Insights From Innovators: The Staffing Cooperative

Insights From Innovators: The Staffing Cooperative

All sectors and industries need workers to function. However, too often staff can find themselves being exploited by upper management and undervalued for the work they provide. The Staffing Cooperative exists to build staffing companies where workers are in control. The Staffing Cooperative is a holding company for staffing companies. Those subsidiaries are investable Delaware corporations, but they’re all majority owned by the cooperative, which is worker-owned. This allows the workers to control the businesses and set priorities. The Staffing Cooperative believes that the equity a worker puts into the company should be valued across the whole and that workers should have the ability to determine who is in a management role. 

Cutting Edge attorney, Sarah Kaplan describes her client as, “giving people access to owning a business, access to owning their own jobs. They are turning the power structure of labor upside-down.” Working with an innovative client like The Staffing Cooperative allowed Kaplan to be creative and design a slideshow of bylaws instead of using a dense legal document. She was inspired by Janelle Orsi’s work at the Sustainable Economies Law Center (SELC). 

The Staffing Cooperative is pioneering a new structure in cooperatives. Since their inception about four years ago, they’ve created a parent holding company, The Staffing Cooperative, that oversees subsidiary companies. Currently, there are two subsidiaries. The first, CORE Staffing in Baltimore, was created in 2016. It is made up of worker-owners who have previously been incarcerated and now staff jobs in a variety of industries including construction, demolition, carpentry, food service operation, and more. Workers have the opportunity to work part-time or hourly full-time jobs. CORE allows workers to grow communally and socially as they reintegrate into society. 

Tribe is The Staffing Cooperative’s newest subsidiary of tech workers. These workers are located all over the country and are typically staffed into tech agencies as web designers, creatives, and developers. Tribe also developed the staffing platform that is used by The Staffing Cooperative, CORE, and will continue to be used by all future worker-owners. 

When asked about The Staffing Cooperative’s long-term plans, their team hopes to continue acquiring and creating new subsidiaries with workers in different industries. This would allow for a conglomerate of industry knowledge that can be used to benefit workers and the overall health of the cooperative. In addition, the goal isn’t just to acquire for growth, but to support workers long-term and provide ways for them to move between industries. Typical worker-cooperatives are not looking at scale in the same way. The Staffing Cooperative is creating a new way of thinking about cooperative potential. By being a holding company on a large scale, there’s potential for higher wages and rates, more benefits, and better insurance policies. 

We asked The Staffing Cooperative for three pieces of advice for others interested in worker-ownership models. They said: 

  • Don’t think of it as structure first, think of the worker first. 

 

  • Don’t let a company’s structure get in the way. 

 

  • Prioritize relationships. For them, it took sitting together as an entire team and hashing out what exactly membership would look like. 

 

Kaplan expressed how much she loves working with her client and that she’s “proud of them for taking the lead and creating a well-optimized structure that is designed to be accessible for investors, but the cooperative maintains control.” 

If you’re interested in getting involved or learning more about The Staffing Cooperative, you can contact them at coordinators@staffing.coop or on Twitter at @staffing_coop. They also accept donations! They’re hoping to continue growing the worker-owner training program and even have plans to launch a school through their fiscally sponsored non-profit program. To donate, email info@staffing.coop

Are you interested in learning more about structuring a cooperative? Do you want to talk to an attorney about how cooperatives can take in outside investment? Contact Sarah@cuttingedgecounsel.com

Is the IRS About to Make a Huge Mistake That Only Supports the Wealthy?

Is the IRS About to Make a Huge Mistake That Only Supports the Wealthy?

The IRS may be making a huge mistake that only supports the wealthy. (But you can help fix it.)

At Cutting Edge Counsel we stand for fairness and equity. A big part of what drives us is the need to level the playing field between the wealthy and the non-wealthy. We envision an America where everyone can invest, with the same benefits available to all investors regardless of economic status.

So we were very disappointed in a recent IRS release that will lead to the opposite result. We’re talking about some of the tax benefits of investing in a Qualified Opportunity Fund — a new type of fund that is intended to incentivize investment in low-income communities designated as Opportunity Zones, which we wrote about here.

