Steward ownership is form of corporate governance that truly instantiates a purpose driven economy and addresses capitalisms most fatal flaws. For anyone interested in redesigning our economic institutions, this is a must listen.
Steward ownership is one of the single most important concepts to understand for those interested in reforming capitalism. Other models of corporate governance that seek to integrate purpose, such as co-ops, public benefit corporations, B Corps, and PBLLCs, leave intact a fundamental tension between purpose and profit. In contrast, steward ownership instantiates profit in service of purpose in a way that is legally binding. Steward ownership is where the keys to the castle lie if we are interested in market economy that addresses the fatal flaws of capitalism as we know it.
Our guest for this episode are Derek Razo and Camille Canon, co-founders of Purpose US, a consultancy supporting companies looking to adopt steward owned governance models.
In this conversation Jenny, Derek, and Camille discuss:
[0:00:00] Derek Razo (DR): What we're talking about is simply stepping back from the default mode, which is that money equals power in corporate institutions and saying, what is the right relationship between governance and finance here, given what this thing exists?
[0:00:16] Camille Canon (CC): And who else should have participatory rights who are perhaps contributing value in other ways that are non-monetary?
[0:00:27] Jenny Stefanotti (JS): That's Derek Razo and Camille Canon, Co-Founders of Purpose US, a consultancy that supports businesses looking to adopt steward ownership structures. This is The Denizen Podcast. I'm your host and curator, Jenny Stefanotti. I'm so excited about this episode, because it is one of, if not literally, my single favorite topic of all the topics we've covered. I love the fact that it is dry and boring and technical, because we get into corporate governance and we talk about the different entity structures that you can use to do that and it's not for everyone.
But it is for everyone in the sense that if you care about the future of the economy and the evolution of capitalism towards something that is non-extractive and not fundamentally flawed due to the growth imperative, you actually need to get down into the nitty-gritty of how companies are governed, because that is where the incentives are. That is where we instantiate decision making. That is where we redistribute power.
Last week, we talked about co-ops, that's one form of corporate governance and the landscape of governance design that would be defined as a co-op. Steward ownership is my favorite of all of them, because truly steward-owned structures are considered the gold standard for purpose. You instantiate into the legal code of the company purpose being the primary thing that you're solving for and profits being in service to that. In all of the other structures, there is fundamentally a tension that exists there. You can redistribute power in ways that might put more stakeholders into decision-making positions, but it doesn't necessarily legally bind those people to make non-extractive decisions.
Steward ownership actually really instantiates it in the legal code. Several months ago, Patagonia announced a new structure for their company. It made headlines. Everyone was talking about it on social media. The form that Patagonia chose was a steward-own structure.
Our guests for this conversation, again, are Derek Razo and Camille Canon. They are our resident steward ownership experts here in the Denizen community. They are the founders and partners of Purpose US, which is a consultancy that helps companies adopt these structures, but they also do field building. They do work in policy, as you’ll hear in this conversation, they're also doing experimentation with a fellowship to address what's really one of the binding constraints in the adoption of these models, which is access to finance. Camille has since moved on to a new role, focused on building data informed solutions to decentralized governance. The two of them just have an incredibly deep understanding of what's happening in the space.
In the conversation, we cover what steward ownership is, why and how it's the most binding, secure way to instantiate profit over purpose, and how it differs from other forms of corporate governance and corporate structures that many of you are probably more familiar with, like public benefit corps, like co-ops, or non-profits. We talk about how steward ownership companies protect purpose across generations of management. Camille and Derek have devised what's called a ladder of security for how much a company's mission is protected from capture by groups looking to benefit economically from the business.
While there's at one of the spectrum, proper, airtight steward ownership structures, they’ve defined a whole spectrum of increasingly binding ways to do this, to instantiate profit in service of purpose. We also talked about, of course, issues in accessing finance. Not surprisingly, that's a big constraint here, just like we saw last week with co-ops. We talk about some of the more novel structures for financing that they're seeing across the landscape. As I mentioned, this is literally if not my favorite topic. It does get technical. Listen more than once if you need to, because I truly believe this is where the keys to the castle lie in instantiating a new economy that addresses these fundamental flaws in capitalism that we've uncovered in our conversation so far.
I hope you enjoy this one and get as excited. You can hear it in my voice, right? I hope you're as excited as I am to learn about this topic, because it really is one of my favorites.
[0:04:41] JS: Before we get into the details of steward ownership, let's talk about the other forms of corporate governance that are purpose oriented, that people might be more familiar with. There's a public benefit corp, which is a different structure that addresses fiduciary responsibility, and there's co-ops and there's stakeholder capitalism. I'd love to hear from your perspective a little bit about the other things that are in the landscape and some of the challenges that they face that are addressed with steward ownership.
[0:05:10] DR: Yeah. This is definitely in the greatest hits of questions that we get when we talk about steward ownership. It might be helpful to just start by saying, without going deep into the rabbit hole, talking about what we mean by steward ownership.
[0:05:24] JS: Let's start with that question instead. Let's start with, what defines steward ownership? There's two key properties that define steward ownership. Then we'll talk about how that compares to the other ones.
[0:05:35] DR: Yes. We generally talked about steward ownership, or stewardship models and structures that guarantee shared ownership. Meaning the key stakeholders participate in profits and governance. They're intergenerational. The governance of it is protected and connected to people who are connected to the mission and in the operation of the company often. They have a defined purpose that the stakeholders, financial and non-financial, are all gathered around and legally accountable to. Sometimes we describe this as the two principles, one being self-governance. A steward-owned company, or asset is self-governed. Its mission, its voting, its control is no longer up for sale, or at least it's protected to the greatest degree possible.
