‘Starting & Scaling Social Enterprises: A Crash Course’

Presented by:Zoe Hunton, Legal Counsel for Nonprofits, Foundations & Social Enterprises, Hunton Law, Palo AltoNeetal Parekh, Social innovation lawyer, entrepreneur, cofounder of Thinktomi, and blogger at Innov8SocialNatalia Thurston, Director of Legal Services, Social Venture Law, Oakland

May 27, 2015 at Stanford Law School

Social Enterprise: The New Sector

Definitions of Social Enterprise No legal definition of social enterprise

No uniformly recognized nonlegal definition

“Social enterprises are businesses whose primary purpose is the common good. They use the methods and disciplines of business and the power of the marketplace to advance their social, environmental and human justice agendas.” (Social Enterprise Alliance, https://www.se-alliance.org)

A social entrepreneur is “Society’s change agent: a pioneer of innovations that benefit humanity.’’ (Skoll Foundation, http://www.skollfoundation.org)

Social enterprises can be business/commercial activities housed within a for-profit taxable entity or a nonprofit tax-exempt entity

The Legal Entity Continuum

Source: http://entrepreneurstoolkit.org

Social Enterprise: Present & Future A compelling tool for change An appealing field of practice Encompasses legal issues facing both for-profit, taxable

entities and nonprofit, tax-exempt entities Corporate law, governance, taxation, finance, etc.

Legal structure menu is larger (and more confusing?) Benefit corp, social purpose corp, L3C

Legal infrastructure to support SE is gradually building LawForChange, Mission Investors Exchange

The Nonprofit and Philanthropic Sector Duty of competence; client counseling Foundation capital directed toward for-profit social enterprises

(equity investment, loans, grants) Hybrids Fiscal sponsorship Incubators/accelerators; Fast Forward Legal distinctions for tax-exempt investors among socially

responsible investing, mission-related investments, and program-related investments in social enterprises

The Recent Rise of New Statutes in CA Early 2000’s : CA leaders meet at Aspen institute and discuss the idea of a new structure

2008 : B Lab introduces CA constituency statute. Passes in legislature but Gov. Schwarzenneger doesn’t sign.

2008 : Vermont becomes first state to pass L3C legislation

2010 : 2 group introduce social enterprise bills: benefit corporation & flexible purpose corporation (later renamed to social purpose corp)

2011 : Both bills pass in CA (6th state for benefit corp)

2012 : WA passes social purpose corporation

2013 : DE becomes 19th jurisdiction to pass benefit corporation legislation

2014 : NC becomes 1st state to repeal L3C

2015 : 27 states have passed benefit corporation legislation, 14 are working on it

2015 : 11-1 states have passed L3C

2015 : 4 states have passed a form of the social purpose corporation

New Legal Forms

Benefit corporation Model legislation - key features : 1) material positive impact 2) expands fiduciary duty 3)

public reporting using 3rd party standards

Example: Patagonia; Rimon Law Group, Singularity University

Social purpose corporation How it differs from benefit corporation : identifies a specific/special purpose (narrower in

scope of impact) ; differing reporting requirements

Example: Prometheus Civic Technologies (1st in CA), Neurolearning SPC (WA)

L3C Social benefits of nonprofit + tax benefits & flexibility of LLC. Due diligence for PRI?

Example: Moo Milk (VT)

Funding Social Enterprises Impact investing Crowdfunding for donation Crowdfunding for investment (DPO’s, JOBS Act, Reg A+) Social venture funds Microlending Social impact bonds

How Founders & Companies Can Preserve Mission

Hybrid structures

Tandem strutures

Governance mechanisms and voting rights

For-profit + nonprofit tandems and parent-sub relationships

IP licensing

Business judgment rule

Constituency statutes

Employee stock ownership plans

Cooperatives

Crowdfunding Legislation

The Etsy IPO – A Case Study in Scaling a Social Enterprise Etsy is an online craft bazaar with a mission to “reimagine commerce

in ways that build a more lasting and fulfilling world.” Established in 2005 in Brooklyn, NY as an online marketplace for

artists and craftspeople to sell handmade goods, Etsy has grown to approximately 400 employees with 25 million members including 1 million active sellers and 19.8 million active buyers.

Etsy’s business model relies on its sellers paying 20-cent listing fees and 3.5 percent transaction and payment processing fees on items sold.

Sales on Etsy topped $1 Billion in 2013 and from 2012-15, Etsy has lost approximately $18.4 Million.

Etsy’s Legal Structure and Social Mission Etsy is registered as Delaware “C” corporation and was certified

as a B-Corp by B-Lab in 2012. Etsy’s four-pronged approach to incorporating social benefits in

its mission includes: Community: Core services support micro-businesses that make and sell handmade goods

to promote job growth rate

Employees: All part-time, temporary workers receive at least 43% more than local living wage

Environment: Offer used bikes and maintenance service to encourage biking to work

Governance: Engage with stakeholders (sellers) to solicit feedback on social performance

Under B-Lab’s rules, Etsy has until 2017 to file amended Articles as a benefit corporation or risk losing B-Corp certification.

Etsy IPO Facts On 4/16/15, Etsy debuted on the Nasdaq stock market issuing

16,666,666 million shares at $16 a share and selling more than 13 million shares on its first day of trading--closing at a peak of $31 a share and raising $267 million with a market valuation of $1.8 million.

As of 5/26/15, Etsy’s stock was trading at $17.09 a share with share price falling 42% in the five weeks since its IPO, with nearly half of that -- 18% -- occurring on 5/13/15, the day after the company reported a worse-than-expected quarterly loss.

Analysts suggest Etsy may have rushed through the offering before it was ready to face public scrutiny.

Growing Pains & Unique Issues Raised by the Etsy IPO Mission v. Profit Motive. New social enterprise legal structures

challenge the traditional Dodge v. Ford rule that the singular duty of directors is to maximize financial gain for a corporation’s shareholders. Lack of case law precedent for benefit and social purpose corporations has created what has been described in one NY Times article as “a tricky untested scheme that opens a can of legal worms.”

Transparency and Fraud in the Marketplace: As only the second benefit corporation to go public, Etsy faces additional public scrutiny from stakeholders including investors and stock market analysts. Recent controversies involve sale of counterfeit goods on the site and Etsy’s 2013 decision to relax rules regarding sale of handmade goods only to allow for sale of mass manufactured goods on the site.

Growing Pains & Unique Issues Raised by the Etsy IPO (continued) Shareholder Lawsuits: On 5/22/15, a national securities law firm filed

a federal class action lawsuit against Etsy alleging the company and executives violated federal securities laws by making false and misleading statements and/or failing to disclose that over 5% of merchandise for sale on the site was counterfeit or constituted trademark and/or copyright infringement.

Social Mission Preservation: Amazon.com recently announced the launch of “Handmade”—an online marketplace offering handmade goods as a challenge to Etsy’s marketplace with over 278 million active users. Will Etsy be able to preserve its social mission while remaining competitive in the public marketplace?