The new tax rules are contained in Subchapter Z of the Tax Cuts and Jobs Act of 2017. Section 1400Z-2 of that new law provides for three tax benefits of investing in a Qualified Opportunity Fund (a QOF): Clause (a) provides for a deferral of tax on rolled-over capital gains until the end of 2026. Clause (b) provides for a 10% or 15% step up in basis for rolled-over capital gains held in a QOF for at least five or seven years by the end of 2026. Clause (c) provides that “any investment” held in a QOF for at least ten years will get a step up in basis to market value upon a sale of the investment. This last benefit is the most valuable of them all.

While the plain language of Section 1400Z-2 says that literally any investment in a QOF, which would include an investment of after-tax capital, can get this last benefit (tax-free capital gains after ten years), the IRS stated in an October 2018 release that this benefit is available only to rolled-over capital gains. The IRS offered no analysis or reasoning behind its statement, which suggests the IRS may have simply mis-read the statute.

This is more than just a technical detail. This is a fundamental reinterpretation of the law in a way that excludes the roughly 95 percent (i.e. non-accredited investors) who may not have capital gains to roll over. As passed by Congress, the law allows for the creation of a true community investment fund that invests in real estate projects in Opportunity Zones. Taking in investment from residents of the very low-income communities that the fund is designed to serve would help to ensure not only that the profits from those projects circulate within the community, but it would also give those residents a voice in the kind of development that happens in their communities. The benefit of tax-free capital gains after ten years in the fund can be a critical factor in attracting these investors.

But this reinterpretation by the IRS changes everything. Bear in mind that, typically, it’s only the wealthiest Americans who have capital gains that can be rolled over into a QOF. From the point of view of a QOF manager, if only the wealthiest investors can enjoy any of the tax benefits of an investment in the QOF, there is no incentive at all to open up the QOF to the less-wealthy residents of those Opportunity Zones.

Hence, under the IRS’ reinterpretation of the law, QOFs will likely be only open to wealthy (accredited) investors; and those wealthy investors will then effectively determine the kinds of development that happens in low-income communities, with no opportunity for the residents of those communities to have a voice or to participate in any way. The outcomes will be very predictable. Overwhelmingly, these wealth-driven funds will invest in so-called “market rate” housing – a euphemism for unaffordable luxury housing that is not intended to serve the residents of those communities but is intended to displace them.

It does not have to be this way; it should not be this way; and the law does not say this! Our firm has written this letter  IRS-Letter-Re-Opportunity-Fund-Tax-Benefit.pdf to the IRS pointing out the apparent error, and we have asked the IRS to clarify that the benefit of tax-free capital gains after ten years in a QOF is available for any investment in the QOF, including investments of any kind of after-tax capital, whether or not an investor is sheltering or eliminating their capital gains taxes. 

But meanwhile, we are making an ask of our community — individuals and organizations. It would be easy for the IRS to ignore one letter from a small law firm based in Oakland that only serves mission-aligned businesses. It would be much more difficult for them to ignore howls of protest from around the country. If you care about leveling the playing field (and if you’ve read this far, you likely do), we strongly encourage you to write to the IRS (addressed to CC:PA:LPD:PR (REG-115420-18), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044), or to your Congressperson, to bring this to their attention. While the official comment period for the proposed regulations has closed, we think this is too important to ignore.

And there is urgency to this, because the IRS may be finalizing their QOF regulations at this very moment. Once they have issued final regulations, it will be much harder to get them to back away from their blunder. So the time to act is now. Together, we can make a difference.

 

 

Insights From Innovators: Mission Driven Finance

Insights From Innovators: Mission Driven Finance

We spoke to Lauren Grattan and David Lynn at Mission Driven Finance to talk about their mission, and how their community-first perspective guides them to find investment opportunities.

What does Mission Driven Finance do and what are its guiding principles? 

Mission Driven Finance is an impact investment firm dedicated to building a financial system that ensures good businesses have sufficient, affordable access to capital.  Built from the ground up with a single purpose—to make it easy to invest in your community—all our funds and structured products are designed to close financial gaps that will close opportunity gaps.  We work with local and national investors to help them create the impact they want, and work with businesses and community partners to help them get the capital they need.

