Frequently Asked Questions

You have questions, we have answers. Read on to learn more.

STEWARD OWNERSHIP

  • Steward ownership is a philosophy that begins with the premise that corporations have a role beyond generating profits to increase shareholder value. That at their core, companies can and should have a reason for being that is rooted in purpose and that serves a broad range of stakeholders. While the corporate ownership structure can vary across companies, all the designs/forms share two key principles:

    Principle 1: Profits Serve Purpose

    Profits are used as an engine to support a company’s mission. They are reinvested in the business, used to repay founders and capital providers, shared with stakeholders and/or donated to charity. Profits are not an objective in themselves, but a means by which the purpose is furthered.

    Principle 2: Self-Governance

    Control of the company can never be sold. Leadership decisions are kept with “stewards” – people who are actively engaged in, or connected to, the business and its mission. The business is not a commodity, but a living system of people working towards a shared purpose. (Purpose Foundation 2018- Steward-Ownership: Rethinking Ownership in the 21st Century)

    So, in the simplest terms, a steward-owned company is not operated as a wealth-building engine for investors alone, who can sell the company at any time. Rather a steward-owned company is designed to stay independent with its purpose safeguarded by “stewards” of the company who shepherd the health and vitality of the business in order to benefit their stakeholders (such as employees, customers, vendors, community members, etc.)

  • Organically Grown Company, Metis Construction and Equity Atlas are examples of companies owned by a Perpetual Purpose Trust, one form of steward ownership. Newman’s Own, Mozilla, Bosch and Playmobil are owned by foundations, another form of steward ownership. And Ecosia, Sharetribe, Ziel and Creative Action Network are examples of Golden Share companies, a third form of steward ownership.

  • Any privately held company, if they are willing and able to make the necessary changes to ensure that the ownership, governance and financing are structured to ensure that 1) profits serve purpose; and 2) the company is self-governed and independence is protected.

  • – Businesses with a strong mission and purpose at the core of their operations, culture, and brand value proposition.

    – Businesses with founders and owners who care deeply about protecting their legacy and the company's ongoing mission-driven operations, and who are not focused on maximizing share-value and profit alone.

    – Companies with next-generation leadership that have aligned-values and are excited and are capable of helping to carry on stewardship of the enterprise into the future.

    – Enterprises with a credible business model and strategic plan; a track record of business profitability, sound financial management oversight; and capacity to adopt effective internal governance systems.

  • – Companies that do not have a long-term commitment to a particular mission or purpose that defines the reason why the business exists and/or how it endeavors to operate.

    – Businesses with majority shareholders who seek to maximize exit-value over other considerations.

    – Companies that lack the leadership capacity to undertake steward ownership; for instance, a situation where the executive bench is not prepared to carry forward the businesses’ mission, plans and strategy.

    – Those with limited financial capacity to undertake steward ownership; this could be the case either in a start-up or in a business transition planning phase if the company does not have a credible plan to generate sufficient positive cashflow to pay back the founders and/or investors.

  • Benefit corporation is a relatively new incorporating structure (similar to an LLC or a C Corp) that allows a company to add specific “public benefits” to their charter such as positive impact on society, workers, the community and the environment in addition to profit as its legally defined goals. In doing so they create latitude for their directors to pursue social goals related to the environment, their workers and their communities without fear of being sued by shareholders.

    Key distinctions:

    – In Benefit Corporations, shareholders typically retain control of governance and economic rights. In a Benefit Corporation ownership can be sold and the Benefit Corporation commitment can be undone by a majority vote of shareholders.

    – Steward-owned companies are permanently protected from sale for private gain, and the commitment to purpose, self-governance and independence cannot be undone by shareholders.

  • A nonprofit organization is an organization that is granted tax-exempt status by the IRS because it furthers a social cause and provides a public benefit, and makes no profit. They have no shareholders, and can raise money through charitable donations.