Its profits are, we say, the profits serve purpose as the second principle. That just means that the company, or asset has a way to pull itself away from being a permanently, perpetually financially extractive institution. There's a way for the institution to become primarily reinvesting its profits either directly in the mission of the company, or sharing with stakeholders. Self-governance and profit serves purpose are the core – those two principles that you're talking about.
Just to redirect to your initial question, there's a lot of models that are floating around in the stakeholder capital inquiry that I think we're all sharing these days. One that you mentioned is the benefit corporation. There's a lot of misunderstanding about the benefit corporation, not the least of which, because it's got a confusing naming convention. There's the B Corp certification, but there's also the benefit corporation legal form, and the two are not the same.
[0:07:14] JS: I can't tell you how many times I have explained this in the last five years. Not least, because we refer to S corps and C corps as the legal form. But B corp refers to the certification.
[0:07:29] DR: Yeah. A benefit corporation, we think of this stuff from the legal code perspective almost. From the legal code perspective, a benefit corporation does something pretty specific. That is, it allows for the allowance of mission and the context of a dual fiduciary duty. In order to create the allowance to do mission-driven things, you're going to basically put that on balance with the pecuniary, fiduciary duty. That's the legal analyst’s version of what you would say, in practice.
One, this isn't super thoroughly well tested in a legal confrontation context. In practice, what that tends to mean is that if you're going to sell the company, you are as the directors of the company, you're entitled to go ahead and potentially take an offer that is lower than the other offer, so long as you can make an argument that is more connected, or more aligned with the public purpose of the company. It's not clear, legally, if it gives any defined further benefit in terms of legal shielding from shareholder actions.
[0:08:36] JS: Because I know it gives certain shareholders the ability to sue, if decision-making isn't aligned with purpose. Has that ever happened?
[0:08:44] DR: I'm not the right person to ask about that.
[0:08:46] JS: Yeah, okay. I don't think it has. I’ve been close to it in a while.
[0:08:51] DR: I think, the main point there being that the benefit of the company is allowed to be considered on top of what is the default fiduciary duty, which is this financial shareholder value maximization default. It doesn't necessarily guarantee you're going to make mission-driven decisions. It doesn't say anything about the governance structure. It doesn't say anything, in fact, about the benefit corporation, corporate structure itself, which is actually one of the weak points that steward ownership tries to address is like, the legal structure itself can just be changed by a shareholder vote, regardless of whether that's better for the public purpose.
[0:09:25] CC: I think, just to zoom out for a second to your initial question, Jenny, around these different models, cooperatives, non-profit ownership, public benefit, corporation, benefit LLCs, all of these different legal forms, the approach that we take in practice around steward ownership is much more from the perspective of design principles, based off of one, how is the entity being financed and where should distributions go in future? As well as, what's the purpose? What is needed according to the stakeholders and people who are really stewarding the entity, or intent to in future. What's best aligned with their mission and objectives? We often joke, oh, we don't want to get into a battle of models. We’re model agnostic.
[0:10:10] JS: Fair enough. Yeah.
[0:10:12] CC: It’s much more about rethinking the underlying dynamics of who has power and who benefits from corporations, or other assets in the economy. I think that's a pretty significant departure from how most of the time these models are spoken about, or we attempt at least to have it be a departure from that.
[0:10:29] JS: I think it's also really – what's been very clarifying for me is also to think about what happens to the profits that are generated. Are they reinvested in the firm? Are they extracted from the container of the firm in order to compensate investors, or employees, or all the people who create value? Because a lot of these new models are just more inclusive. They talk about more inclusive capitalism that is better, distributing the value that gets created to the people who create the value, in addition to reinvesting in the firm.
I think, also really critically thinking about reinvesting capital in the purpose outside of the container of the firm, which I think also supports what I mentioned earlier about how it instantiates a cooperative economy, versus a competitive one, because there isn't the same incentives of the people who have the power to extract, to really be in tension with that and the purpose. I think that's what makes this particular model so, so beautiful.
[0:11:27] DR: Yeah. Underlying all of that is legal – right? I think that's where, to your point about, if there's anything that is the keys to the castle, it's just taking the inquiry about, to Camille's point, about who benefits and who controls assets and saying, “Okay. Well, we want a different model of capitalism. We want stakeholder capitalism, more cooperative capitalism,” whatever the language you want to use is. When you take that inquiry down the rabbit hole, you find that you need to build in new institutional structures that are legally and financially binding. That extraction is, just make it – I think of it a little bit like computer security. It's like, you have to make it more expensive to attack, than the benefit would be.
[0:12:10] CC: I think, also that if you can't tell, we're wonks about how to do this from a structural perspective. I will say in practice, what we see on top of that is, in many ways, the clarification, or transformation of relationships between stakeholders, where there were points of unclarity previously. Let's say, an investor and a founder think that they agree, and when the rubber hits the road from a documentation perspective, it often creates opportunities for real clarity to be achieved. There's that point. Then I think that on the process of defining purpose with stakeholders, it's this other magical transformation around it no longer being an asset, or something that's only there for personal interest, but rather something that is in service to a larger purpose that's co-defined, and the principles of which are co-defined and stewarded.
[0:13:01] JS: You mentioned something really, really important, Derek, earlier that I want to make sure we underscore and double-click on, because it's a word that doesn't necessarily have meaning for people, which is the notion of intergenerationality. Because there have been many cases of – Amazon's acquisition of Whole Foods is a great example – where the generation of founders ran an entity with purpose, but absent legal teeth there was no intergenerational security. Ben and Jerry's is another classic example of this. Can you say a little bit more about how the steward ownership structures address this? This is also why I often say that these other models have an inherent fragility associated with them, because the outcomes are contingent on who happens to be sitting in the decision making seats.
