Navigating Governance, Finance, and Company Vision Through Alternative Ownership
Updated: Dec 18, 2021
If you're a mission-driven business owner, it can be challenging to finance your mission while retaining your company vision. Traditional methods tend to require giving up a measure of control for the sake of financing. But we don't want to lose sight of the company vision — we want to keep to our purpose.
Alternative ownership comes in.
Her CEO Journey™episode with Camille Canon, the co-founder and executive director of Purpose US, helps us navigate the tricky maze of ownership, governance, and money. She explains the concepts in ownership structure and alternative finance. Lastly, she clears up misconceptions about raising capital, reveals the secrets to creating a sustainable alternative ownership model for your business, and gives insight into the minds of investors.
If you are a mission-driven founder looking for an ownership structure that integrates your company vision, financing, and governance, then read on!
Here are three reasons why you should continue reading:
Learn about the relationship between ownership, governance, and money.
Gain clarity on the misconceptions about raising capital.
Find out how to create a profitable, sustainable alternative ownership model that keeps your company vision in mind.
Visit Christina Sjahli's website for more insights on designing an ownership structure that aligns with your company vision on the Her CEO Journey™ podcast series!
Episode 137 | Steward Ownership: A Method for Preserving Business Owner’s Legacy and Purpose - The Journey of Sarah Joannides
Chat with Christina and set up a time here!
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Connect with Camille: Purpose website
Camille’s Journey in Purpose US
Purpose US was established in 2018 with autonomous teams in Europe, Latin America, and the US supporting alternative ownership governance and financing structures.
Camille lived in Berlin. She ran a startup team which led her to relocate to Northern California, where she took on a set of real estate development projects.
While in Berlin, Camille saw the inefficiencies of the way we move money for the benefit of people in communities.
She began to question the relationship between money and power, eventually conversing with her mentor in Berlin.
Coincidentally, the German co-founders of Purpose were searching for someone to help them grow an idea. Camille’s friend, Paul, referred her to them.
What Problem Does Purpose US Address?
On a macro level, Purpose US’s goal is to rewrite The Code of Capital because the existing laws for capital encoding perpetuate inequality and preserve wealth accumulation.
“... the existing legal system of how capital is actually encoded through the law through contracts and ownership, and everything else perpetuates inequality and preserves wealth accumulation. And so if we want to have a more just, equitable economy and society, we need to actually address these underlying dynamics of how the system is perpetuating harm.”
These dynamics must be addressed for societies to achieve a more just and equitable economy.
On a micro level, they seek to support entrepreneurs in structuring and mobilizing capital into alternative ownership forms.
The three components of the ownership structures they focus on are the disruption of the relationship between money and power, intergenerational stewardship, and redefining fiduciary duty.
At What Stage Does Purpose US Help Entrepreneurs?
The people making business decisions in a company are often influenced by how they raised capital.
Company officers tend to figure out ways to secure their company and set realistic expectations for investors.
Purpose US worked with startups and explored different ways to negotiate terms that would protect their optionality down the line.
“... ‘Okay, how do we negotiate terms that protect your optionality later down the line?’ What we found was that the entrepreneurs who were successful in doing this, they could tell the right story [...], and they were good entrepreneurs, and they had good ideas, and investors wanted to invest in them.”
They discovered that entrepreneurs who were successful in negotiating terms could tell good stories and present good ideas, thus reeling in investors.
Purpose US created an educational program to equip entrepreneurs with information such as alternative finance tools and capital sources to attract potential investors.
Does Being Series A Matter?
Raising a large seed round that gets converted into equity and having investors share a percentage thinking you were going to exit signals a breakdown in communication.
Before Series A, a business owner can lose a fair amount of control over multiple funding rounds, risking the company vision. Hence, being Series A does matter.
Conversely, if you’re raising funds on a safe note, there’s no distribution of voting rights, which offers decreased risk compared to Series A.
One of the most valuable things to keep in mind is that capital isn’t free.
Decide on a capital that’s realistic to raise and incorporate sustainability and profitability into your model early on.
“... it’s relevant to seed founders on what’s the amount of capital, it’s actually realistic for you to be raising. And how do you build in sustainability and profitability into your model earlier on so that you can reduce the cost of capital as you continue to raise funds...”
Firebrand Bakery: A Sustainable Model
Matt Kreutz, the founder of Firebrand Bakery, a consumer packaged goods company in Oakland, has been running the business for 12 years without outside capital.