    Steward-owned companies are for-profit ventures that operate in the world of commerce to serve a specific purpose through their products, services and operations. Unlike conventional companies where profit is used to benefit shareholders, in steward-owned companies the profits are primarily reinvested back into the purpose. Steward-owned companies raise money through debt or equity that can have certain predetermined economic rights but the voting rights can never be sold, nor can the company be privatized and sold for personal gain.

  • Get clear on your mission and purpose: Why does my company exist? Who do we exist to serve? How do we operate that furthers our purpose? If you haven't already, consider putting it down in writing and clearly defining what it looks like to serve your purpose and the metrics that help you measure if you’re delivering on your mission.

    Identify your stakeholders: Who are the people or entities that are key to your success? Do you see them participating in the governance and/or financial benefits of the business?

    Get your financial house in order: Create a business plan and strategy for the products and services your company will offer to further your purpose. Create realistic financial modeling and plans for how you will both carry out your business, pay back investors and founders, and return value to your stakeholders.

    Build your team: Recruit people with a shared passion for your mission and purpose that can also capably execute the operations of the business. Start to think through ways you can create shared accountability and governance structures for ongoing stewardship of your purpose.

    Have conversations with your investors and owners now: What do they expect to get out of the business? Financially? Legacy? Other things that are important to them? What is their time horizon for ongoing involvement?

  • When the driver of the company is not simply maximizing shareholder value, there are many possible advantages including increased motivation, innovation and cooperation towards a common purpose. In steward ownership, one challenge is the need for ongoing vigilance to maintain shared clarity around the company’s purpose, or else that unifying factor could wane. Additionally, steward-owned companies need to create sufficient economic incentives for leaders and staff to maintain the financial well-being of the company, which is fundamental to the business’ ability to carry out its purpose.

  • The core philosophy around liquidation is that no single entity or band of entities should be incentivized to liquidate the company for private gain. In this spirit, steward-owned company liquidations look similar to liquidations of traditional companies, except that the stewards have to approve that the liquidation is in the best interest of the purpose, and that the upside for equity holders is capped:

    Traditional Liquidation: First priority goes to satisfy outstanding payroll and accounts payable obligations, and second to debt holders. The remaining excess profits are split among preferred and common shareholders. Focus is often maximizing shareholder value.

    Steward-Ownership Liquidation: Similar to the traditional ownership, payroll, accounts payable and debt obligations are settled first. However equity holders’ portion of the liquidation value is capped (ie., they are entitled only to their principal investment plus any unpaid dividends) and the remaining proceeds are then distributed to the purpose and/or stakeholders per pre-established guidelines (e.g. donated to mission-aligned non-profits, or paid out to employees, vendors, customers, community allies, etc.)

  • Purpose is the preeminent authority, supporting a global community of businesses and entrepreneurs on their path towards steward-ownership. Through research, open-source resource development, hands-on support, and investment, Purpose is building the ecosystem necessary to make steward-ownership and alternative financing accessible.

    A good starting point for learning more about this field is: Steward-ownership: Rethinking ownership in the 21st century

    Additionally, Purpose Foundation and RSF Social Finance recently published a report that catalogs their learnings from their research and conversations with entrepreneurs, investors, founders, owners, non-profits and business leaders: State of Alternative Ownership in the US - Emerging Trends in Steward-ownership and Alternative Financing - Learning Journey Report 2019

    And to fuel the adoption of steward ownership, they have compiled an online toolkit of resources which can be found here.

PERPETUAL PURPOSE TRUSTS

  • A perpetual purpose trust (PPT for short) is a type of trust which has no beneficiaries, but instead exists to advance some non-charitable purpose. These types of trusts can be set up to hold the ownership of a company indefinitely (in perpetuity) to allow it to continue to serve a purpose through its operations.

    PPTs have a great deal of flexibility in how the “purpose” is defined; it could relate to a larger, external mission (such as solving the climate crisis or supporting healthy food systems), or it could be defined to protect the ongoing values by which a company operates (such as profit sharing and/or employee engagement).

