A STEWARD OWNERSHIP PRIMER FOR PURPOSE-DRIVEN START-UPS
At AOA, we often hear from entrepreneurs who want to explore a steward ownership structure when they’re just starting out, to ensure that their mission is locked-in from the get-go. Many reach out to us when they are still in the formative stages, with a plan to introduce a new product/service into the marketplace, and a desire to do things differently.
We love that so many entrepreneurs want to codify purpose and shared governance/rewards – and to secure permanent independence – right from the onset. However, we believe that for many early stage entrepreneurs, spending a lot of time on ownership design prior to building a viable business may be premature.
When should I consider steward ownership?
Your first and most important priority as an entrepreneur is to build a viable product/service that people will pay for. New businesses are based on a whole host of assumptions and projections that won’t be validated until they’ve been tested in the marketplace. Doing this should be job #1.
If your goal is to become a steward-owned venture, as long as you haven’t given away too much control (read: majority equity stake and/or board control) in your enterprise in order to get off the ground, you’re still in the driver’s seat. You can steer the ship towards your founding purpose, and you can personally guarantee that it isn’t sold off to someone who will tear down what you’ve begun to build.
When things begin to get complicated, however, is when you consider taking on more significant equity investment (beyond the early friends/family capital that often fuels start-ups). For many start-ups, this comes a few years into the game, when they’ve demonstrated viability and need help to scale and grow. At this stage, it’s a critically important time to pause and give serious thought to whether a steward-ownership structure is the right fit for your business.
What do I need to consider if I’m thinking about Steward Ownership?
Steward Ownership may be right for you if:
You believe that the profits generated by your enterprise are a means to pursue your mission, and should primarily be used for reinvestment in the mission.
You believe control of your company should be held by stewards of the business – those actively involved in running the business – rather than external shareholders.
You do not consider your business a commodity that can/should be bought and sold – but instead, view it as a living system of people working towards a shared purpose that should remain self-governed and independent.
Let’s pause on that last point, because it’s a very important one for founders/entrepreneurs to answer honestly.
Are you ready, at this stage of the game, to commit to the idea that you will not have an opportunity in the future to sell your business to an external firm/party?
Do you view starting a business primarily as a method to build a stream of income for yourself and others? Or do you see it primarily as your nest egg? Assuming your business builds in value over time, it can theoretically be sold as an asset.
Are you willing to set aside the potential for a sale to a third party to look at alternative pathways for liquidity?
Some entrepreneurs are willing to make this tradeoff, because they have different goals and/or belief systems:
They may place a higher value on the idea of building and sharing equity among the stakeholders that bring value to their business, and do not see themselves as needing/deserving of a greater piece of the pie.
They may be young enough that they aren’t counting on this particular venture to carry them into retirement.
Or they may have had the good fortune to be successful in other ventures, and simply do not need more than a salary and/or a consistent stream of income.
What are the best steward ownership options for early stage entrepreneurs?
Establishing a start up business entity as a steward-owned company is possible, and can be done quite simply utilizing a Golden Share model.
A Golden Share model is an adaptation of a for-profit company (C-corp or LLC) where the economic and voting rights are divided through the use of different shareholder classes. The kicker is that at least one percent of the voting shares are classified as “golden shares” which have the right to a) veto changes to the structure in a manner which would undermine its commitments to purpose, and/or b) veto any sale of the company by any one founder for their own self-interest. (Read our full post on the Golden Share model here.)
Let’s look a bit more closely at an example of a Golden Share ownership model: Ziel Activewear.
Ziel’s structure includes four share classes:
Steward Shares: Hold 99% of the voting rights but have no dividend rights. Only individuals active within the company can hold Steward Shares.
Founder Shares: Have dividend rights but no voting rights.
Investor Shares: Structured as non-voting preferred equity, they have dividend rights but not voting rights.
Veto Share: 1% voting rights held by Purpose Foundation, with no dividend rights.
You can read more on Ziel and other start-up case studies from Purpose Foundation here.
Caveat: Ziel was not formed as a steward-owned company when it was founded in 2015. They transitioned to their Golden Share model in 2018, as they were preparing to take investment capital. Founder Marleen Vogelaar had experience with traditional venture capital, having previously raised $75M as a co-founder of Shapeways, a 3D printing service and marketplace. With Ziel, she knew she wanted to do things differently – to grow without sacrificing mission or independence.
In Summary:
If you’re a pre-revenue entrepreneur, it’s not necessary to establish your business as a steward-owned enterprise from the onset. This can come later. That said, it’s never too early to start laying the foundation: embedding purpose into your operations and culture, enabling stakeholder participation in governance, and sharing economic rewards with those that create value for the organization (beyond founders/capital providers). The critical juncture comes when you consider equity capital to fuel growth. If you’re approaching that stage and looking for resources, here’s a few great places to start:
Purpose-US has established their AltCap Fundraising Accelerator, a 12-week program for mission-driven entrepreneurs who want to raise money on great terms to build sustainable, profitable businesses.
If you’re in the start-up community, chances are you know Zebras Unite. Their focus is providing zebra companies with the culture, community and capital they need to succeed and thrive. And the recently formed Zebras Unite Capital team provides a range of advisory services, focused on the participatory design of capital and support mechanisms for founders of all stripes.
And if you’re already thinking very far down the road about how you might structure your start-up to prepare for a future exit that doesn’t translate to an acquisition by a larger company or a public stock offering, check out the terrific work being done by a collaboration of folks under the auspices of “Exit to Community.” They are supporting founders who want to explore what it could look like to eventually transition their ownership to their community of stakeholders.
