1. “Social Enterprise Legal Forms and Financing”
ESRC Seminar
“Social Enterprise Legal Forms and Financing”
Kim Alter March 25, 2008 1
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2. “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
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3. 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
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4. 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
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5. 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
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6. Critical Levers Ownership Governance Risk Liability Claim on benefits
Power to dissolve
Governance
Control systems 6
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7. 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
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8. Ownership Structures © 2007 Marjorie Kelly & John Stutz 8 8
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© 2007 Marjorie Kelly & John Stutz 8

9. 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
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10. Other Legal Issues Liquidity / Capital Requirements
Returns (financial/social)
Exit strategies
Branding/image
Operational requirements (regulatory)
Compensation
Tax 10
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11. 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
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12. 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
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13. Hybrid Social Enterprises
Must look at the WHOLE:
combination of two or more structures as the social enterprise 13
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14. Scojo Foundation
Scojo 14
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15. 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
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16. 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
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17. 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
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18. 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
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© 2006 Charly Kleissner 18

19. 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
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© 2006 Charly Kleissner 19

20. 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
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21. Conclusion Watch out for Governance and ownership issues
Clear value proposition for different types of investors / donors
Maintaining control
Mission drift 21
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