[0:13:51] DR: Yeah, absolutely. There's two sides of it, let's say. One side of it is the legal structure of the company, the governance of the company itself as an asset. The other side of it is the financing. The two are ultimately totally interdependent. They're related in a fundamental way. We can go down that rabbit hole if we want to, but take my word for it for the moment. When we're talking about creating an intergenerational ownership, governance, financing structure, on the governance side, what we want to see is an answer to a set of questions that allows us to know that we're not going to be captured by any particular group’s interest.
We're trying to set up a governance structure which includes the right stakeholders, but also limits those stakeholders in terms of their ability to take the entity off course, or capture the entity. Sometimes it's about finance and limiting the power of capital, but it's also often about balancing the power of different stakeholder groups, to Camille's point. At a very deep level, that means we're trying to make sure that the company – the financial value of the company is held in trust in some way, such that it's not an incentive to sell the business, or keep the business away from its mission. That is where we start to overlap with the financing side and say, “Okay. Well, if we're going to create an intergenerational governance structure,” and usually this is done with a trust, or in Europe, a lot of foundation ownership models. Sometimes we could see cooperatives with “poison pills.” We would consider those to be steward-owned.
[0:15:19] JS: Cooperatives of what? Did you say poison pills?
[0:15:21] DR: Oh, yeah. Sorry. It’s a technical term that just means when the company is sold, if and when the company is sold, the value generated is being directed away from the people making the decision to sell it, at least in part. It's in a way, it's just the most basic game theory, right? It's just disincentivizing people from selling the thing purely for personal gain. Then on the financing side, make sure that you've set a financing that doesn't force the company into needing to sell the asset, in order to actually create the value that the asset is there to create. A lot of that has to do with valuation. It has to do with equity structures. It has to do with how we buy and sell equity and get liquidity and all these things.
[0:16:05] JS: Well, I think it also – and Camille, I'd love to hear your answer to this one. I think it also just provokes a fundamental rethink of the questions of who owns the firm and what ownership means. I think, also, what I find really compelling is just the decoupling of economic rights versus control rights, because historically, we're used to seeing the story about shareholders owning the firm and having voting rights that ultimately control the firm. Camille, can you say more about how steward ownership interrogates these notions of ownership and rights?
[0:16:37] CC: Yeah. I mean, it's a complete disruption. It manifests in a bunch of different ways across the different models that have emerged. I think of it as these structures set the incentives up such that, to use Derek's language, a company can be stewarded intergenerationally. The flip side of that is, it's like, we know what happens if we put people in a room full of money and turn off the lights, right? They grab the money. This is a known behavior. Part of the question that we're asking and exploring these experiments is, well, what is the relationship between money and power that allows people to cooperate for a greater good, while also personally benefiting?
[0:17:18] JS: Derek, do you have anything to add?
[0:17:19] DR: Yeah. I mean, I think that you summed it up well. It's around the separation of economic and governance rights. When we say this, people often get confused, because they think what we mean is, investors should have no control, founders, or employees, or choose your favorite stakeholder should have all the control. That is not exactly what we're talking about. What we're talking about is simply stepping back from the default mode, which is that money equals power in corporate institutions and saying, what is the right relationship between governance and finance here, given what this thing exists to do?
[0:17:55] CC: And who else should have participatory rights, who are perhaps contributing value in other ways that are non-monetary?
[0:18:04] JS: Yeah. I think, one thing is really important to note when we have this conversation is to some extent, this feels radical. But then, it's important to remind people that dual class shares do exactly this, where companies go public and there's a Class A of shares that has 10 votes, when a Class B of shares that has one vote, or even in the case of Snapchat, a class of shares that is entirely stripped of voting rights. This type of innovation has happened before. This is just applying it to specifically giving more control to those who are more bound to the purpose.
[0:18:37] DR: The only thing I was going to add there is just, it is both about connecting those governance rights to people who are bound to the purpose and also, about making sure that those voting rights are held in a context where the person is held accountable to that purpose, right? The steward ownership critique of super shares, say in Facebook is the super votes of picking a random company here that uses super votes. But pick your favorite media target for critique. Those super votes are not – They are left to the judgment of an individual who is holding those super votes as to how exactly they should be used.
The reality is that individuals are fallible. What we actually want is institutions that have roles that can be held accountable for either being aligned, or misaligned with that mission, and who can be evaluated on some criteria other than, did they have the most money at the right time, or were they in the right place at the right time? Did they contribute a certain thing in a certain period? The reality is that most of our institutions in the world that are involved in administrating liberal democracy are not buy and sellable. It's a funny exception that we've made for corporations, especially given how close the corporate infrastructure is to public utilities these days.
[0:19:53] CC: Just to build off of what you're saying, I think, and this is somewhat technical, but the other component of the trust that we work with is that in the governance design, we are one, distributing power, or participation to stakeholders beyond just shareholders. Two, we’re integrating into the structure, the ability for those stakeholder groups, or other stakeholder groups to hold that group of trustees accountable. Part of the thesis behind that is that it will create more resiliency over time, because there are multiple checks, basically, within the trust structure.
[0:20:30] JS: Well, also in the last 40, 50 years, with the rise of money market capitalism, executives are increasingly compensated in equity to align incentives with shareholders, disproportionately compensated in equity, effectively giving them even more incentive to grow and extract. We've seen this with record high buybacks in the last five years. Is it the case then with steward ownership structures that there has to be some way to cap this infinite ability to extract that inherently comes with granting equity to the management?
