Transcript Document

ESRC Seminar
“Social Enterprise Legal
Forms and Financing”
Kim Alter
March 25, 2008
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SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP
“Social entrepreneurs need to focus on their objectives,
and then how to achieve those objectives given the law.”
– David Roll, Founder of Lex Mundi, Pro Bono Legal Council for
Social Entrepreneurs
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SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP
What is a legal structure?
• Legal structure does not define an
organization
• Agreements among stakeholders on:
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Governance
Ownership
Exit
Purpose
Claim on benefit
• Plus agreements with the state
• Regulatory mixer
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SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP
Limitations of Absolutes
• For-profit companies are incompatible with a social
mission.
• If you want to do good, you have to create a notfor-profit organization.
• If you want to create an enterprise with a social
mission, you cannot do this in a for-profit
company.
• If you want to capitalize with grants you must be
a not-for-profit.
• If you want to attract investors you must be a forprofit.
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SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP
Key Drivers of SE Legal
•Form
Nature of business activities
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Use or destination of earned income
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Mission activities, owners, business growth, etc.
Source of income
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Public, donors, insurance, government, investors, etc.
Stakeholders
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Social entrepreneur, clients, employees, investors,
suppliers, public, etc.
Amount of income earned through SE
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Related or unrelated to organization's mission
Purpose and objectives
Limits placed on either monetary amount or
percentage of budget
SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP
Critical Levers
• Ownership
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Risk
Liability
Claim on benefits
Power to dissolve
• Governance
• Control systems
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SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP
Why worry about ownership?
• Most social, economic and environmental
inequities are the result of gaps in
ownership:
• Haves and Have Nots
• Without balanced distribution of ownership
• Inequities occur: poverty and environmental
degradation
• Social mission integrity
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Ownership Structures
Company
Fannie Mae
Grupo Nueva
John Lewis
New York
Times
Vision
Promote Home
Ownership
Sustainable Latin
America
Exemplar of
employee ownership
Ownership
Control
2006
Revenue
Customers
Government
chartered
$48 bil. (04)
Multiple
stakeholders
Trust Owned
$1.4 bil
Employees
Employee Owned
1 bil
Cultural Institution
Organic Valley Protect family farms
rural communities
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Intended
Beneficiaries
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$3.3 bil.
Society
Family controlled
Farmers
Producer
Cooperative
$330 mil.
© 2007 Marjorie Kelly & John Stutz
Capital
• How to get capital
• Not pay too much
• Not influence mission
• Pura Vida
• Nonprofit owned forprofit (llc)
• Overleveraged on debt
• Converted to equity
• Lost owner control
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• Café Direct
• Not-for-profit to for-profit
• Publicly traded company
(plc)
• Raised £5 mil in 2004
• Guardian shares w/charity
Other Legal Issues
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Liquidity / Capital Requirements
Returns (financial/social)
Exit strategies
Branding/image
Operational requirements (regulatory)
Compensation
Tax
SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP
Spectrum of Practitioners
Purely Philanthropic
Hybrid
Purely commercial
Type of
Organization
Traditional NGO
NGO enterprise or
socially responsible
business
Traditional for-profit
Motives
Appeal to goodwill
Appeal to self-interest
Mixed motives
Methods
Mission-driven
Market-driven
Balance of mission and
market
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Goals
Social value creation
Social and economic
value creation
Economic value
creation
Destination of
Income/Profit
Directed toward
mission activities of
NGO (required by law
or organizational policy)
Reinvested in mission
activities or operational
expenses, and/or
retained for business
growth and
development
Distributed to
shareholders and
owners
SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP
Adapted from Gregory Dees; and Lee Davis and Nicole
Etchart.
Defining legal structure
1. Define mission of social enterprise
2. Clarify objectives and purpose – what are you
trying to achieve?
3. Roles and relationships with stakeholders
4. Identify critical issues
5. Consult an attorney and review options
creatively
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Attention to control systems and ownership
6. Implement best legal structure to support the
mission, not the other way around.
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SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP
Hybrid Social Enterprises
Must look at the WHOLE:
combination of two or more
structures as the social enterprise
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Scojo Foundation
Scojo
United States
Scojo Vision
For-Profit LLC
El Salvador
Scojo El Salvador
Subsidiary
For-Profit Sociedad Anonima
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United States
Scojo Foundation
Nonprofit 501(c)(3)
India
Guatemala
Mexico
Scojo Inida
Franchise Partner
Franchise Partner: One Roof
Subsidiary
Community Enterprise Solutions
US For-Profit +
Nonprofit section 25 company
Nonprofit 501(c)(3)
Mexican for-proft subsidiary
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Bangladesh
Franchise Partner: BRAC
Bangladeshi non-profit
Council Connections
Target Population
Customer * Social Impact
• 20 Clinic Members
• Established 25 Years Ago
(Non–Profit)
CCC
CCHN
Quality
Management
Practice
Management
Financial
Viability
Council
Connections
• 420 Clinic
Members
• Established 18
Years Ago
(For–Profit)
Service Lines
Pharmacy
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Lab
Services
Med/Surg
Supplies
SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP
Office
Supplies
• 13 Clinic Members
• Established 5 Years Ago
(Non–Profit)
Managed Care
Contracting
Technical Services
Organization
Hybrid Business Model
• Why?
• To leverage attributes of both legal structures,
while not being boxed into only one
• To attract / leverage different types of capital /
investors
• To partially subsidize services / products
• To develop immature markets
• To invest in basic research, R&D, and market
testing
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Hybrid Social Enterprise
In-Kind Equity
Consulting
Brand
Intellectual Property
R&D
Marketing
For-Profit Entity
Market Access
Brand
Consulting
Profit Sharing
Liquidity Events
Investor Guarantees
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SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP
Not-For-Profit Entity
Hybrid Investment Strategies
High
• Social Investors
• Foundations
Grants
Social Loans
Investment
Risk
• Social Investors
• Foundations
• Social Venture Funds
Grants
Social Loans
PRIs
• Social Investors
• Foundations
• Social Venture Funds
• Banks
• Governments
• Corporations
Grants
Social Loans
Commercial Loans
Government Loans
Equity
Low
Seed
Start-Up
Early Expansion
• Banks
• Governments
• Corporations
• Etc.
Commercial Loans
Government Loans
Equity
Late Expansion
Enterprise Life Cycle
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© 2006 Charly Kleissner
Hybrid Investment Strategies
Investors
Banks:
* Commercial Loans
* Equity
Social Investors:
* Equity
Foundations:
* Mission Related Equity
Entities
Foundations:
* Social Loans (PRI)
Social Venture Funds:
* Social Loans
For-Profit
Social Investors:
* Grants
Foundations:
* Grants
Nonprofit
Hybrid Social Enterprise
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SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP
© 2006 Charly Kleissner
Conclusion
• Hybrid business structure is appropriate if
you
• Need to/want to attract / leverage different
types of capital/investors
• Need to/want to partially subsidize services /
products
• Develop immature markets
• Invest in basic research and testing
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SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP
Conclusion
• Watch out for
• Governance and ownership issues
• Clear value proposition for different types of
investors / donors
• Maintaining control
• Mission drift
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