  • You may be familiar with the concept of trusts as they relate to wealth management and estate planning. Trusts are a common practice to protect the ownership of assets, for the benefit of a specific trustee (often an individual or a group of family members). With PPTs the beneficiary is the purpose of the business.

  • When ownership of a company is placed into a Trust, it can no longer be bought and sold, hence it becomes permanently independent. And because the trust will never “exit” and the business will never be sold, there is no longer any need to expend energy and resources on providing liquidity for shareholders or finding new owners. Going forward, the leaders of the company can put all their focus into running a healthy and sustainable business for the benefit of the purpose and all their stakeholders.

  • This answer depends on many factors, including the number and type of decision-makers (shareholders and stakeholders) involved, the need to raise capital to finance the transition and the complexity of the governance structure designed. A ballpark figure would be six months for a very simple transaction, up to 18 months for a highly complex one.

  • This also depends on many factors, including those listed above. Additionally, the cost will be impacted based on the company’s internal capacity (and therefore what outside expertise will be needed to support the transition, such as legal, financial, project management, etc.).

  • Once the decision is made to proceed, the work roughly falls into 3 buckets:

    1. Ownership Structure and Governance

    The Trust agreement must be designed, which includes a Purpose Statement that clearly defines how the company assets will be used (e.g. for the ongoing benefit of the mission and/or group of stakeholders). The new governance structure also needs to be defined and policies formalized around who will hold/exercise the stewardship voting rights and who will share in the economic dividend rights. The state of incorporation for the Trust must be chosen, and a Trustee appointed. Finally, the company’s articles and bylaws are updated, as needed.

    2. Finance and Capitalization

    Financial modeling and scenario testing is done to determine the ideal funding mix to capitalize the company and provide liquidity for founding shareholders, if necessary. Then debt and/or equity financing is secured to complete the transaction.

    3. Change Management and Communications

    Proactive communication with key stakeholders (e.g. customers, employees, vendors, investors) is critical to ensure a smooth transition. Companies should be intentional in creating a plan around which stakeholders need to be consulted vs. informed of key decisions to ensure buy-in and minimal disruption to the business.

  • Organically Grown Company, Metis Construction and Equity Atlas are three examples.

  • No, it’s just one example of steward ownership. Other common forms are foundations and “golden share” companies. Cooperatives can also be structured as steward owned.

  • The majority of states have rules that disallow perpetuity for non-charitable purpose trusts. Delaware, Nevada, Oregon, South Dakota and Wyoming are the exceptions; they have each passed statutes to allow for perpetuity. Other states are likely to follow their lead. Companies outside of those states may re-incorporate into a jurisdiction that allows for trust ownership.

EMPLOYEE OWNERSHIP TRUSTS

  • An employee ownership trust (EOT for short) is the name used for a perpetual purpose trust that holds some or all of the shares of a company for the purpose of providing ongoing benefit to all or most of the employees of the company. Metis Construction and Equity Atlas are examples of EOTs.

    Perpetual Purpose Trusts can also be multi-stakeholder in nature, meaning that their purpose is to serve a broader group of stakeholders (not just employees). Organically Grown Company is a prime example. Their trust is designed to benefit the purpose of promoting the growth of sustainable agriculture, and in doing so, benefit employees, customers, growers, community allies and investors - on balance.

  • An Employee Stock Ownership Plan (ESOP for short) is an employee retirement benefit plan that gives workers ownership interest in the company. They are regulated by the Employee Retirement Security Act of 1974 (known as ERISA). When a company undergoes an ESOP conversion, all or part of the company is sold to a stock ownership trust that holds individual stock accounts of employee shares until they reach retirement age and/or leave the company.

    ESOPs are widely used in the US and can confer significant retirement benefits on the participating employees, at no cost to them. And from the company’s perspective, there are significant tax benefits to be realized, as well as potential benefits from higher engagement and productivity, and the ability to recruit and retain talent.