[0:21:07] DR: I mean, I think that's a deep design question. I think that we don't always necessarily, or often make explicit caps. A lot of the time, what we do is define processes for the reaggregation of economic and voting power. That might be as simple as being able to buy back the shares at a certain price, or at a price that's set by a formula. These things are all pretty conventional financial terms, especially when you're looking at mid-sized deals. Those are in a way, it's a cap, in the same way that you're not going to hold a share of Apple forever. You're going to hold it until you sell it. At the point that you sell it, the value is capped.
I think that when it comes to executive compensation, this issue is dealt with at the ownership governance level, in most of the larger steward ownership structures. I think that you still want to have the ability to compensate executives in competitive ways, but you want to just make sure that if they're voting on share buybacks, they're not voting on things for which they're financially conflicted directly. They're not making decisions that are directly in line with their financial conflict without accountability from some entity, usually like a trust, or foundation, or whatever that is actually saying, “Hold on. Wait, wait, wait. Is doing these buybacks actually in the best interest of our overall mission to decarbonize the economy, or whatever? No? Okay, then why are we doing it?” Just having someone in the system, this version of the principal agent problem, where it's like, you have to have somebody to short circuit the loop of self-interest.
[0:22:43] JS: I think it's really important, too, to talk to the fact that this is not new. This is something that has been practiced for decades and arrived at in other parts of the world. Camille, could you tell us a little bit more about that?
[0:22:59] CC: Yeah. I mean, in the US for tax reasons, in the mid-20th century, it became basically impossible to do foundation ownership, which is the primary model for steward ownership in Northern Europe. What we see in Denmark is the example that we often point to, where 60% of the public market cap is structured as steward-owned businesses. Novo Nordisk, the largest producer of insulin on the planet, the governance control over that company is owned by a foundation and economic rights are freely shared on the public market.
We've got Bosch and Zeiss and a long list of European examples. We also see it all over the world. Tata Group in India is structured this way. Some of the oldest companies on the planet are in Japan that are structured this way. This is by no means something that is novel. What has been a challenge in the US is that our legal code makes it really hard to design a different set of principles, ones that are more fragmented in ownership and not trying to extract as much value for private wealth as possible.
[0:24:11] JS: IKEA. IKEA is a really important example, too. Just want to make sure we mention that one. One of the things that I actually saw for the first time and I do want to get a little bit geeky and technical and talk about the different structures in a minute. Before we go there, actually, I saw something new at the conference with you, Camille, because I hadn't yet seen this before – spectrums of steward ownership. Because a lot of times, there just are constraints for well-intentioned entrepreneurs in terms of what they can do. Can you speak a little bit more to that spectrum and how you've been thinking about it?
[0:24:41] CC: Yeah. Derek, and I, over the last, almost four years have worked with dozens of businesses, a lot of them mid to large-sized businesses looking for succession solutions. Baby Boomer founders who started their company for a mission and now they don't want to sell to private equity is the most common use case. What we found in the process of doing those transactions is that it is often really difficult to get a 100% of the company's ownership into a trust.
At the same time, as we were working with younger startups, what we were finding is that this full-blown conversion into a steward-owned structure is often in conflict fundamentally with the financing means of the business. We came up with this heuristic that you're referencing, which is the ladder of legal security, which is rather than saying, “Okay, either there's a 100% ownership held in some trust entity and that's the gold standard of steward ownership, or you go a conventional route, let's look at the different legal tools that we can integrate into an ownership structure, or in some cases, just a governance structure to act as additional protection for the mission of the business, or the interests of the founders.”
[0:25:54] JS: Can you speak to some of the things on that spectrum?
[0:25:57] DR: The context of this, a lot of it came out of our work with startup founders. Just realizing that when you are doing well, you get to write the rules. When you're not doing well, you fall to your lowest level of governance security. That is the consistent pattern. We wanted to build something for ambitious startup founders who want to raise competitive amounts of capital, but who also want to know, how do I do this without ruining the values focus, or the values protection that I as a founder might bring?
We think of these as modules of different levels of strength, and you can combine them and they're composable in that way. At the top of the ladder is trust, or foundation ownership. That means, we have a trust. Usually, we use purpose trust as the structure that we use in the US, or in Europe, a lot of times, we'll use a foundation. In some cases in the US, but rarely, you're able to use the foundation as well. You're able to hold some amount of ownership in this trust and say, the amount of the ownership is absolutely committed to this new fiduciary duty, which is the purpose that we're describing here. That's the top level of security.
It's very hard to break. It's very legally accountable if it's designed well. It's enduring. It's not going to go anywhere. This trust doesn't expire, etc. At the bottom of the ladder of security, one of our partners who has done a lot of startup investing says that our ladder of security is actually wrong, because at the bottom is what most startup founders use, which is hope. The one step above hope is ethics, or advisory councils are a tool that we see lots of folks using. This is at the bottom of the ladder of security, because it's basically trivial to dissolve an ethics council. An ethics trust, or like an oversight trust, a separate entity that is not bound inside of the current entity is one step above that. Example of this is the Facebook Oversight Board.
[0:27:52] JS: I was about to ask. Yeah.
[0:27:54] DR: Very low on the ladder of security, for obvious reasons, right? It's where the teeth are – It's at least not inside of Facebook. That's a step out from an ethics council, but it is not a super tight form of legal security for mission. Above that is stakeholder minority ownership. You might have heard of this as exit to community, or some of these other structures where you do a community offering of equity, or a DPO, or something. This has a different method of legal protection, which is to decentralize ownership away from big blocks towards people who are non-institutional. Because non-institutional stakeholders who are shareholders often have higher tolerance for ambiguity for the business doing things that are outside of the realm of pure profit maximization, etc.
