B Corps are not statutory business forms. In fact, any business form can be a B Corp – this is slightly confusing because the name implies you have to be a corporation. In fact a sole proprietorship, partnership, LLC, LLP, co-operative, or any other type of business can be a B Corp.
The way to become a B Corp is to receive certification from B Lab, a nonprofit organization that created the B Corp designation. You can get this designation by demonstrating, through the use of an assessment tool, your organization’s commitment to multiple stakeholders including your workers, customers, suppliers, community, and the environment. You also must pay a fee to join the B Corp community.
In approximately 30 states, there exists what is known as a constituency statute. These statutes vary but in essence they allow the board of a corporation to consider the interests of constituents other than the shareholders when making decisions. A corporation in a state without a constituency statute must do what is in the best interests of the shareholders and the company. The board has a great deal of latitude (in most cases) to determine what is actually in the best interest of the shareholders and the company, but it is not always clear how far this latitude extends.
B Lab launched an initiative to create a new corporate form called the Benefit Corporation to provide some comfort to businesses that want to be accountable to all stakeholders, not just shareholders. They lobbied state legislatures to adopt this new form and some version of it has now been adopted in sixteen states.
New corporations can form under one of these statutes and existing corporations can convert into them. The basic provisions of a benefit corporation statute include
- Benefit corporations must have a purpose of creating a general public benefit, which is defined as “a material positive impact on society and the environment, taken as a whole, assessed against a third-party standard.”
- Members of the board of directors and officers are required when making decisions to consider the effects of their decisions on shareholders, workers, suppliers, customers, community and society, the local and global environment, and the short and long-term interests of the corporation.
- Benefit corporations must prepare annual reports regarding their pursuit of general public benefit.
Can a B Corp be a Benefit Corporation and Vice Versa?
Yes! A benefit corporation can seek certification as a B Corp. And a company that is a certified B Corp can convert from its current form to a benefit corporation. Conversion requires a two-thirds vote of all current investors. In some states, investors that vote against conversion have dissenter’s rights which means a dissenting shareholder may require the corporation to purchase at fair market value the shares owned by the shareholder. It is possible that B Corps that are currently formed under regular corporate statutes will be required to convert to benefit corporations to be able to maintain their B Corp certification.
VC and angel investments are very difficult to get. You can spend months perfecting your pitch and never find an interested investor. Less than one percent of businesses receive this kind of funding. As our pie chart shows, private investment capital only represents about 4% of the total capital that is available for investment. The rest is in the public markets.
Even if you do get this type of investment, it often involves giving up control of your company. Many say that when you get VC funding, you’re hiring your new boss. And founders are not infrequently fired by VCs.
When the deal between you and the investor is hammered out, guess who holds all the cards? You will probably be asked to live with some terms that you are not happy with, including a lower valuation than you might feel is fair.
Also, VCs and most angels expect a fairly high return on their investment in a short amount of time. Most of the businesses they invest in don’t make it, so the ones that do have to cover the losses for the others plus make a reasonable return for the wealthy folks that give their money to VCs to invest. You will almost certainly be pressured to put fast growth above all other concerns. The investor will also expect an exit event which usually means you will have to sell your company.
When you raise capital through community investment, from a large number of small “retail” (non-wealthy) investors, you call the shots. You decide on the kind of investment you want, the offering price, and how your investors will ultimately exit. Your investors will not have any control over the business unless you want them to.
Greg Steltenpohl, the founder of Odwalla, spoke to a rapt audience at the recent Social Venture Network spring conference in San Diego. Here are some excerpts from his talk:
The riskiest thing I ever did was bring an investment banker in to invest in the company. Us entrepreneurs don’t think nearly enough about the decision of who you get in bed with with the money. You put some real thought into who you partner with but when it comes time to go get the money you just want the money and you’re so happy that someone believes in you that you take the money. It’s crazy. There is way not enough attention paid to thoroughly thinking through and vetting and doing your homework on who is the money. As soon as the money comes in, the destiny is changed. You gotta make sure that that is what you want.