We have three guiding principles:

  • Community Connected Capital – We use a network mindset to source, underwrite, and support investments. This helps us build solutions for and with the community.
  • Employers as Change Agents – Impact isn’t just for nonprofits. We believe small businesses are critical components of thriving communities, and help them to intentionally use their operating expenses to create positive change.
  • Strength in Diversity – We’re stronger together, as a team and as a society. Diversity is not an afterthought for us but rather core to our ability to source deal flow and underwrite effectively. With a variety of lived and worked experiences, the team is collectively able to recognize untapped market opportunities and partner sensitively with traditionally underserved communities, supporting our vision of an inclusive economy that is strong and resilient.

What inspired your work and mission?

Communities need good businesses, and good businesses need capital. But the financial systems, structures, and policies in America have both intentionally and unintentionally restricted access to capital and opportunity. The result is significant wealth inequality that hinders social mobility, dampens economic growth, and fosters conditions for political instability–Mission Driven Finance can change that.

We saw bold visions, innovative enterprises, and great community programs seeking capital on the one hand, and a growing pool of impact-intrigued investors on the other, but little to connect them. So we built a team with deep impact and finance skills, and intentional diversity of thought and experience to bridge the divide between community projects and investors.

While there are increasing responsible options in public markets, these have limited intentionality and typically mean moving money out of your regional economy. Investors are hungry to support initiatives in their own backyard or issues they’re passionate about, but have few opportunities to do so.  Mission Driven Finance exists for this reason: to make investing in your community a great investment.

How does MDF decide on its investment strategies?

We start always from a community-first perspective, with the goal of mobilizing capital into overlooked and underestimated areas, whether geographic or thematic.  We identified five key hurdles to unlock transformative capital for communities: size, credit, complexity, timing, and alignment.

Our structure allows us to pursue smaller and more nuanced community-based transactions that would otherwise be cost-prohibitive and suffer from inertia. We can service many types of transactions while leveraging a core set of elements and operations, allowing us to close gaps in a cost-effective manner.

Our investment strategy centers around mobilizing capital in ways that meet all of the following criteria:

  • Is there a capital gap that is preventing scale?
  • If we close this gap, will it increase impact?
  • Are we particularly well-positioned to close this gap?
  • Does closing this gap create a more inclusive economy?
  • Is this gap indicative of a common problem that we can close?

Our first fund, Advance, is an evergreen commercial debt fund to close a gap for community-driven small businesses and nonprofits in the greater San Diego area that are too big for microfinance, yet can’t qualify for (sufficient) bank financing or venture capital. This gap of $100k to $500k plagues retail, childcare centers, and small real estate developers alike, stymying impactful organizations.

Following our community-connected capital approach, we work with a variety of partners to source and support potential investments, including other lenders and investors, business improvement groups, nonprofits and foundations, and accelerator and incubator programs. We regularly seek borrowers that meet our 3 T’s:

  • Tenacious – Driven leadership with a history of execution and commitment to their community
  • Tweens – Don’t fit SBA/microloan/bank/VC criteria and stuck without affordable access to capital
  • Tipping Point – Where our investment will unlock potential and attract additional resources

How does MDF evaluate potential investments?

Mission Driven Finance employs a private equity approach for evaluating financing opportunities using a deep community engagement model to find, evaluate, and de-risk investments.  Our approach allows us to focus on the potential to achieve a plan as opposed to a specific credit quality or company history. In this way, we can mobilize capital to people and projects that might otherwise be unable to access financing.

The core of the Mission Driven Finance investment process is identical regardless which investment vehicle–an Asset Pool in the Fund or other vehicles outside the Fund–holds the investment or deploys the capital.  In all cases we evaluate the investment on its own merits, ensure alignment with investors, and then leverage the most efficient investment structure.

Our scoring rubric includes three concurrent and interconnected underwriting modules – management, impact, and finance – and is intended to determine comfort with the:

People – The management is high quality, coachable, and well validated by their community.