Above that is protected stakeholder board seats. In a lot of countries, this is known as co-determination. Basically saying, we're always going to have two employees on the board, as an example of what a protected stakeholder board seat is. There's a lot of innovation with this structure, because it sits in the middle. It's a little bit more palatable than some of the other higher tier security tools.
Above that is super shares. This is the classic example that most people in the startup space know is you have two classes of shares, class one has 20 times the voting rights of class two, and you sell class two to the investors and founders hold class one. That allows you to control the board. Then above that, we have golden shares. A special share class that is given the ability to veto certain types of actions that are objectively out of alignment with the mission. We see this one becoming more useful in large scale contexts, like public companies looking to do very specific protections. Then trust your foundation ownership is at the top. That's a whirlwind tour through a ladder of security.
[0:29:49] JS: No, it's just important, because there may be people listening to this who are interested in this and can't go all the way there and just understanding there are mechanisms to do it partially with teeth, I think is really important. The golden share I thought was really interesting, and that is a structure that you can put in place to instantiate steward ownership where the golden share has a right to veto any decision that would undermine the commitment to the purpose, which is actually held outside of the firm by a veto service foundation. It sounds like you actually don't see that very often. I thought that was such an interesting solution to the issue of just instantiating it.
[0:30:25] CC: What we found in practice is that the golden chair, as you just described, it over extends the best use of a golden chair, in part, because if the legal advice that we've received over the last couple of years is if there were ever a sale of the company without the consent of a golden share, that golden share would have very little recourse as a non-economic shareholder without any financial backing to actually sue, to undo the transaction. Just from a legal security perspective, we found in the US, it's a bit harder to integrate.
[0:30:57] DR: Right. You get this catch 22, where in order for the golden share, which is supposed to be the one financially non-conflicted actor in the system, in order for that to have real power, it needs to have economic power, or economic value in sort of a self-referencing bug.
[0:31:15] JS: Okay. I know this is going to get technical, but I do want to touch briefly on what are the structures that you see? I know, there's a lot of different ways to structure it under the hood legally. What are the dominant structures that you're seeing?
[0:31:29] CC: The dominant structure that we've been using as for the ultimate, the final owner of a company shares is a perpetual purpose trust, or a special purpose trust, which is unique for two reasons. It's non charitable, which isn't why it's unique. But it is a non-charitable trust. It's unique, because the beneficiary of the trust isn't a living person. I think when most people think about trust, they think of, “Oh, I set up a trust for my child to make sure they could go to college or whatever.” That's not the case here. We have a purpose, which is the beneficiary of whatever the assets are in the trust. The other is that it runs in perpetuity. It doesn't end after 21 years, or with the death of a grantor.
The thing that's really awesome about it for our purposes, is that the definition of that purpose and how we use it is unbelievably flexible. Derek mentioned Facebook's Oversight Board. They're structured as a purpose trust. The case law around defining purpose trust, there was one guy who put a bunch of money into a purpose trust and set up the trustees to go out and start and proliferate a new alphabet. The trustees went to the court and basically said, “We can't do this. We're going to fail. Please, let us use these funds for some other purpose.” That's as far reaching as we've seen.
The definition from a fiduciary perspective is very flexible. From a governance perspective, in terms of how governance is structured, who gets to participate, is also unbelievably flexible. A part of it is that it's a non-charitable structure. What we find in the laws, there is a benefit to these private structures, because they do allow you much more flexibility than non-profit structures as an example.
[0:33:10] JS: Are you seeing many non-profits? I know, MAPS, for example, the organization that does such important work and psychedelics is structured as a public benefit corporation that's owned by a 501(c)3.
[0:33:20] CC: Yeah. I mean, OpenAI is a non-profit. Mozilla is a non-profit. There are lots of examples of non-profit structures that would fall under the header of steward ownership.
[0:33:28] JS: Okay.
[0:33:29] DR: I do think it's important to name that the non-profit status is largely a tax status. You have to justify some charitable purpose to the state. In a way, the state is your mission-driven owner. I do think that that's pretty limited, though, in terms of the level of accountability, security, mission drive and competitiveness that often we're going for. Now, we're going all the way back to your first question, but that's the way in which we see that not all companies owned by non-profits, you would say are steward-owned. I think in the US, a great example is Mozilla, right? It's a company, competitive, it's in the market and it's owned 100% by a foundation.
Due to a bunch of very esoteric legal issues, it's pretty hard to do minority, or 51% ownership in a foundation, largely because that self-referencing nature that we talked about and we keep coming back to, where you're protecting the structure itself is not a charitable purpose.
[0:34:28] JS: Right. Are there also some issues, too, with those? I mean, as I understand it, the state of California in particular, there are a lot of challenges with employment law that would inhibit non-profit structures for steward ownership companies.
[0:34:42] CC: Do you mean around equity distribution?
[0:34:45] JS: I think, in particular, around hiring contractors, because a lot of what's happened with Uber and Lyft and tech companies moving towards the gig economy.
[0:34:53] CC: I don't know much about that. We've had a fair number of nonprofits reach out to us in terms of “How do we structure incentives in a non- profit structure for management?” I think, the most creative solution that we've seen in the market for that is how OpenAI is about.
[0:35:07] JS: What did OpenAI do?
[0:35:09] CC: They have a subsidiary LLC in that.
