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Whether it’s at the country, corporate or individual level, this blog considers how to gauge and measure impact.

Wednesday, March 14, 2012

So You Want to Start a Social Enterprise? 10 Legal Questions Founders Should Ask Themselves and Their Partners First

By Pankaj Jain

Flickr credit: fontplaydotcom

As a corporate lawyer working at the intersection of start-up space and social enterprise sectors, I often find myself assisting co-founders in structuring relationships. When it comes to these founder partnerships or the much broader larger organizational arrangements, the conversations are inherently complex. That’s especially true at the formation and termination stages of a social enteprise. Below are two fictional, but not altogether uncommon, scenarios: 

Scenario 1: After succeeding in their university’s social business plan competition, three young college students decide to formally launch their entrepreneurial venture ABC Inc. immediately upon graduation, which will provide affordable and tailor-made software applications for the development sector. While two co-founders (who are responsible for execution and operations respectively) are committed to building ABC Inc. from the scratch, the third co-founder (who specializes in technology) wants to pursue a graduate business degree after two years. ABC Inc. also has a term sheet for USD 250,000 seed investment round from certain angel investors, at an attractive valuation, who are worried that ABC Inc. may lose its founder, who also serves as Chief Technology Officer, in a relatively short span of time.

Scenario 2: After two years of running a low cost healthcare start-up XYZ Ltd. targeted at customers earning less than USD 2 a day, the co-founders mutually decide to part ways, citing mutual lack of alignment of intent for the future of their business model and lack of growth opportunities for two of the four initial co-founders. While XYZ Ltd. was performing relatively well compared to its industry peers, two of the co-founders, who are minority shareholders, are not comfortable with the future trajectory of the business, whose revised customer focus is people earning less than USD 10 a day. These two co-founders also do not foresee personal growth for themselves and believe their fellow co-founder and CEO is not the best candidate to scale the business. The seed series investor in XYZ Ltd. also is keen to let go of the founder CEO. However, this investor has neither the contractual rights nor the support of the board of directors of XYZ Ltd. to fire the founder CEO, who incidentally owns a significant majority of XYZ Ltd. along with his “friends and family.”

Based on past experience and insights from helping founders of start-up/early stage social enterprises (and their respective investors) navigate their strategy, below are ten questions questions founders should consider asking themselves and one another that might help manage these two relatively common situtations. I would also advise them to listen closely to their answers through a structured discussion before jointly embarking on a social entrepreneurial venture:

  • Individually, what are you looking to gain from this endeavour? E.g. what personal growth, professional growth, social impact, financial returns, etc.

  • What amount of time are you willing to commit?  What are the necessary conditions for you to commit that amount of time i.e. what growth or financial returns or personal flexibility do you require?

  • What is the vision for the social business enterprise in terms of scale, sustainability and social impact? What do you see as the core competency of the organization and how do you measure social impact?  What should be the focus of the organization going forward?  Is there a broad agreement on the trajectory of the social business going forward?

  • What are the skill sets within the team and how do these skill sets complement each other? Are your individual skill-sets being reflected in the job-description? What are your skill gaps as a team?

  • How do you perceive each of your roles?  Do you believe that you are in the most appropriate role for yourself today, and will that continue to be the most appropriate role for you as the organization scales? Do you see the professional development afforded by the role as enough to hold you with the organization for the long-term? What factors might enter into a decision to stay or leave the organization?

  • Of the founder team, who is indispensable and what happens when one of the founder leaves the company? How do you ensure enough and continual “skin in the game”? E.g. Is there an appropriate “lock-in” of founders’ shares or progressive vesting of founders’ equity over a period of time?

  • Is the social entrepreneurial venture intended to be for-profit or not-for-profit? Are all the founders on the same page in relation to this understanding? How much does each of you want to own in the organization?  How much money are you willing to put in, how much equity control are you willing to give away as an employee stock option pool or to angel investors/ impact investors/ commercial investors?

  • How much management control are you willing to give away as you grow?  What do you view as the downside and upside of bringing in outside investors?

  • How do you handle decision making and dissent in the business relationship?  How are disagreements typically handled? In your view, are points of dissent constructively and openly handled in the business relationship?

  • Who are your board of directors, advisors and mentors? How do you plan to formally engage with them?

These questions and the ensuing discussion may lead to informed decision making as well as apt structuring of the mutual relationship between the co-founders of a social business enterprise, salient terms of which should ideally be incorporated in an appropriately drafted founders’ agreement.

Any thoughts on any other points that I may have missed? Experiences?

(Since not giving a disclaimer is a professional hazard, the above mentioned scenarios are fictional, and concocted for illustrative purposes only).

 

 

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