“Social Enterprise Legal Forms and Financing” ESRC Seminar “Social Enterprise Legal Forms and Financing” Kim Alter March 25, 2008 1 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 1

“Social entrepreneurs need to focus on their objectives, and then how to achieve those objectives given the law.” – David Roll, Founder of Lex Mundi, Pro Bono Legal Council for Social Entrepreneurs 2 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 2

What is a legal structure? Legal structure does not define an organization Agreements among stakeholders on: Governance Ownership Exit Purpose Claim on benefit Plus agreements with the state Regulatory mixer 3 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 3

Limitations of Absolutes For-profit companies are incompatible with a social mission. If you want to do good, you have to create a not- for-profit organization. If you want to create an enterprise with a social mission, you cannot do this in a for-profit company. If you want to capitalize with grants you must be a not-for-profit. If you want to attract investors you must be a for- profit. 4 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 4

Key Drivers of SE Legal Form Nature of business activities Related or unrelated to organization's mission Purpose and objectives Use or destination of earned income Mission activities, owners, business growth, etc. Source of income Public, donors, insurance, government, investors, etc. Stakeholders Social entrepreneur, clients, employees, investors, suppliers, public, etc. Amount of income earned through SE Limits placed on either monetary amount or percentage of budget 5 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 5

Critical Levers Ownership Governance Risk Liability Claim on benefits Power to dissolve Governance Control systems 6 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 6

Why worry about ownership? Most social, economic and environmental inequities are the result of gaps in ownership: Haves and Have Nots Without balanced distribution of ownership Inequities occur: poverty and environmental degradation Social mission integrity 7 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 7

Ownership Structures © 2007 Marjorie Kelly & John Stutz 8 8 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP © 2007 Marjorie Kelly & John Stutz 8

Capital How to get capital Not pay too much Not influence mission Pura Vida Nonprofit owned for- profit (llc) Overleveraged on debt Converted to equity Lost owner control Café Direct Not-for-profit to for-profit Publicly traded company (plc) Raised £5 mil in 2004 Guardian shares w/charity 9 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 9

Other Legal Issues Liquidity / Capital Requirements Returns (financial/social) Exit strategies Branding/image Operational requirements (regulatory) Compensation Tax 10 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 10

Spectrum of Practitioners   Purely Philanthropic Hybrid Purely commercial Type of Organization Traditional NGO NGO enterprise or socially responsible business Traditional for-profit Motives Appeal to goodwill Mixed motives Appeal to self-interest Methods Mission-driven Balance of mission and market Market-driven Goals Social value creation Social and economic value creation Economic value creation Destination of Income/Profit Directed toward mission activities of NGO (required by law or organizational policy) Reinvested in mission activities or operational expenses, and/or retained for business growth and development Distributed to shareholders and owners   Adapted from Gregory Dees; and Lee Davis and Nicole Etchart. 11 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 11

Defining legal structure Define mission of social enterprise Clarify objectives and purpose – what are you trying to achieve? Roles and relationships with stakeholders Identify critical issues Consult an attorney and review options creatively Attention to control systems and ownership Implement best legal structure to support the mission, not the other way around. 12 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 12

Hybrid Social Enterprises Must look at the WHOLE: combination of two or more structures as the social enterprise 13 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 13

Scojo Foundation Scojo 14 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 14

Customer * Social Impact Council Connections CCC CCHN Council Connections 20 Clinic Members Established 25 Years Ago (Non–Profit) 13 Clinic Members Established 5 Years Ago 420 Clinic Members Established 18 Years Ago (For–Profit) Practice Management Managed Care Contracting Quality Management Technical Services Organization Pharmacy Lab Services Med/Surg Supplies Office Supplies Service Lines Target Population Customer * Social Impact Financial Viability 15 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 15

Hybrid Business Model Why? To leverage attributes of both legal structures, while not being boxed into only one To attract / leverage different types of capital / investors To partially subsidize services / products To develop immature markets To invest in basic research, R&D, and market testing 16 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 16

Hybrid Social Enterprise In-Kind Equity Consulting Brand Intellectual Property R&D Marketing For-Profit Entity Not-For-Profit Entity Market Access Brand Consulting Profit Sharing Liquidity Events Investor Guarantees 17 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 17

Hybrid Investment Strategies Social Investors Foundations Social Investors Foundations Social Venture Funds Banks Governments Corporations High Banks Governments Corporations Etc. Social Investors Foundations Social Venture Funds Grants Social Loans Grants Social Loans PRIs Invest- ment Risk Grants Social Loans Commercial Loans Government Loans Equity Commercial Loans Government Loans Equity Low Seed Start-Up Early Expansion Late Expansion Enterprise Life Cycle 18 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP © 2006 Charly Kleissner 18

Hybrid Investment Strategies Investors Banks: * Commercial Loans * Equity Social Investors: Foundations: * Mission Related Equity Foundations: * Social Loans (PRI) Social Venture Funds: * Social Loans Social Investors: * Grants Foundations: For-Profit Nonprofit Entities Hybrid Social Enterprise 19 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP © 2006 Charly Kleissner 19

Conclusion Hybrid business structure is appropriate if you Need to/want to attract / leverage different types of capital/investors Need to/want to partially subsidize services / products Develop immature markets Invest in basic research and testing 20 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 20

Conclusion Watch out for Governance and ownership issues Clear value proposition for different types of investors / donors Maintaining control Mission drift 21 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP 21