[0:35:13] JS: All right, we'll look that up. We'll check it out. We'll check it out and we'll put it in the show notes. I want to move on to a really important piece of this puzzle, which is challenges accessing finance. Because one of the things I thought was so interesting when we first met was you were talking about a lot of the companies that you're working with are actually conversions to steward ownership models, once they reach escape velocity. You alluded to it a little bit earlier, Derek, when you talked about just how early-stage startups just don't have the luxury of adopting some of these models. I can attest as an early-stage startup that wants to adopt the gold standard; For me that was just cost prohibitive at this stage of the entity.
I just think it's really interesting that a lot of the conversions happen once they reach a point where they no longer have to raise outside capital in order to sustain the business. I’d love to talk a little bit more about what you're seeing in terms of challenges and accessing capital, because I think that this is a really important thing to understand when we're talking about the space. There are a lot of entrepreneurs that want to adopt these structures and just can't because of the capital constraint.
[0:36:18] DR: There's a lot of different answers to this question. We see a lot of people who are trying to do mission-driven structures and are trying to also raise capital. This is obviously a tension. I think that the biggest part of the tension is the fact that in the default mode of buying ownership in a company as a startup, in a way, the equity is always overpriced. It's always as expensive as it possibly can be, because that's the default condition of ownership.
What happens is, you've got these equity structures where the financial success, or failure of the company, or how fast the company is able to grow is directly linked to the governance of the company. When we work with founders who are trying to raise capital, but trying not to lose their mission, a lot of the times we really hone in and focus on that aspect. You say, “Okay, let's create some super shares. We'll start there. Then over time, maybe we can move those into a trust and we'll have a plan for doing that, or structure.” That's the most common thing that we work with a lot of early-stage founders on.
The other side of that is the financing and saying, okay. Well, now, how do we make sure that these – you're either going to raise the right amount of money, such that this company doesn't get overwhelmed by financial obligation to repay equity, or you're going to, like you said, achieve escape velocity. For us, what that means is you're going to access one of the layers of the financial system that is functionally public financing. That's either commercial credit market debt, or going public and using the opportunity to go public as an opportunity to set up a more mission-driven structure.
There's this gap that we sometimes talk about, the growth stage gap. It's like, before the gap, you need to figure out hacky solutions. You need to use the tools that are the closest thing to the standard that the market will bear. The goal is don't raise too much money. Retain control. Then over time, as the company grows and is more profitable and is able to sustain itself, you're going to be able to buy those shares back. You're going to be able to take out new liquidity rounds from debt, or sell new rounds of equity that are maybe priced in a more mezzanine fashion, or something like that. These are the tools that we think about, but that's the fundamental challenge is getting over that growth stage gap. Because there's infinite debt.
Debt availability is very cheap and it is at global scale. It's just a matter of getting your company to the point at which you can actually start to recapitalize and restructure the company, either using debt, or using more equity, or whatever the structure you want to use for it.
[0:39:02] JS: What are some of the innovative things that you're seeing in the space to address this?
[0:39:08] DR: Oh. I mean, we're seeing so much, or to start. I think that there's a renaissance happening in non-diluted startup financing that is really exciting. Some examples of that are pipe.com, and use other revenue-based financing tools that are productized on revenue-based finance. A lot of people are using redeemable equity. Raising functional venture equity and saying, “Okay, we're not going to cap the return. We are going to give ourselves the right to buy this equity back at some point.”
I think that there's a question about how the web3, crypto stuff overlaps with all of this. Actually, financing, I guess, not trustless systems, but trustful systems. I think the challenge in this space is really that all of these alternative capital providers and the vast majority of alternative capital providers are focused either on software. Recurring revenue businesses where you can securitize the instrument with the subscription itself, or they're focused on a very particular subset of a very particular industry. There's still not at scale provision of non-diluted financial instruments for people to scale out, unless you're running a software company, basically, in which case, there's tons of capital.
[0:40:24] CC: I mean, what we find in practice is, for a while, we were supporting a lot of entrepreneurs directly in raising capital. What we found was the people who were good and you can't see me, but I have air quotes, “good” from a good business idea of being a multiple time founder, a proven track record, those folks were able to raise capital on terms that we would describe as alternatives. That is what we found time and time again. They were able to both, because they were “good entrepreneurs,” but also because they went in equipped with what's possible. Because I think it's part of the friction in the system in these conversations is that you are proposing something different. That, in some way, goes against how people expect a standard investment to operate. With a deeper understanding of how the dials can be turned to ensure that whatever the outcome is from a mission, or founder perspective is accomplished.
[0:41:24] DR: Yeah. I mean, the funny thing about the startup space, to be honest with you is there are tons of alternative deal structures being done. It's just that no one is talking about them. Partially, because the only people who get the alternative deal structures are those with a lot of leverage to start with.
[0:41:41] JS: But that's how it should start, right? I mean, that's why I'm so excited about Clubhouse to begin with, was because there was so much competition to get into the round. Paul is a repeat entrepreneur, right? He was already doing well. It's like, if anybody can do it, you have to get – that's where it starts, right?
[0:41:58] CC: Yeah.
[0:41:58] DR: Yeah. I think that entrepreneurs often get cold feet, because even serial entrepreneurs, if you're a serial entrepreneur, you might do, I don't know, 10 rounds in 10 years, or something. We have had the gift/curse of doing many more rounds than that. Many more deals. What you start to realize is every round is a back and forth. Every contract is a negotiation. As much as everybody says, there's a standard, it's like, anyone with any reasonable amount of leverage and experience negotiates away from the standard in their best interest in one way or another.
