawyers passionate about this emerging arena.

Q8 | Innov8Social: What advice do you have for attorneys interested in practicing social enterprise law?

A8 | Todd Johnson:

First, there really isn’t such a thing as “social enterprise law.” The most important goal for any young lawyer passionate about this area must be to become a very good lawyer in a specific expertise – capital markets, mergers and acquisitions, venture capital and private equity, intellectual property, etc. Then apply that expertise to social enterprises. Initially, focus on becoming an expert.
Lawyers need to understand at the beginning of their careers that the trajectory of an attorney’s career is like an hour-glass—broad at the beginning, specialized as it develops, and broad in the later years — and prepare accordingly.note: photo of Todd was adapted from his LinkedIn photo. 

If you wonder what positive steps are taking place to support homeless populations in suburban areas, you just need to visit the Downtown Streets Team Facebook page to see uplifting updates.There is Joe who used to sleep under stairways, who now sleeps in his own home with his dog Mollie. There is Jesus (aka “Chuy”) who gained employment in catering and food services and completed his first shift earlier in February. There is Keceziner (sounds like “Cassina”) who found permanent housing through Downtown Streets Team and is enrolled in classes to become a pharmacy technician.

The FB page showcases many more examples of successful transitions, dedicated volunteers, and progress in the mission to address local homelessness.Downtown Streets Team

Meet Downtown Streets Team

Downtown Streets Team (DST) is an innovative 501(c)(3) non-profit organization envisioning creative solutions to addressing local homelessness. Looking beyond unhoused populations, DST collaborates with multiple stakeholders including social service agencies, government agencies, individual communities, private sector to empower, prepare, and equip unhoused individuals with the skills and resources that will make their transition a success.

Meet Andrew

Innov8Social had a chance to learn more about DST and its new social enterprise initiatives from Andrew Hening who oversees Employment Services and Social Enterprise at the growing organization.
Andrew Hening
Andrew studied Foreign Affairs at the University of Virginia and interned at the Department of Economic Development in Richmond and clerked as a paralegal before heading west as an Americorps VISTA fellow. He worked on homelessness initiatives with the City of San Jose and continued his work in the field by joining Downtown Streets Team in 2011.
Andrew was a 2012 New Leaders Council Fellow and serves on the Steering Committee of Starlight REACH, a panel of local community leaders working on mental health outreach plans for local youth.

Andrew shared a little about the history of DST, a for-profit social enterprise arm that he is working on, and what is ahead for the organization.

Interview with Andrew Hening, Manager of Employment Services and Social Enterprise at Downtown Streets Team

Q1 | Innov8Social:   How do you define social innovation?

A1 | Andrew Hening, Manager of Employment Services and Social Enterprise at Downtown Streets Team:  For me, social innovation is any for-profit/non-profit/hybrid/program/project/initiative that deliberately looks beyond the profit motive and disrupts the status quo in order to address a societal challenge.

It is not just a company, for example, using environmentally mindful production processes because it is cheaper or the PR Department recommends it. Rather, it is a company that explicitly embraces going green in the mission statement and is trying to introduce a product or service that fundamentally changes the way we think about our relationship with the environment.

Q2 | Innov8Social:  What is the mission of Downtown Streets Team (DST) in Silicon Valley? How long has the organization been around?

A2 | Andrew:  DST strives to end homelessness by restoring the dignity and rebuilding the lives of unhoused men and women. Appreciation of other people ‘s own autonomy is essential, and to that end, we simply do whatever it takes to empower individuals to embrace their own change.

The program was created in Palo Alto in 2005 with just four Team Members and a $25,000 budget. We are now in Palo Alto, San Jose, and Sunnyvale with almost 100 Team Members and a budget close to $2,000,000. Though more importantly perhaps, in every community we’ve entered, we have helped shift the dialogue away from the homeless being the problem and, instead, to them being seen as part of the solution.

Q3 | Innov8Social:  What are the major barriers for homeless job seekers? How does DST address them?