    There are also challenges to installing and operating ESOPs. From the company perspective, they are complex and expensive to administer (typically $150K+ in legal fees to install and roughly $30K to administer annually). ERISA also requires the company to buy back shares from workers that leave or retire; the value of the shares is based on third-party valuations, which can fluctuate wildly year-to-year due to company performance and market forces outside the company’s control. And just like in conventional ownership structures, the ESOP Trustees have a fiduciary duty to maximize profits for the benefit of the employees in the plan. This can result in the company putting less resources into other mission priorities, and a decision by the ESOP Trustees to sell the company if the price is attractive or the stock repurchase obligations become too high.

    An Employee Ownership Trust, on the other hand, is relatively simple to install and is significantly less expensive (typically $40 - $60K in legal fees to install and about $5 - $10K annually to administer). Instead of being based on individual stock ownership allocation, all the shares are held by the Trust permanently for the purpose of providing ongoing worker benefit. There is no need for employees to retire or leave the company to reap the economic benefits - they simply receive profit-sharing as they go. Employers can also choose to make contributions to a 401(k) plan on their behalf to balance real-time rewards with retirement benefits.

    From the employer perspective, EOTs do not allocate stocks to individuals, they are not subject to ERISA, and they are not subject to repurchase obligations (and therefore avoid the expense of annual valuations). And because profits are paid out as compensation at the corporate level, they are tax-deductible.

    Fundamentally, EOTs take a longer-term perspective than ESOPs, with the goal of preserving the company’s ongoing purpose and independence as a benefit to current and future generations of workers.

  • Worker cooperatives are structured so that employees are the shareholders of the company, holding both economic rights and the governance rights, and they often adhere to a “one-member, one-vote” principle. Similar to an ESOP, worker-owners can sell the company to private investors and convert it to another corporate form through a process known as de-mutualization. Some cooperatives, like Equal Exchange and Organic Valley, have found creative solutions to remove any incentive to sell the cooperative for personal gain (for example, by including a “poison pill” in their operating agreement that states that all profits from any sale of the business will be donated to charity, or by adding a “golden share” with veto rights should a sale be attempted).

    EOTs can be flexibly-structured to include a spectrum of governance rights for employees, however they are always designed to prevent the workers from selling the business for personal gain and to protect the ongoing purpose and independence to benefit current and future employees.

  • This answer depends on many factors, including the number and type of decision-makers (shareholders and stakeholders) involved, the need to raise capital to finance the transition and the complexity of the governance structure designed. A ballpark figure would be six months for a very simple transaction, up to 18 months for a highly complex one.

  • This also depends on many factors, including those listed above. Additionally, the cost will be impacted based on the company’s internal capacity (and therefore what outside expertise will be needed to support the transition, such as legal, financial, project management, etc.).

  • Companies that see their employees as the most important stakeholder of the business, and who want to ensure they share in the success of the business in real-time, are good candidates for an employee ownership trust. Founders with a vision of providing an opportunity for employee ownership to both current and future generations of workers - as their legacy - are also good candidates. And companies that are either fully- or partially owned by an ESOP may consider a conversion to an EOT to mitigate the challenges discussed above.

FINANCING A STEWARD OWNERSHIP TRANSITION

  • There are 3 archetypes of companies that are viable candidates for steward ownership financings:

    1. The Established, Profitable, Purpose-driven Business

    Companies that have a strong track record of commitment to purpose and profitability are the most viable candidates of all. For these companies, operational cash flow can support repaying/liquidating founders and early investors without bringing in outside financing; or if financing is needed, their operational cash flow can sustainably support debt payments and/or an competitive dividend to investors (4 to 8% is a good benchmark as of April 2020) as well as periodic stock redemptions.

    In an ideal world, the capital structure of these companies is relatively simple; for example, existing owners are few in number and aligned in desire for a steward-ownership transition and the company has not taken on much, if any, previous growth capital from outside investors). But even companies with more complicated capital structures or a history of more conventional fundraising may be candidates for steward-ownership transitions.