At some point, we'll release it. We have this alternative version of the National Venture Capital Association term sheet written from the perspective of good governance and founder control that –
[0:42:41] JS: I want to see that.
[0:42:42] DR: Yeah. We can share it with you. It's like, there is not as much standardization as people want there to see, I guess, especially on the capital side.
[0:42:52] JS: I want to talk about the fellowship. You have a Purpose Futures fellowship, as the fellowship of fund managers that you launched. Tell us about what led you to do it and what you're seeing within the cohorts. About 10-ish people?
[0:43:07] CC: 25 people.
[0:43:07] DR: Yeah. You want to take the first part –
[0:43:08] JS: Oh, 25.
[0:43:09] DR: - Camille, and I'll take second?
[0:43:11] CC: Yeah. In the spring, a handful of folks in our network who hadn't raised funds and managed capital before reached out to us and said, “I'm done doing conventional capital. I want to do something different. I want to integrate these principles of stewardship and shared ownership, both into the structure of the fund and how I'm approaching deals. Can you help us?” We didn't really have the capacity to help them. There are about four of them. We thought, “Cool. Let's label it a fellowship. We’ll raise some non-profit fundraising and be able to support these people in aggregate.”
In the course of that process, we wanted to see who else was out there. It surprised us that four different very qualified groups of people were reaching out to us. We did what I would say is a small application outreach, just the people in our network, and received over 30 really incredible applications from people around the country who are exploring this.
[0:44:06] JS: That's amazing.
[0:44:08] CC: It’s amazing, this question of shared ownership. I mean, it was amazing to us as people who spend all their time thinking about shared ownership. There are all of these people out there doing this incredible work. What had really initially started with the intention of focusing on funds that were interested in stable assets, so mature businesses, housing, commercial real estate, expanded as a consequence of the diversity of folks who reached out to us.
Now the cohort is 11 different funds. 25 fund managers. They're all across the country. They're all approaching a common set of questions in different ways. That looks like, there's a diversity of approaches in terms of how they're looking at stakeholder inclusion economically and stakeholder governance. In some of the projects that we're working on, it's really just a cooperative of people who are trying to figure out how to do shared ownership. Others, the focus is on supporting conversions into employee ownership trust, which is another form of a purpose trust.
We're seeing these questions of “Who are the stakeholders? Who gets to participate? What is value? How does that value flow is being interpreted in a bunch of different ways?” The other key spectrum that we picked projects across is this question of, are they building replicable models? Or are they taking place-based approaches? We have a handful of projects that are primarily focused on real estate in one specific place. As an example, The Guild in Atlanta, started out as a project in our very first fellowship on one piece of land that has now expanded into an Atlanta-wide fund focused on purchasing assets and transitioning the ownership of those assets into the hands of community and primarily black, historically black neighborhoods.
On the flip side, we have a model that is looking at housing and evergreen housing structure, that would kick back 10% of the value generated in the fund into a vesting structure for renters, that by default of renting, you participate in 10% of the overall value of the fund. On the one hand, the replicable model there being, that can be done in any city across the country and others, we have really these deep community-based approaches. Reflective of that, I think the last question that we wanted to explore in the fellowship is “What kind of capital are they moving?”
Our overarching goal in launching the fellowship and supporting the funds is after doing this work for a couple of years, we realized time and time again, the issue is capital. Our inboxes consistently are filled with entrepreneurs and business owners and communities who want to do alternative ownership. The sticking point in the system is always, where are we going to get the capital from? Who's interested in this? We see approaching this question from the fund structure as an opportunity to mobilize much more capital at scale more quickly.
As we reviewed the applications in the fellowship, we realized, oh, people are trying to mobilize different forms of capital across the market. There's an argument to be made for the role that for example, philanthropic concessionary capital can play in a project, versus, I don't want to say more ambitious, because I think all of the fellowship projects are unbelievably ambitious, but ambitious from a scale perspective, projects that are looking to tap into pension funds and move into the billions of dollars over the next couple of years. They're amazing.
[0:47:48] DR: Yeah. That was very well said. I can add some detail to what types of things we're seeing. I think, connected to your last question, Jenny, is our decision to make this fellowship about mature assets and mature asset classes. Largely, because you face, basically, none of the same problems that you do with startups. If you're buying a business, there is an asset that is generating cash. That cash can go to pay off a loan, or a bond, or an equity holder and what is not fundamentally risky, starting from zero situation.
All we're doing in that case is just changing the recipient of the eventual – of that buyout from whatever, a manager who was going to do a management buyout, or another private equity fund. Just changing it to one of these, for example, employee ownership, trust structures. We have a focus on employee ownership, a focus on – buying out midsize companies to employee ownership, employees to merchant structures, co-ownership and real estate, as Camille was talking about and gave one model of. Different verticals, childcare, creative space, residential, etc.
Community solar, so working to basically bridge the gap between large scale solar financing, which is a pretty reasonable asset to want to invest in, unless you are ready to write a $100,000, or a $1,000,00 check, you're not even going to get into the small project financing opportunities. We're seeing more and more interest inassets. Those three, the employee ownership, real estate and solar assets are the focus we’re seeing.
[0:49:20] JS: That's super interesting. I mean, it's just really well, one, congratulations. This is so exciting. I'm really, really interested to see how this evolves. I imagine it scaling out, but I also just love this idea of these experiments across different specific use cases and verticals that can potentially then scale up there, and then potentially spill over into the similarly structured circumstances. That's amazing. Congrats. I'm really excited to see how this one evolves.
