IS YOUR COMPANY A VIABLE CANDIDATE FOR STEWARD-OWNERSHIP FINANCING?

A key part of a successful transition to steward ownership is your financing strategy. And a good financing strategy speaks to the following questions:

• How will you provide liquidity for existing founders/owners?

• Do you need to bring in new investors?

• If so, will you be able to offer sufficient returns to attract that money to the table?

• Do you need to find a mission-aligned lender? If so, how much debt can you support?

The answers to these questions are unique to each company, and if you commit to exploring steward ownership, we recommend building a financial model to help answer these questions in full (which we can help with, by the way).

But you don’t need a full financial model to determine directionally whether or not your company could be a good candidate for a successful financing.

Here are the three most common archetypes of companies that are viable candidates for steward ownership financings:

1. The Established, Profitable Business

Companies that have a strong track record of profitability are the most viable candidates of all. For these companies, operational cash flow can support an annual competitive dividend to investors (4 to 8% is a good benchmark as of May 2020) as well as periodic stock redemptions.

In an ideal world, the capital structure of these companies is relatively simple (i.e. existing owners are few in number and/or aligned in desire for a steward-ownership transition and the company has not taken on much, if any, previous growth capital).

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 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. So, if your company has been around awhile, 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 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.

Do you fit any of these archetypes?

Then you might be a viable candidate for a successful steward ownership financing.

Do none of these archetypes apply to you?

Then perhaps your business is not quite ready to become fully steward-owned.

But either way, it is never too early to begin moving toward partial steward ownership or laying the groundwork for full steward ownership in the future. The more effectively you prepare now, the easier a transition will be later.