In a rapidly evolving multi-stakeholder-ecosystem-economy, many are finding that currently available legal structures (both profit and not-for-profit) are simply not serving us anymore.
Private company legal structures that put shareholders first throw the balance of value co-creation out for customers, employees, suppliers, universities, and other partners who contribute to a product’s success. Not-for-profit legal structures that prevent too much commercial activity make it tricky for these entities to co-create with private companies without hurting charitable volunteers who do as much work (if not more) than the employees from the partner private organisations who are earning salaries.
Our organisational legal structures are also directly linked to the way we raise funding and finance for our business and innovation ecosystems.
Conventional legal structures limit us to conventional forms of funding, which in turn limits the full potential of our ecosystem mindsets, behaviours and actions.
Venture capital funding promotes profit for investors only. Corporate funding entangles us in corporate governance which includes things like conflicts of interest, which are counter-intuitive to ecosystem thinking. Donations build two-way relationships between not-for-profits and donors while downplaying other stakeholders.
Therefore, it is imperative that we innovate new ways to govern, and in turn fund our ecosystems.
There are three approaches we can take:
Approach 1: Configure existing legal structures in innovative ways that serve, instead of hinder, our ecosystems.
There are a variety of ways to get creative with existing legal structures.
In one practical example, we re-configured a classic company shareholders agreement. We engineered (albeit lengthy) shareholders agreements that link different share classes to value contributions, per product, per product milestone and per value contributor (The Value Contributor Method™.) This means that a variety of value contributors can obtain a share of ownership in one or more products, in one or more share class, by contributing funds, or effort, or both.
As a second practical example, we are working on a not-for-profit that can govern and fund its core operations with a membership association structure, and still fund the products that its members develop through crowdfunding and commercial co-venturing structures that form under a different, but linked, limited liability entity.
It is important to take into account any tax implications into account before you cement any legal configurations, for example, ensuring that these configurations do not impact the tax-exempt status of not-for-profits.
Approach 2: Explore new types of legal structures that have emerged in recent times.
I have been saying for the last three years that what we really need are new legal structures that sit somewhere between a private company and a co-operative to enable our ecosystems to function optimally.
While I still haven’t come across the ideal legal structure that truly supports shared value co-creation amongst multiple types of stakeholders as yet, I was most excited to learn about new types of legal structures that aim to at least enable the combination of purpose and profit.
From what I have seen, the USA seems to be leading the way in this regard.
The first new type of legal structure is the ‘Benefit Corporation.’ A Benefit Corporation blends for-profit and not-for-profit principles and has a fiduciary responsibility to both shareholders and non-financial stakeholders. In other words, it is a legal entity that is not just about maximising shareholder wealth, but also its mission. Shareholders cannot sue a Benefit Corporation if it makes lower profits, but benefits society.
The second new type is the L3C or ‘Low Profit Limited Liability Company.’ This is another version of a hybrid not-for-profit and for-profit organisation. The primary purpose of an L3C is social, but its secondary purpose can be profit. Profits can be distributed in a similar fashion to a Limited Liability Company, but the organisation can still enjoy the tax-exemptions and reputation of a social enterprise. Funds can be raised through Programme-Related-Investments.
On the not-for-profit side, a new model has emerged in the UK called ‘Community Shares’ which enables communities to both build and benefit from a co-created solution. These shares do not issue dividends and cannot be bought and sold, but rather earn interest for its members as the co-created product or service succeeds in the marketplace. A community share model works with charitable organisations and co-operative structures, but not private companies.
Approach 3: Develop new legal structures and funding models
With the rise of blockchain technology, a number of ecosystem role-players are experimenting with decentralised financing and fundraising models that raise money through utility or security based tokens.
Others are experimenting with blockchain based governance models that use smart contracts to manage and track value contributions and intellectual property in an ecosystem.
However, blockchain-based initiatives still rely heavily on existing types of legal structures to protect and reward those who invest in otherwise largely unregulated environments.
The question is, will our current available legal structures work well with the new ecosystem technologies, approaches and behaviours we want to encourage?
Or will we need brand-new legal structures that are co-designed with our regulators? A brave hybrid of for-profit, not-for-profit and other multi-stakeholder engagement that produces shared value at scale?
We are tackling this challenge and other big challenges via our private community that supports those who are orchestrating or participating in ecosystems. If you would like to be a part of this community, please contact email@example.com.