    2. The Growing, Fluctuating, Purpose-driven Business with a Bright Future

    Although steward-ownership financing is easiest with a track record of steady profits, investors everywhere are looking for the same thing: a bright future and growth driven by clear purpose. So, if your company has been around a while, is growing, and has had its ups and downs, steward-ownership financing is still possible as long as the future is bright. Is there a clear path to consistent profitability? What would it look like to share some of those profits with investors? Is this a leadership team and mission that investors can believe in? These are key questions that need to be asked to determine whether it is feasible.

    Just like before, it is much easier if the company has limited/no debt and if all owners in the cap table are aligned with the idea of steward ownership.

    3. The Purpose-Driven Startup in a Growing Industry

    Given the inherent risk of startup investing, it is definitely more of an uphill climb to successfully execute steward-ownership financing at this stage, especially considering that investors are giving up conventional voting and governance rights. That said, it is not impossible or unheard of. Rather than promising investors an annual dividend from cash flow (which most startups cannot support), these companies could design offerings that promise to share revenue/earnings with investors until they hit a competitive but doable benchmark (i.e. 2-3X ROI or 10 - 20% IRR), at which point those investors come off the cap table and those shares are returned to the company, ensuring independence for the long run.

  • Absolutely. They simply attract a different sort of investor - one who is mission-aligned, believes in stakeholder balancing, and has a long-term outlook for their investments.

    Steward-owned companies are intent on permanent independence and never plan to “sell out.” This means there will likely never be a big liquidity event, such as an IPO or sale to another firm. Rather, depending on the situation, investors make their returns through a pre-determined mechanism such as preferred stock with annual dividends, or revenue/royalty sharing with a capped total return.

  • It depends on what you mean by “return.” Steward-owned companies undoubtedly provide a more competitive return for society by aggressively pursuing a positive mission and reinvesting their profits across a broader swatch of stakeholders (i.e. employees, suppliers, community partners, customers), rather than focusing primarily on maximizing profits to investors. That said, investors are also an important and valuable partner and ensuring that they can earn a fair financial return is critical to the success of the movement.

    Steward-owned companies can and do provide a fair and competitive financial return for shareholders. That said, investors who have a short-term outlook (< 5 years) or who are hoping to make 10X on their money are probably not the right fit for steward-owned companies.

    Investors who have a long-term outlook, on the other hand, should be very encouraged about the growth of the movement. There is research showing that steward-owned companies survive longer and are more resilient during tough times. According to one study, steward-owned companies are six times more likely to survive over 40 years than conventional companies (Børsting, C., Kuhn, J., Poulsen T., und Thomsen, S., 2017)

  • Yes, and, depending on the situation, you may need to consider potential trade-offs, including:

    – Taking a discount compared to what you could get in the open market

    – Getting paid out over time, rather than all at once

    – Keeping some of your ownership in the company

    – Subordinating the rights of your shares to new investors

    When evaluating whether such trade-offs are worth it, it is useful to consider a “regret minimization framework” - when you are 90 years old, looking back, what will you regret more? For many owners, the answer in their heart is that they would rather leave a little on the table and see their company continue to serve a great purpose in the world into perpetuity.

  • All of the above. This is very situation specific. Equity provides more flexibility, however, and given the unconventional nature of some of these financings, debt sometimes is simply not feasible.

  • The process looks similar to a conventional fundraise:

    1. Design terms (ideally in collaboration with a prospective lead investor)

    2. Create a Private Offering Memorandum

    3. Adjust company articles and bylaws as needed to accommodate the new offering

    4. Register your offering with the SEC

    5. Close on your lead investor

    6. Fundraise from others until you hit your goal

    The process is not hard to explain, but it is hard to execute well and it takes a lot of time and energy. Unless you are experienced and confident executing private offerings, we recommend that you hire someone to help with all or part of your fundraise.

  • The process looks largely the same (see the previous question), but the offering design and target investor audience will look different.

  • Most investors are not. But we don’t recommend you try to raise money from “most investors.” Why not? Because most investors want you to focus on growth-at-all-costs and have a short-term outlook. They see your company as a financial asset with a value to be maximized.