Plan – There is a clear strategy and vision to grow both revenue and impact.

Purpose – They have an underlying mission that is core to their ethos and pervasive.

Potential – There is a history of achievement, commitment, and a viable path to success.

All of our processes are designed to be inclusive, intentional, and looking for ways to say “yes.”  We follow a 5-stage process to underwrite potential investments:

  1. Assess

Initial screening based on alignment with management, impact, and financial criteria.

  1. Assist 

The beginning of a formal engagement, including technical assistance around financial and impact frameworks, management evaluation, and transaction structuring.

  1. Approve 

The formal approval and closing process, including legal agreements.

  1. Active 

In addition to servicing, we provide ongoing support and monitoring of the investment to maintain status as a trusted partner, be aware of any developing issues, and find opportunities to help them grow their business, along with collecting regular impact data, financial updates, and stories. 

    5. Alumni

Even after a borrower successfully exits the portfolio, we continue to look for opportunities to help them grow or integrate with other parts of our portfolio, and also collect long-term impact stories.

Who can invest in MDF’s investment funds?

Accredited private, institutional, or charitable investors can participate, all via promissory notes.  Private and institutional investors can invest directly or through accounts such as IRAs. Charitable investors can invest from foundations either as a Mission Related Investment in their corpus or as a Program Related Investment from their grant allocation.  Another avenue for charitable investors is to invest through their Donor Advised Fund with a community foundation. We have good local partnerships with both the San Diego Foundation and the Jewish Community Foundation of San Diego.

How have you seen societal concepts about investing change in the last few years? 

We certainly see an increased focused on responsible and impact oriented investments as evidenced by the rapid growth shown in data like US SIF publishes.  However, this has also given rise to a large amount of impact-washing. Additionally, as much as people talk about shifting their investments to align with their mission or emotions, they still often end up taking a financial-first approach and mission falls to the wayside – even within mission-based organizations.  The biggest shift we see is while there is still a huge need for education, most investment committees and advisors have at least heard of “impact investing” and “responsible investing”, even if they aren’t doing anything about it (yet).

We see more and more non-accredited investors wanting to invest with their values but still being unable to do so.  We’re hoping to be able to reach non-accredited investors in the next year or two.

What advice would you give to companies who want to raise capital from impact investors?

Make sure your mission is completely core to your ethos and what you do, and can’t be removed from your business.  For instance, we don’t get excited about buy-one-give-one or companies that pledge to donate some portion of their profits to some cause.  We are looking for businesses where there is no possibility that the business can scale without the impact also scaling. It follows from all of that, you should also be thinking about how to measure your impact if you haven’t already! In addition, we look for management that clearly is a part of their community, and who would consider any loss of impact a failure even if the business is succeeding.

What advice would you give to investors who are considering impact investing?

Beware of impact washing.  Do your homework–not all funds, managers, and businesses are created equal.  Be clear about your goals and where you are on both the financial and impact spectrums. Don’t seek impact investments to both outperform the impact of your philanthropy and at the same time outperform your financial benchmarks.

And most importantly, you can’t close racial wealth gaps and earn 30%.

How do you hope to see Mission Driven Finance grow in the next few years? 

Over the last three years, we built a core operational team, launched a creative community debt fund, and leveraged that infrastructure for multiple structured products in a previously unmet market range. 

Now, we are ready to take this to scale in communities across the US. Our goal is to expand our toolkit to meet the full range of community capital needs and investor appetites. We already wield debt creatively in service of community and intend to complement that with capital options, expertise, and legal reference structures in Opportunity Zone business investing; venture and mezzanine investments; revenue-based financing; and real estate acquisition, pre-development, and construction financing.

Our near-term plan is to build on the foundation of our central team and add specialized capacity to efficiently bring creative capital solutions to more communities. We will be instituting a dedicated portfolio management function focused on the deployment of capital, and creating an advisory services team focused on building impact funds and transaction structures. Additionally, we want to capture and share stories and best practices, both to serve our investors and to build the impact investment field.

