The Legal Step Entrepreneurs Can Take to Safeguard Their Business’s Purpose
When you’re launching a new business, you are likely hoping to use it to provide an unmet need or solve a problem you see in the world or your community. Your mission is your reason for putting in the long hours and taking on the stress and responsibility of being a founder of a new for-profit company.
From my experience launching and now growing a law firm, Rockridge Venture Law, I know all too well the struggles many entrepreneurs face, especially in just getting the business off the ground. And from my time working with fellow missional entrepreneurs, I’ve seen too many businesses lose their ultimate purpose and get forced by various factors into compromising on their mission. That’s why I’m a firm believer in safeguarding your business’s purpose from the outset by launching as a legal benefit corporation.
Before we get into the reasons why that’s a good idea, let’s distinguish between two terms that are often conflated: Certified B Corporation (“B Corp”) and legal benefit corporation (“benefit corp”). While a business can be (and often is) both, a B Corp is a for-profit business that has been assessed and verified by the independent nonprofit B Lab to have exceeded a threshold for positive impact on people and planet. A benefit corp, like an LLC or nonprofit corporation, refers to a business legally incorporated under that framework. The documents of incorporation for a benefit corp must, depending on the statutes of the incorporating state, include a legal commitment to conduct business for the benefit of multiple stakeholders, achieve a stated mission beyond profit, and provide a timeline for releasing impact reports to the public and to any shareholders.
Benefit corps are allowed via state-by-state legislation, so you have to look at what is required in the state where you plan to incorporate. For businesses planning to scale, incorporating as a benefit corp in the state of Delaware is most common and what most investors and banks are most comfortable with. (Find a full list of the states that currently allow benefit corp incorporation here.)
Rockridge Venture Law is part of the community of Certified B Corporations. Learn more about this growing movement of people using business as a force for good, and sign up to receive the B the Change Weekly newsletter for more stories like this one, delivered straight to your inbox once a week.
If you want to legally protect the missional character of your for-profit startup, launching as a benefit corp is one of the best ways to do so. And doing so from the beginning sets your business pattern: How you start is likely to influence how you operate. Launching with key parameters and metrics for how you’re going to run your business, framed by benefit corp governance, means you’re more likely to achieve all of your goals — your guiding purpose along with the sustaining growth and profits needed to continue to achieve your purpose.
Here are my five top reasons — in addition to protecting your business’s overarching purpose — that you should consider incorporating as a benefit corp from the beginning.
1. Find the Right Investors
As you consider how you will scale your business, incorporating at the outset as a benefit corp is a signal to potential investors that your management team has a long-term growth strategy and seeks financing partners who want the company to consider all stakeholders — including your employees, the environment and the communities you impact — in decision making. Also, by not benefit-incorporating at the outset, you may lose the ability to do so once you have secured your first investors. Your company is thus more susceptible to shareholder primacy — the traditional business directive to be responsible for investor and shareholder profits above all else — with your investors driving the company based primarily on the bottom line and not based on your business’ values and its impact on other stakeholders.
For example, say your company wants to roll out a primary caregiver leave policy. If your investors are concerned doing so will cut into shareholder dividends, they may be legally empowered to vote down the idea unless you have defended your social mission in your documents of incorporation by including benefit corp governance language (and carried forth this mission operationally).
With a legal structure in place that outlines your business’s commitment to its values — that in effect builds these values into the legal DNA of your company — you are likely to weed out investors who aren’t aligned with your goals.
2. Attract Capital
We increasingly see announcements of companies raising capital and having successful exits as benefit corporations — some of the latest include the likes of Ripple Foods and AllBirds, which is now reportedly valued at more than $1 billion. The market also has been influenced by the likes of Larry Fink, leader of BlackRock, the world’s largest investment firm. In his 2018 letter to CEOs, Fink stated: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”
With the benefit corporations I’ve advised, being a benefit corp has not been an impediment to raising money. And my experience is backed up by a recent report, “Just Good Business: An Investor’s Guide to B Corps,” in which researchers from Yale worked with Patagonia and Caprock Group to look into trends and the current state of investors’ interest in B Corps and benefit corps. The report notes: “Many venture-backed Benefit Corporations have received multiple rounds of funding, showing that Benefit Corporations can readily meet venture capital risk and return expectations. … Nearly every Silicon Valley venture capital firm has invested in a Benefit Corporation as of 2017, demonstrating mainstream appeal of the young legal structure.” Not only will incorporating as a benefit corp improve your ability to attract capital, it will enhance your attractiveness as more investment firms move in this direction.