Mr. Steltenpohl speaks from experience. Because of pressures from investors, Odwalla was sold to Coca Cola.
Giving up control and/or going public are not requirements for raising capital. Many large and successful companies have avoided those routes.
Clif Bar is one example. The founder, Gary Erickson, chose not to sell the company, giving up $60 million to stay in control.
When asked why the company hasn’t gone public, Erickson said, “We have exponentially more freedom.”
Marjorie Kelly has a chapter in her new book, Owning Our Future called Stakeholder Finance: Capital as Friend.
Talk to CEC today about how we can help you preserve your freedom by raising capital from stakeholders that will be your friend!
In California it is possible to do a private securities offering without a great deal of regulatory compliance work. This offering under Section 25102(f) of the California Securities Code is sometimes called a “friends and family” offering.
Using this exemption from the general requirement that securities offerings must be registered, you can sell securities to an unlimited number of accredited investors (as well as company executives) and up to 35 unaccredited investors, as long as the unaccredited investors meet one of the following requirements:
- Have a preexisting personal or business relationship with the company or its principals; or
- Have the ability to protect their interests due to their financial experience or the fact that they have experienced professional advisors.
“Preexisting Personal or Business Relationship”
The term “preexisting personal or business relationship” includes any relationship consisting of personal or business contacts of a nature and duration such as would enable a reasonably prudent purchaser to be aware of the character, business acumen, and general business and financial circumstances of the person with whom such relationship exists.
Unfortunately, there is not much guidance on what qualifies as a sufficient preexisting personal or business relationship or sufficient financial experience to meet the requirements of this exemption. One interpretations of these requirements by a California court stated that
[t]he relationship described in the rule contemplates more than mere acquaintance. If the qualification requirement is to serve the purpose of the corporate securities law, which is to protect unsophisticated investors [citation omitted], the relationship must be one of sufficient duration and nature that the offeror of a security has reason to believe the investor is able to assess the issuer’s honesty and competence. . . Whether a prior relationship warranting reliance on the seller of an unregistered security exists is an objective test and looks to what a reasonably prudent investor would be aware of about the offeror from the prior personal or business relationship. This test is intended to protect investors by placing on the offeror the burden of establishing that the nature and duration of the relationship is one that would enable a reasonably prudent investor to assess the general business and financial circumstances of the issuer.
Another court stated that “it is unquestionable that occasional meetings between the offeror and offerees without demonstrating the true nature of the relationship between them, do not satisfy the regulatory condition for private exemption.”
Again, this requirement is not well-defined. One court stated that the financial experience of the offeree should be measured:
from the issuer’s rather than the offeree’s point of view . . . [because] that approach . . . is more consistent with the statutory purpose of protecting the gullible investor [citations omitted] because it places on the issuer the burden of establishing his offerees’ abilities to “fend for themselves” as a condition for exemption from the regulatory provisions that would otherwise apply.
Courts have implied that qualifications such as prior investment experience in similar ventures, serving as a board director, operating a corporate enterprise, or a degree in business administration could be sufficient to satisfy the “financial experience” test.
- All purchasers must state in writing that they are purchasing for their own account and not for resale.
- The offering of the security may not be advertised to the public.
- A simple form must be filed online with the Department of Corporations.
Even if you comply with the requirements of 25102(f), you also have to make sure you are complying with federal securities law as well. If most of your business is done in California, all of your investors live in California, and you are formed under California law, you should be eligible for the federal intrastate exemption from federal registration requirements, which means that there is no need to do a federal filing. Otherwise, it will be necessary to work with a securities law expert to determine how to complete the required federal securities compliance.
Mill Valley Beerworks, a successful brew pub in Mill Valley, relied on the §25102(f) exemption to raise almost $200,000 in capital needed to open the business. The owners used a creative pitch to people they knew in their community: Sponsor one bottle of beer for $5,000 and receive a note paying 10 percent interest. In addition, for each beer bottle sponsored, the company donated $250 to a charity chosen by the investor.