I just had one more question for you. I'm sure this is on a lot of people's minds. Where do DAOs fit in? Where does blockchain fit in? You mentioned this a little bit, but are you seeing a desire to try to integrate, or apply some of these principles to DAOs?
[0:50:06] DR: Yeah. Complicated question. I think that there are a lot of ways in which they overlap. Potentially, I think that in practice, we have gotten dangerously close to closing a couple of deals that would be really interesting examples of the overlap. In a really funny turn of events, the crypto investors that we've worked with are some of the most conservative in terms of structure. It's not what I would have expected, to be honest with you, but that is the reality of what we've seen and we've worked with some relatively well-known folks in the space.
Ultimately, I think that the questions of the community of people that are doing DAOs are asking, are really interesting questions. I would say that my personal critique is that a lot of them actually just take the shareholder capitalist angle, and then apply it to a completely decentralized group. Essentially, taking a company public from day zero, but then you also give those shareholders the right to vote on specific projects. I think that there are limited cases where that can work really well. I question shareholder democracy as a core, not just as a governing tool, but project management tool.
[0:51:18] JS: That's interesting.
[0:51:19] DR: I have questions about the efficacy of that.
[0:51:21] JS: Yeah. It's almost like a – what you're seeing in the space is almost a dialing up of shareholder primacy in the sense that it's giving more control over day-to-day management to those who have that extraction incentive, and are farther away from the details of the firm and the details – I mean, a lot of the issue with shareholder capitalism, too, is that the shareholders are so distant and they don't have proximity to the real-life implications of some of these decisions on the workers, etc. Other stakeholders.
[0:51:53] CC: Yeah. I think where there's possibility, though, is a couple of the funds and the fellowship are looking at how do we do more fractionalized ownership for folks who are unaccredited investors. Just a quick side note on the American legal system is really designed for wealthy people. It's very difficult to receive ownership if you're not an accredited investor, both from a securities perspective and from a taxation perspective. One of the projects in the fellowship in particular, we keep looking at it and asking the question of like, should this be a DAO? Is there a way for us to do fractionalized ownership and distributed value leveraging new technologies in a way that maybe transcend some of the problems in the existing legal system? Now, we're not doing that yet. But I think that the overlap is very clear between how to –
[0:52:47] DR: We have a lot of ideas about how to do it.
[0:52:50] CC: Yeah. How to more equitably distribute ownership in the economy and the opportunities that DAOs present in that regard.
[0:52:58] JS: Awesome. Yeah.
[0:52:58] DR: I think that, not because you didn't ask. One of the more interesting questions in the web3 space beyond DAOs is actually the creation of new sources of liquidity. Uniswap and these other projects that are actually looking at providing liquidity as a algorithmic service, that is something that I think the overlap is potentially really clear where what we're ultimately aiming for is we just want to be able to have things create value, and that value be transferred and materialized, without it fundamentally decomposing the governance of an institution.
If we can create more accessible liquidity pools that don't require you to have a $100 million dollars of real estate assets, in order to access liquidity for a portion of your fund, we're talking about a game-changing effect there. I mean, I think we’re into more interesting questions that we haven't hit this yet, or we've hit it, but not –
[0:53:52] JS: Direct.
[0:53:52] DR: - finished out the deal doing it. Yeah. These purpose trusts are very flexible entities. It's pretty easy to imagine a purpose trust aiming at a specific Ethereum address, where they'll vote on a specific issue, say, rather than the entire network’s every project has taken. That starts to get really interesting in terms of combining the decentralized, trustless governance type of structure. Making it intentionally where it makes sense, and maybe doing it differently and having multiple types of governance tokens, or multiple venues for governance or processes for governance, that make sense for different aspects of a given project or network.
[0:54:33] CC: Yeah. I think what Derek is in part pointing to is the conflation of network and democracy, right? A lot of the work that we've been doing around these structures is how do we create meaningful nodes of where power is negotiated between stakeholders, which at that level of nuance, I don't think is something that we've seen experimented with quite yet in the web3 space.
[0:54:54] JS: Question for you. I just love to hear just a little bit more about what you're seeing from your vantage point in terms of how the interest in this is evolving. I know you're getting a lot of interest from the psychedelic community. What else are you seeing? I know that space is shifting pretty quickly.
[0:55:11] DR: Yeah. I think, maybe the main observation is my feeling right now is that the cat is out of the bag on this whole idea and that it is evolving. The mutation rate on the idea is no longer in our hands.
[0:55:27] CC: I really felt this, the psychedelic conference that Jenny and I were both at, where half of the presentations, it felt like from founders, or investors referenced steward ownership, which I have to say, is a pretty weird experience, given how long we've walked around, beating the drum around it.
[0:55:43] JS: You picked a great brand. You picked a great brand.
[0:55:46] CC: Yeah. Doing into language – someone asked me afterwards, are all those things steward owned. I was like, I don't know, really. We definitely don't want to get into the realm of certification and naming who's right and who's wrong in their interpretation of these things. That’s antithetical to the approach that we've taken. It's great to have. It seemed a bit more meme-ish than it has been previously.
[0:56:10] JS: Exciting times. I'm really, really, really excited to watch your work evolve over the next several years. We're all cheering you on and here to support you in any way that we can, and certainly, continue to talk about and propagate the ideas. Thank you, guys, so much for your time. Even more so, thank you so much for the work that you're doing in the world. It's incredible, and I'm really proud of you.
[0:56:33] CC: Thank you, Jenny.
[0:56:33] DR: Thank you.
[0:56:34] CC: Thank you for having us.
[0:56:35] DR: Yeah. Appreciate it.
[END OF INTERVIEW]
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