And large institutional investors, such as retirement funds and pension funds, are beginning to shift as well. Rick Alexander, head of legal policy for B Lab, wrote about a report prepared by the London-based insurance giant Aviva, entitled Delivering the Sustainable Financial System the World Needs. Based on the report’s findings, Alexander writes:
“Insurers must carefully invest their premiums in diversified holdings in order to make sure they can pay off their liabilities, which extend far into the future … [and] depend on long-term stable growth. Corporate strategies that create profits by externalizing costs ultimately hurt universal investors [like pension funds], because those costs must be absorbed by the rest of the market.”
3. Get the Best Talent
To have the most competitive advantage, you need the strongest team — especially when you’re small and rapidly scaling. To have the best team, you need to have a company that is attractive to the millennial generation, which a Deloitte study predicts will make up 75% of the U.S. workforce by 2025. The study also found that millennials “want to work for organizations that foster innovative thinking, develop their skills, and make a positive contribution to society.”
Being a benefit corp shows you take your mission and purpose seriously and is a public commitment your employees can stand behind. Taking care of your employees, running a business that is positively impactful, offering autonomy and new opportunity — these are all talent-attractors and common practices of benefit corporations.
From our perspective, being a Certified B Corp law firm has helped us to develop a better legal and support team than otherwise possible. Our main corporate office is in Cookeville, a small town in Tennessee. Cookeville is a charming university town attractively surrounded by state parks and caving, lake and river activities, but it’s also a rural area without the attractions of Big City life that are offered by the much trendier nearby cities of Nashville and Chattanooga. (Disclaimer: We have an office in Chattanooga also.) One reason we are able to attract talent from outside hotspots to work with us is because of the corporate social responsibility framework we have in place. People realize we are promoting values and practices they want to be connected with and that we mean it — in fact, by our incorporating documents we are legally bound to continue doing business this way. Ideally, expanding sophisticated intellectual property counsel in this rural region will help facilitate innovation from the local university and scale bright ideas from inhabitants of the rolling hills around us — a universal win.
4. Gain Consumer Trust and Loyalty
We’ve found that operating with purpose helps build strong connections with clients. While the “Amazoning” of the consumer space provides a convenience factor that can override people’s desire to buy from values-aligned brands, customers and clients increasingly are looking for purpose-first companies to support.
Consider Accenture Strategy’s 2018 global survey of nearly 30,000 consumers that found “62% of customers want companies to take a stand on current and broadly relevant issues like sustainability, transparency or fair employment practices. The closer a company’s purpose aligns to their own beliefs, the better.”
Incorporating as a benefit corporation is a public signal that you are committed and legally required to be transparent and to balance purpose with profit.
5. Work With Aligned Businesses
By specifically looking to service and sell to fellow benefit corporations, you can ensure you are working with aligned businesses. You will both effectively have a pre-screen on one another because as benefit corps you know each business is legally committed to its stakeholders, has a longer-term view on values and goals, and will treat each other with those values in mind.
We regularly hear stories of entrepreneurs launching businesses and working with big, online legal platforms instead of a values-aligned, benefit corp law firm like ours. Some of those platforms are markedly better than others, but in most, if not all, cases those platforms are not designed to reflect mission-oriented business models in legal foundations and operating frameworks. We’ve also heard from entrepreneurs who can afford and hire law firm services who end up getting poor treatment while their attorneys focus on bigger clients.
For us, as a benefit corp, transparency is key. The troubles we often hear from potential clients about their existing legal teams — not communicating openly, surprise billing, and a lack of experience in the purpose-business space — don’t happen when clients come to us and, I would hope, other law firms that are benefit corps and/or B Corps.
Our ongoing involvement in building the B Corp and benefit corp presence in our region means we are best positioned to represent corporate clients wishing to fully implement and maintain benefit corporation structures and, really, any who want to do good in the world and need competent, earnest, and transparent counsel behind them, beside them, and at times, in front of them leading the way.
This article was originally published by Rockridge Venture Law. B the Change gathers and shares the voices from within the movement of people using business as a force for good and the community of Certified B Corporations. The opinions expressed do not necessarily reflect those of the nonprofit B Lab.
5 Reasons Your Startup Should Be a Benefit Corp was originally published in B the Change on Medium, where people are continuing the conversation by highlighting and responding to this story.