Our immediate expansion areas include:

  • Launch a Community Finance Fellowship to simultaneously develop leadership in and deploy capital to more overlooked and underestimated communities
  • Replicate our San Diego debt fund to other regions, particularly in Baton Rouge, LA and Columbus, OH
  • Begin providing fund management services to more community partners around the country that need support to grow their own investment structures
  • Add specific thematic funds to the platform without narrow geographic constraints to complement the place-based broader impact funds, such as cleantech and natural climate solutions

 How can people get involved and support your mission? 

It’s all about dollars and deals – and all through community partners.  If you are connected to sources of capital, help them understand the power of impact investing into their own community, and how an intermediary like us can facilitate that effort.  If you are connected to community-based organizations or individual companies that need capital to grow, help them understand how impact-based financing might be a good fit.  And if we can add value to either of those, then call us.  

The most powerful allies for us are those impact-oriented investors that will take a catalytic approach to mobilizing capital into the community or area they care most about, working with us to leverage their investment 5-20X, and at the same time leveraging their network to drive more deal flow.

https://www.missiondrivenfinance.com/join-us/

 

Webinar: How To Use Opportunity Zones For Good

Webinar: How To Use Opportunity Zones For Good

The concept of opportunity zones as a innovative and exciting way to bring investment into the poorest parts of US cities has caused heads to turn all over the country. Unfortunately, its gaining too much attention from the wealthiest investors. In August 2019, the NY Times explains how a Trump tax break is making his allies richer while local communities continue to struggle to create businesses. Listen to our June 2019 webinar featuring, Kim Arnone and Brian Beckon as they explain in-depth how to make sure Opportunity Zones are home to community- centered funds, businesses, and investors.

A Tax Trap for Cannabis Businesses, and How Not To Get Snared

A Tax Trap for Cannabis Businesses, and How Not To Get Snared

For a cannabis business, section 280E of the Internal Revenue Code sucks. But here’s how to make it suck less.

Normally, businesses deduct the “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business[.]”  But section 280E of the Internal Revenue Code prohibits any deduction of business expenses if the taxpayer’s trade or business consists of trafficking in controlled substances.

Unfortunately, selling cannabis constitutes“trafficking” in a controlled substance, even when it is medical cannabis recommended by a doctor or otherwise legal and licensed under state law.

So, licensed cannabis businesses are expected to file federal tax returns and to pay tax on gross income instead of net income.

Here are the learnings from the important section 280E tax cases involving cannabis businesses:

You can subtract cost of goods sold.

Gross income is gross receipts minus the cost of goods sold.  Section 280E does not prevent cannabis businesses from subtracting the cost of goods sold.

You will want to calculate cost of goods sold correctly.

The tax regulations tell us how different kinds of costs need to be accounted for.  There is a section of the Internal Revenue Code and its accompanying regulations that normally apply to put more kinds of costs into the category of costs of goods sold, but those regulations do not apply to cannabis resellers.  Section 263A talks about including indirect costs in the cost of goods sold. However, a cost that is not otherwise deductible cannot be part of COGS under 263A. That limits the usefulness of section 263A to cannabis businesses. The takeaway is that it is well worth the effort and expense to work with bookkeepers and accountants who know these rules well.

If a licensed cannabis business has more than one trade or business, it can deduct business expenses of the non-cannabis business – but only if they are separate!

The U.S. tax court is willing to let cannabis businesses separate cannabis sales from other types of business transactions and deduct business expenses as usual for the non-cannabis business activities.  This requires an analysis of whether the non-cannabis line of business stands on its own, separate and apart from the cannabis business, or whether a claimed separate business is really just “incident to” the cannabis sales.

In one example, a medical center provided numerous benefits for its patient members, including meals, hygiene supplies, and social activities.  These other benefits were substantial when compared with its medical marijuana sales. All of the facts of the case convinced the court that these other benefits stood on their own as a separate trade or business, and the organization proved the expenses with good record-keeping.  Although the organization charged one membership fee, without separating the cost of medical cannabis from the costs of the other benefits, the tax court allowed the organization to deduct the costs of the non-marijuana activities.  In contrast, in a case where a dispensary sold a few books, t-shirts, and smoking supplies, but made an overwhelming percentage of its revenue from cannabis sales, those sales of non-cannabis products were just “incident to” the business of dispensing medical marijuana.

