Latest Organically Grown Company News
Oct 28, 2019
Organically Grown Company One of the thorniest problems that impact companies face is how to expand—that is, finding ways to scale without selling out. For one thing, growth can involve undermining an enterprise’s mission. Also, a business that, say, brings on equity investors takes the chance of losing control to a less mission-focused partner. With that in mind, for the past year or so, impact funder RSF Social Finance and Purpose Foundation , a nonprofit aimed at creating alternative, mission-driven financing vehicles, have been developing new legal and financing structures. They just released State of Alternative Ownership in the U.S, a report about companies exploring alternative ownership models. Drawing on interviews with more than 60 entrepreneurs, retiring founders and others, the report examines the concept of “steward ownership” and weaknesses in existing models, as well as new options. “There are real alternatives to raising VC capital or debt, selling your company or the other accepted methods,” says Kate Danaher, RSF’s chief lending officer. All About Steward Ownership The models discussed in the report all fall under the heading of steward ownership. That’s a philosophy which seeks to create structures that “keep a company’s underlying purpose deeply embedded in its operations”, enabling “generations of stewards to carry on the mission and values of an organization and protect its impact.” It also seeks to counter what Danaher calls “perverse incentives of capitalism”, whereby investors demand a level of growth that’s pretty much impossible for most companies. The further problem in the U.S., according to Danaher, is that, while stewardship models exist, they’re problematic. Cooperatives provide for employee ownership, but, according to Danaher, they tend to have a hard time raising growth capital and often include a complex governance structure. With Employee Stock Ownership Plans (ESOPS), regulated by the Employment Retirement Security Act of 1974 (ERISA), a business is sold to a retirement trust that benefits the employees. However, according to Danaher, over time, as a company grows, the cost of operating ESOPS requires continually funding those retirement accounts, harming the company’s ability to put money back in the business. Alternative Models With that in mind, RSF and Purpose are creating alternative models. One, a perpetual business trust, is based on an approach often used in Europe, according to Danaher. It allows companies to convert to a new business structure through which they hold 100% of the company’s common stock in perpetuity in a trust specifically created to protect the company’s mission. “The trust’s purpose is to serve the mission, that’s the bottom line,” says Danaher. Purpose and RSF piloted the structure in 2018 working with Organically Grown Company (OGC), a Portland, Ore.-based organic produce distributor. While the company had an ESOP in place, many of its founder-owners were on the cusp of retirement, potentially threatening the capacity to have money left over for the business. OGC bought back its shares from the employees and growers who owned them, transferring them to the Sustainable Food and Agriculture Perpetual Purpose Trust. RSF provided a $10 million loan to help buy out the majority of OGC’s shareholders, along with $1 million in working capital. Then, in July 2018, OGC closed another $11 million from investors, using part of the money to buy out the rest of their shareholders. Under another model, a foundation holds a “golden share” that allows it to veto a sale of the business for private profit or a change in the steward-ownership structure. Those holding voting shares in the company control all decisions; these shares have no economic value. Golden share companies may also offer non-voting shares with economic rights. ( B Lab General Counsel Rick Alexander developed the U.S. Golden Share charter in collaboration with Purpose, according to RSF). According to the report, since starting work on the report in January, more than 100 U.S. businesses have contacted the organizations about steward ownership model. They’re now working with about a dozen companies.