    But you, the founder/owner/CEO/steward see it differently. You see your company as a valuable asset where the purpose, not profits, should be maximized. Thus, if you raise money from those conventional investors, you will be at odds with them. Even if it is not apparent at first, in a few years, the pressure will grow for you to compromise your mission and squeeze your stakeholders in the pursuit of profit maximization.

    The good news is that ‘most’ does not equal ‘all.’ A small but rapidly growing segment of the investment community is coming around to the fact that we cannot, in good conscience, build a world on the premise that a company’s share price is the only thing worth optimizing.

    So YES, there are investors who are not only willing to invest in steward-owned companies, they cannot wait to invest in steward owned companies. They have seen the light and their main concern is not how much profit they can squeeze out of their investments, but that there are not enough good, multi-stakeholder, purpose-driven companies in which to invest into in the first place.

  • 98% of lenders will evaluate steward-owned companies the same way they evaluate conventionally owned companies. They will ask: do we believe that this company will have the cash flow to support this loan? And if they default, will we be able to be made whole?

    There are a small number of mission-driven and locally-rooted lenders that may offer more flexibility for purpose-driven/steward-owned companies, but probably best not to count on it as part of your plan until you have actual conversations with these lenders and letters of intent (LOIs) in hand.

  • There is no such thing as “typical.” Every company and situation is different. That said, a good rule of thumb is 12 months start to finish. It could be longer or shorter depending on the company, the size of the raise, the industry, and the macroeconomic conditions at the time. It is rare to execute a steward-ownership financing any faster than 6 months.

LEADERSHIP & GOVERNANCE IN STEWARD-OWNED COMPANIES

  • The day-to-day differences are less about the “how” and more about the “why.” For the majority of companies in the US, the key driver that underscores decision-making is “how will this affect my bottom line?” There are a growing number of companies that are adopting a triple-bottom-line or multi-stakeholder approach, basing their decisions not only on how their actions affect profitability and share value, but also the social and environmental impacts they carry. However, these commitments to social good can be discarded as leadership and ownership changes - they are not embedded in the structure of the organization.

    In steward-owned businesses, there is clear alignment around the “purpose” for which the company exists and how stakeholders will share in the value created by it. Leaders are still focused on running a profitable business, but because they are not driving towards a liquidity event, they can filter their day-to-day decision-making through a longer-term lens. Put in simple terms: steward-owned companies are not set up for shareholder-primacy and share-value maximization, they are set up for mission-primacy and mission-maximization.

  • In conventional companies, control (voting rights, board seats) is exerted by shareholders who can buys, sell or inherit those rights.

    Steward ownership represents a different way of allocating power. Control of the company and its operating decisions are kept with “stewards,” who are people that are actively engaged in, or connected to, the business and its mission. In conventional companies, a good deal of control is exerted by remote shareholders that hold board seats.

    Governance roles, responsibilities and mechanisms vary depending on the steward-ownership form. For example, at Organically Grown Company, there are two governing bodies: the Trust Protector Committee (TPC), and the Operating Board of Governors (BOG).

    The Trust Protector Committee is the “keeper of the mission”, ensuring the company stays aligned with the purpose established by the trust. Qualified stakeholders (individuals with an interest in the operation of the company) may participate in governance by electing the TPC.

    The Board of Governors is appointed by the TPC, and they actively work with company leadership to ensure sound operations and strategic plans that deliver measurable results (financial and non-financial) towards the company’s mission and benefits to all stakeholders.

  • While this list is not intended to be comprehensive, it should give you a picture of the leadership style and skillsets needed to operate a steward-owned company:

    – Mission-driven

    – Ability to manage to vision and purpose

    – Commitment to transparency and accountability

    – Systems thinking

    – Highly collaborative and accepting of broad-based decision-making

    – Ability to inspire trust, integrity and ethical action

    – Adaptability and learning agility

  • They can utilize other types of incentives, such as profit-sharing and/or deferred compensation.

  • We would love to answer your questions. Give us a shout: team@alternativeownership.com