The determination of whether a non-cannabis line of business is separate or not might have to stand up to IRS or even tax court scrutiny.  The tax court has considered:

  • Is there a separate profit motive to this activity?
  • Is there a separate legal entity?
  • Is the activity carried on by different employees?
  • Is the activity carried on in separate spaces?
  • Are the activities accounted for separately?
  • Are the activities under separate management?
  • Is the non-cannabis activity just there to attract cannabis customers?

The learning is: If there is a separate line of business, keep it separate.  Consider using a separate legal entity, separate management, separate staff, separate space, and account for the activities separately.  An entity that has a cannabis business can deduct business expenses from a non-cannabis line of business if they are separate. The separateness must be documented, and the business expenses must be documented, because there is a likelihood of audit.

The IRS is auditing cannabis businesses, so keep good records.

The IRS is auditing entities that it suspects to be trafficking in cannabis and improperly taking business deductions contrary to section 280E.  One business that got audited stated that its business was “medicine sales.” This did not prevent the audit.

And, of course, if you have a business that will be subject to section 280E, don’t take those business deductions! Instead, focus on cost of goods sold and on keeping any separate lines of business separate.  Make sure costs of goods sold are well documented, for the peace of mind that in the event of an audit, the business will be able to meet its burden of substantiating those costs.  Back up your financial records. (In one case, one computer crash was supposedly responsible for the loss of all financial records for certain years, and the records had to be reconstructed for audit.  This was not a good way of substantiating costs.) Keep receipts.

Don’t use a pass-through entity.

There is a higher likelihood that a cannabis business will be audited, and that in event of an audit, the IRS could find a deficiency.  If the business is taxed as a partnership or an S-corp, the business’s income and loss flow through to the owners, even if no cash is distributed. This means that if the IRS finds a deficiency, the IRS would go after the owners personally for a deficiency in their personal tax payments. This is why the owners of businesses affected by section 280E typically opt for corporate taxation, even though it may result in more tax liability overall.

Don’t use a management company just to separate employee compensation if employees are processing or selling cannabis.

There is a rumor that it’s a good idea to form a separate legal entity to provide “management services” to a cannabis business, and that the management company can avoid section 280E because it is providing management and is not itself in the business of selling cannabis.  The U.S. Tax Court addressed this in December 2018. The plan backfired. The court held that the management company was trafficking in a controlled substance for the purpose of section 280E because the management company’s employees were “directly involved in the provision of medical marijuana to the” members of the related dispensary.  The dispensary could not deduct business expenses, which included the management company fees.  Then the management company also could not deduct business expenses. This meant that the management company structure actually resulted in more tax because both the dispensary and the owners of the management company paid tax on the amount of those non-deductible business expenses.  The learning is that it can make sense to set up a separate entity that can deduct business expenses, but only if that business is not “trafficking in” cannabis, while remembering that having your employees process and sell cannabis is part of “trafficking.”

Of course, the information above should not be taken as tax, legal, or investment advice. If you would like to speak with one of our consultants, contact us here

 

 

 

 

How Any Company Can Have a Positive Impact

How Any Company Can Have a Positive Impact

Over the past couple of decades we’ve heard a lot about “social enterprises,” a term usually applied to companies that are visibly making the world a better place. Those are the good guys, the heroes of our time. We would all like to be one of them, to do something positive for at least our corner of the world.  Yet, not every company is curing cancer, feeding the hungry, or solving some environmental problem. What about the rest of us?

The good news is that regardless of your industry or the product or service you offer, your company can have a positive impact in the world – not just because of what your company is doing, but because of how you do it. But it requires that you challenge some of the conventional wisdom that you may have taken for granted. Here’s how:

  • Re-think your ownership. In the conventional wisdom, a corporation is owned by its shareholders and is solely responsible to its shareholders, with all other considerations being secondary. In fact, whether shareholders can truly be said to “own” a corporation is subject to some legal debate. Individual shareholders do not have the “bundle of rights” that is generally understood to comprise what we call “ownership.”