A3 | Andrew:   Homeless job seekers face an array of barriers, such as large gaps in employment, criminal histories, and/or mismatched skill sets due to changes in the economy. Fortunately, we have had a great deal of success with helping people overcome these challenges. In the past 18 months, over 40 Team Members have graduated into employment, including people who had not worked in 20 years, people who have multiple felonies for assault and theft, and people who have had to completely retrain themselves in a new career field.

The fact of the matter is, all of our Team Members have so much talent to offer employers, and the real challenge, really the most significant barrier we see, is helping Team Members realize that themselves. Our work experience contracts, our weekly success meetings, our Participants of the Week awards, our peer-based management structure, and our commitment to treating people with respect and dignity are all designed to help people see the best in themselves again or for the first time.

Q4 | Innov8Social:  Can you tell us a little about the Social Enterprise initiatives of DST, such as the training class for homeless entrepreneurs?

A4 | Andrew:   In 2012 DST ran two business-planning classes for our more entrepreneurial Team Members. The curriculum fundamentally aims to show our Team Members that there is more to a business than the idea itself, which is a lesson I have had to learn myself. During the four week class we work with students on creating a business plan that includes: market analysis, sales and marketing strategies, organizational structure, product description and research, and basic financial information.

Of the ten Team Members who have taken the class, two people are actually in the process of launching their businesses, which could more accurately be described as micro-enterprises at this nascent stage. A Palo Alto Team Member is using his experience in power-washing to start a small contracting business with local restaurant franchises, and a San Jose Team Member has already obtained his business license and seller’s permit for a portrait business. It’s incredibly exciting to see the progression from a raw idea to an actual money-making endeavor.

On top of helping our Team Members find creative revenue streams for themselves, we are also in the process of starting a “for-profit” arm of DST. We are working with an organization in Berkeley to launch a “triple-bottom-line” weatherization company that will employ Team Members with all types of backgrounds and barriers. The company will be working on weatherizing homes in order to reduce energy usage in the Valley, and all profits will be reinvested in the company, so we can hire more Team Members, or they will be donated to DST’s “non-profit” services.

Q5 | Innov8Social:  What are goals for DST in 2013 and beyond?

A5 | Andrew:   In addition to starting the “for-profit” arm, one of our major goals for 2013 is to launch a new team in San Rafael. If and when this happens, it will mark our first expansion beyond Silicon Valley and will be a major test for the scalability of our program. DST has witnessed amazing growth since our founding, and the success of these two initiatives will propel our mission and our operating values to previously unimaginable levels. Our entire staff is extremely excited about the impact that awaits.

On Tuesday, January 29th 2013 Ashoka Legal brought together a few top law firms specializing in social enterprise law and hybrid structures. The session was created to be an open discussion and training on some of latest trends, tools, and resources for setting up nonprofits, for-profits, hybrids, and new corporate structures.
Hybrid Structures Webinar: Nonprofits, For-profits, and New Corporate Forms
The event, held at the Morrison & Foerster offices in San Francisco, was live-streamed online. The presenters’ list included:

Watch the Webinar

For social innovation attorneys, law students, and social entrepreneurs seeking to research legal entity options, formation, and restructuring—this webinar is an excellent tool to begin unpacking the many options available. And, the experience is made more meaningful as it is guided by attorneys at the forefront of the social enterprise legal space.
If you missed the the live webinar or live session, Morrison & Foerster is making the archived webinar available for viewing until April 2013.

Legal Structures

The speakers spoke in detail about legal structures that have been covered on Innov8Social, weaving in practical experience, policy history, and examples into their assessment of how each structure may benefit a social enterprise or non-profit.
Legal structures for social enterprise law covered in the webinar
Hybrid legal structures
  • For-profit subsidiary of a nonprofit
  • Nonprofit under control of for-profit
  • Sibling relationship of for-profit and nonprofit
  • Independent, but aligned entities
Other tools that can create value, and enable entities to remain mission-driven 
  • Licensing
  • Trademark
  • Integrated reporting: to integrate social, environmental impact alongside financials