After talking to private equity investors, Matt realized they wanted to sell the business. However, he knew that if he did, he would likely find the exact same business again.
Purpose US helped Matt Kreutz raise $2.5 million to expand and create an entire line of consumer packaged goods.
In that transaction, 30% of the business was transitioned into an Employee Benefit Trust.
The structure of the $2.5 million was a profit flip where investors get 90% of distributed profits until they reach twice their initial investment, after which profits are distributed pro-rata based on ownership.
Finding The Right Investors For Your Company Vision
Camille doesn’t believe in creating two camps of conventional investors and alternative capital investors.
Entrepreneurs building successful mid-to-large-sized businesses who negotiated alternative terms were raising finances from conventional investors.
Good deals are hard to find.
To ensure that you have the right investors, you should search for investors who align with your mission and vision in protecting your business.
“If your intention as a startup founder is to protect your mission and you don’t want to sell the business, you probably don’t want investors on your table who don’t share that vision or don’t understand your motivations because they’re probably not the right investors for you.”
Do Purpose US Investors Look For Similar Return?
It helps to address the perception of upside. There’s an idea that when optionality is taken off the table for future sale, you’re reducing potential returns.
Taking away the gamble might feel limiting to investors who want to extract value.
Another limitation would be the investor’s fund structure and whether they can invest in a timeline that aligns with the business.
Most collaborative investors are willing to talk about the appropriate risk-return profile of a company.
Not all companies will have great returns, so it's critical to consider the alternative return model that makes the most sense.
“Not all companies are going to have hockey stick growth and have a 10x return. That's just not going to happen for every business.”
The Field of Alternative Capital
The terms and structure of capital raising and narrative depend on the business, the industry, the entrepreneur, and the entrepreneur's network of people.
As alternative capital is an emerging field, there is no standard alternative capital term sheet or approach out there.
Camille believes that the whole field right now is about fostering discourse with investors and collaborating to find an appropriate approach.
Investors want to invest in good bets; entrepreneurs who come to the table well-stocked have more chances to negotiate control for themselves.
"Investors want to invest in good businesses, good entrepreneurs, good bets. The more an entrepreneur can come to the table with those things well-stocked, so to speak, the better the likelihood is that they're going to be able to negotiate more control for themselves."
Financial Results While Maintaining Company Vision
Even though investors are looking for entrepreneurs and creating impact, financial results still matter.
While the motivation for impact and change is admirable, it doesn't matter if the business isn't successful.
“I think that folks who are doing something that’s really ambitious and incredible for the world, they step forward into conversations about the possibility of this business as a vehicle for impact and change. And that’s great. But none of that matters if the business isn’t successful and there isn’t an engine for that mission.”
Investors aren’t so much looking for returns as they are looking for it to work.
The first thing investors usually look at is whether or not a company has profitability, a good team, and functionality.
While possibly the majority of investors are financially motivated, there is a growing number of investors that have their eyes set on supporting missions.
“But I do think that there is a growing number of investors who are interested in driving, supporting interesting missions, in cases where they believe that the business is going to be successful.”
Demystifying Concepts in Raising Capital
A lot of Purpose US’s work and education focuses on the objective of optionality.
You don’t have to find all the solutions to ownership structure and governance on the first day. In fact, you shouldn’t.
“You don’t have to find the perfect solution to your ownership structure, the perfect solution to your governance all on day one. And in fact, I would argue that you shouldn’t.”
Make sure you’re clear regarding your purpose and core stakeholders.
Enable iteration within that concept.
You can integrate optionality into the terms of a given deal by speaking with investors and clearly articulating your future intentions.
Camille’s Parting Advice
Raising capital is difficult.
The frustration and friction in raising capital might make people feel limited, but explore your opportunities and sharpen your eye for opportunities.
“And the frustration of that and the friction of the system sometimes makes people feel like they don't have options. And I would push to say that, like, you should explore the options in raising capital. You should look at opportunities.”
There’s a diversity of approaches to raising capital influenced by different factors.
Creativity abounds in the market nowadays, and many people are hopeful to see more money go into companies moving forward.
Listen to the full episode on alternative ownership below:
Camille Canon is the co-founder and executive director of Purpose US. She used to spearhead real estate development projects. With Purpose US, their mission is to support the business community in developing models that protect purpose. Through strategic programming, legal support, and legal innovation, they are removing existing barriers and improving accessibility.
You may contact Camille through Purpose’s website.
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