Some legal scholars argue that a corporation, as a person under the law, cannot be owned by anyone but simply has contractual relationships with shareholders, just as it has contractual relationships with employees, customers, suppliers, lenders, and other constituencies – all of whom in some sense invest in the corporation. In other words, what a stockholder owns is simply stock that confers certain rights, not the corporation itself.

  • Re-think your responsibilities. With an expanded view of a corporation’s owners and investors as including multiple constituencies, it follows that a corporation bears a responsibility to all of those constituencies. A corporation that prioritizes the interests of stockholders at the expense of all others is essentially a predatory corporation: It preys upon its community in order to extract wealth from the community and concentrate that wealth in the hands of its stockholders.

That is not what the law requires. A corporation’s board and management should recognize that the corporation owes a responsibility to all of its constituencies. Since the interests of its various constituencies are not always aligned, it is one of the core duties of a corporation’s board and management to balance all those interests in a way that is fair to all of them and does not unduly burden any of them.

  • Re-think your capital-raising strategy. In the conventional wisdom, a company that isn’t big enough for an IPO must raise capital from banks, angel investors, or venture capital firms. In each case, that involves putting your fate in the hands of a small number of people who already hold wealth and power. And if you succeed, your profits will further bolster their wealth and power.

Instead, you can raise capital from your own community, including the non-wealthy, using “community capital” strategies like crowdfunding, direct public offerings, and community investment funds. Members of your community invest because they want you to succeed, not merely because you offer the highest financial return on their investment. And when you succeed, the profits will continue circulating in your community and will build wealth right where you want it. As a bonus, when the investors of capital are part of the same community as the company’s employees, customers and suppliers, it is easier to balance their interests because at some level they all want the same thing: a peaceful, healthy and thriving local community.

  • Re-think the growth imperative. Our culture’s obsession with growth – at both the micro- and macro-economic levels – is unhealthy and destructive. At the level of the broader economy, it is increasingly clear that an economy cannot continue to grow indefinitely; it will eventually hit limits at which collapse is inevitable. At the level of individual companies, the problem with big companies is that they concentrate wealth, which leads to a concentration of political power that is fundamentally anti-democratic.

We are told that every company should aspire to go big and go global, untethered from community, and opportunistically locating wherever the most profits can be extracted. But if we think of a company as existing to serve its community – including all of the constituencies that make up its community – then it becomes clear that each company should aspire to grow only to the size that will allow it to most effectively serve those constituencies. Growth, then, becomes a means to an end, not the end in itself.

  • Re-think where your money goes. In the conventional wisdom, spending decisions are based on a simple calculus that balances cost against the quality of goods or services. Similarly, investment decisions are based on a balancing of risk and reward. It is often assumed, if rarely articulated, that these decisions are values-neutral.

And yet, none of those decisions are actually values-neutral. Every spending decision, every investment decision, and every choice of a supplier or professional provider is effectively a vote for someone’s set of values. Any company can greatly magnify its positive impact in the world by choosing to do business with others who share a similar commitment to a better world.

It requires that there be an inquiry into the values and social impact of any potential supplier, provider or investment target. That inquiry can become part of a company’s routine decision-making process. For example, before purchasing supplies from a big-box retailer, consider the impact of that retailer on the local economies in which it operates. Before sending legal work to a big law firm, find out whether that firm supports extractive industries at odds with your company’s values such as fossil fuels and weapons manufacturing.

You’ll notice that the changes described here start with changes in our underlying assumptions; and when those changes take root and become widespread, we will have a change in culture. It’s the broader culture that needs to change. But, of course, changes in assumptions and culture are not the end game. Rather, those changes will compel changes in behavior that will lead to a healthier and more equitable world.

When companies across the country recognize their responsibilities to all of their constituencies, when everyone has an opportunity to invest in their own communities, and when the economy is dominated by locally-rooted companies that deploy their resources in a values-conscious way, we will have an economy that is very different from the one we have today, one that is truly sustainable, and with opportunities for everyone to thrive. That is our vision at Cutting Edge Capital.