‘Starting & Scaling Social
Enterprises: A Crash Course’
Presented by:
Zoe Hunton, Legal Counsel for Nonprofits, Foundations
& Social Enterprises, Hunton Law, Palo Alto
Neetal Parekh, Social innovation lawyer, entrepreneur,
cofounder of Thinktomi, and blogger at Innov8Social
Natalia Thurston, Director of Legal Services, Social
Venture Law, Oakland
May 27, 2015 at Stanford Law School
Social Enterprise: The New Sector
Definitions of Social Enterprise
 No legal definition of social enterprise
 No uniformly recognized nonlegal definition
 “Social enterprises are businesses whose primary purpose is the common
good. They use the methods and disciplines of business and the power of
the marketplace to advance their social, environmental and human justice
agendas.” (Social Enterprise Alliance, https://www.se-alliance.org)
 A social entrepreneur is “Society’s change agent: a pioneer of innovations
that benefit humanity.’’ (Skoll Foundation, http://www.skollfoundation.org)
 Social enterprises can be business/commercial activities housed within a
for-profit taxable entity or a nonprofit tax-exempt entity
The Legal Entity Continuum
Source: http://entrepreneurstoolkit.org
Social Enterprise: Present & Future
 A compelling tool for change
 An appealing field of practice
 Encompasses legal issues facing both for-profit, taxable
entities and nonprofit, tax-exempt entities
 Corporate law, governance, taxation, finance, etc.
 Legal structure menu is larger (and more confusing?)
 Benefit corp, social purpose corp, L3C
 Legal infrastructure to support SE is gradually building
 LawForChange, Mission Investors Exchange
The Nonprofit and Philanthropic Sector
 Duty of competence; client counseling
 Foundation capital directed toward for-profit social enterprises
(equity investment, loans, grants)
 Hybrids
 Fiscal sponsorship
 Incubators/accelerators; Fast Forward
 Legal distinctions for tax-exempt investors among socially
responsible investing, mission-related investments, and
program-related investments in social enterprises
The Recent Rise of New Statutes in CA

Early 2000’s : CA leaders meet at Aspen institute and discuss the idea of a new structure

2008 : B Lab introduces CA constituency statute. Passes in legislature but Gov. Schwarzenneger
doesn’t sign.

2008 : Vermont becomes first state to pass L3C legislation

2010 : 2 group introduce social enterprise bills: benefit corporation & flexible purpose
corporation (later renamed to social purpose corp)

2011 : Both bills pass in CA (6th state for benefit corp)

2012 : WA passes social purpose corporation

2013 : DE becomes 19th jurisdiction to pass benefit corporation legislation

2014 : NC becomes 1st state to repeal L3C

2015 : 27 states have passed benefit corporation legislation, 14 are working on it

2015 : 11-1 states have passed L3C

2015 : 4 states have passed a form of the social purpose corporation
New Legal Forms
 Benefit corporation
 Model legislation - key features : 1) material positive impact 2) expands fiduciary duty 3)
public reporting using 3rd party standards
 Example: Patagonia; Rimon Law Group, Singularity University
 Social purpose corporation
 How it differs from benefit corporation : identifies a specific/special purpose (narrower in
scope of impact) ; differing reporting requirements
 Example: Prometheus Civic Technologies (1st in CA), Neurolearning SPC (WA)
 L3C
 Social benefits of nonprofit + tax benefits & flexibility of LLC. Due diligence for PRI?
 Example: Moo Milk (VT)
Funding Social Enterprises
 Impact investing
 Crowdfunding for donation
 Crowdfunding for investment (DPO’s, JOBS Act, Reg A+)
 Social venture funds
 Microlending
 Social impact bonds
How Founders & Companies Can Preserve
Mission
 Hybrid structures
 Tandem strutures
 Governance mechanisms and voting rights
 For-profit + nonprofit tandems and parent-sub relationships
 IP licensing
 Business judgment rule
 Constituency statutes
 Employee stock ownership plans
 Cooperatives
 Crowdfunding Legislation
The Etsy IPO – A Case Study in Scaling a
Social Enterprise
 Etsy is an online craft bazaar with a mission to “reimagine commerce
in ways that build a more lasting and fulfilling world.”
 Established in 2005 in Brooklyn, NY as an online marketplace for
artists and craftspeople to sell handmade goods, Etsy has grown to
approximately 400 employees with 25 million members including 1
million active sellers and 19.8 million active buyers.
 Etsy’s business model relies on its sellers paying 20-cent listing fees
and 3.5 percent transaction and payment processing fees on items
sold.
 Sales on Etsy topped $1 Billion in 2013 and from 2012-15, Etsy has
lost approximately $18.4 Million.
Etsy’s Legal Structure and Social Mission
 Etsy is registered as Delaware “C” corporation and was certified
as a B-Corp by B-Lab in 2012.
 Etsy’s four-pronged approach to incorporating social benefits in
its mission includes:
 Community: Core services support micro-businesses that make and sell handmade goods
to promote job growth rate
 Employees: All part-time, temporary workers receive at least 43% more than local living
wage
 Environment: Offer used bikes and maintenance service to encourage biking to work
 Governance: Engage with stakeholders (sellers) to solicit feedback on social performance
 Under B-Lab’s rules, Etsy has until 2017 to file amended Articles
as a benefit corporation or risk losing B-Corp certification.
Etsy IPO Facts
 On 4/16/15, Etsy debuted on the Nasdaq stock market issuing
16,666,666 million shares at $16 a share and selling more than
13 million shares on its first day of trading--closing at a peak of
$31 a share and raising $267 million with a market valuation of
$1.8 million.
 As of 5/26/15, Etsy’s stock was trading at $17.09 a share with
share price falling 42% in the five weeks since its IPO, with
nearly half of that -- 18% -- occurring on 5/13/15, the day after
the company reported a worse-than-expected quarterly loss.
 Analysts suggest Etsy may have rushed through the offering
before it was ready to face public scrutiny.
Growing Pains & Unique Issues Raised by
the Etsy IPO
 Mission v. Profit Motive. New social enterprise legal structures
challenge the traditional Dodge v. Ford rule that the singular duty of
directors is to maximize financial gain for a corporation’s
shareholders. Lack of case law precedent for benefit and social
purpose corporations has created what has been described in one NY
Times article as “a tricky untested scheme that opens a can of legal
worms.”
 Transparency and Fraud in the Marketplace: As only the second
benefit corporation to go public, Etsy faces additional public scrutiny
from stakeholders including investors and stock market analysts.
Recent controversies involve sale of counterfeit goods on the site and
Etsy’s 2013 decision to relax rules regarding sale of handmade goods
only to allow for sale of mass manufactured goods on the site.
Growing Pains & Unique Issues Raised by
the Etsy IPO (continued)
 Shareholder Lawsuits: On 5/22/15, a national securities law firm filed
a federal class action lawsuit against Etsy alleging the company and
executives violated federal securities laws by making false and
misleading statements and/or failing to disclose that over 5% of
merchandise for sale on the site was counterfeit or constituted
trademark and/or copyright infringement.
 Social Mission Preservation: Amazon.com recently announced the
launch of “Handmade”—an online marketplace offering handmade
goods as a challenge to Etsy’s marketplace with over 278 million
active users. Will Etsy be able to preserve its social mission while
remaining competitive in the public marketplace?