Becoming A Benefit Corporation Is Complicated: This Startup Wants To Help
When Anand Kulkarni was birthing his new startup, Crowdbotics, nine months ago, he knew it had to be a public benefit corporation (PBC). He wanted the business to make money. But he also wanted to make sure the company’s workers, customers, and community would be treated fairly. By setting up as a PBC–a legal designation that requires businesses to do right by their stakeholders as well as their shareholders–he could set down a marker about Crowdbotics’s values, he says, and hopefully ensure those values could be maintained over time.
Kulkarni, who last year left his previous startup LeadGenius, a marketing automation service, says startups need to safeguard their ideals lest they get lost in the transition to growth. “As companies scale up, you often experience tensions between financial demands imposed on you as a profit-making company, and the desire of the founding team to stay true to the principles that motivated you to create a company in the first place,” he says in an interview.
[Illustration: wacomka/iStock]
Kulkarni is incorporating Crowdbotics in Delaware using a service called Clerky, which helps startups with legal documentation needs, including standard “C” Corporation filings, and it recently added a new option of PBC incorporation. Delaware is one of 33 states that now allow benefit incorporations.
Benefit corporation statutes vary in strength and force, but they generally allow managers to take account of a wider array of stakeholders than standard companies, including workers, suppliers, local communities, and the environment. (In addition, some startups become Certified B Corporations, a tougher certification offered by B Lab, a nonprofit.) C Corp managers are legally obliged to maximize earnings for owners, and sometimes, as Kulkarni says, that imperative can get in the way of other priorities. B Corp managers, by contrast, are legally obliged to look after stakeholder interests alongside those of shareholders.
“The nice thing is, it’s baked into the corporate charter. It’s not a mission statement. In addition to maximizing shareholder value, it’s permitted to use resources to maximize social value for the company as well,” says Kulkarni, a University of California, Berkeley-trained mathematician. “It’s not a choice for every company. But if they want to take account of their social impact, and make that something defensible and a core purpose, it’s an elegant way to do that at the inception.”
[Illustration: wacomka/iStock]
Crowdbotics develops ways to automate web and mobile software. Its coders are “on demand,” working remotely from across the U.S., Latin America, the Middle East, and Eastern Europe. Most are women or minorities–individuals frequently “underrepresented in the software universe,” Kulkarni says. “We want to say that the reason this company exists is not only to deliver strong returns to the market, but also to create value for society or stakeholders, like our developers who are not typically part of the equation.”
Clerky’s software and templates allow startups to do the full PBC incorporation process online. It standardizes knowledge about the best way to file, as opposed to going to a lawyer, for whom PBCs may be a new thing, says Darby Wong, cofounder and CEO of Clerky. Startups will often check their completed paperwork with outside lawyers, he says. But in his experience, many law firms aren’t interested in drawing up formation documents. There isn’t enough money in it. “Most of their money is in doing acquisitions or venture capital financing, IPOs, etc. Company formation is something they do to get the company to a point where they can start to make money. It’s not a huge part of their business model,” he says in an interview.
B Lab says more startups would become PBCs if the process of incorporation was simpler and cheaper. “We work with companies trying to bridge the gap between being for-profit and being socially responsible,” Rick Alexander, head of legal policy at B Lab, tells me. “A lot of founders have heard about benefit incorporation, but they don’t know how to do it, and they don’t have money to invest in legal fees. [Clerky means] they can have the forms they need, and they can do what they would have liked to have done, and they don’t have to pay the money.”
PBC incorporation on Clerky costs $99, plus official filing fees. The price is the same as for C Corp formation. Clerky also helps companies with fundraising, hiring personnel, and equity compensation schemes. In all cases, Wong says getting the paperwork in order as the company is founded can help avoid problems later on–for example, when a startup is looking for funding. Several thousand startups have used Clerky’s existing service, including LeadGenius, which has raised more than $20 million in venture capital.
[Illustration: wacomka/iStock]
Crowdbotics is part of the latest Y Combinator accelerator class, showing how PBCs are spreading. There are now at least 4,000 PBCs in all, including Method, Kickstarter, and Plum Organics (some states don’t keep numbers, so an official count is difficult to come by).
It’s still a legal gray area as to whether PBC incorporation actually safeguards a company’s mission in all circumstances. For example, if a company is part of a hostile takeover, it will be hard for managers to do anything differently than what the new owners want. But still, the option represents the best legal safeguards currently available.
“I think the legal structure makes all the difference in the world,” says Alexander at B Lab. “If you want to explicitly operate as a company that takes account of all your stakeholders, you cannot do that effectively without this structure. Ultimately it comes down to the shareholders, but this offers a huge amount of protection.”
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