B Corps Attract Notice, But Not in Silicon Valley: UPDATED

Last August, 8-year-old CouchSurfing, a social networking Web site whose members offer their homes to travelers free of charge, dropped its non-profit status and became a “B Corp” or “benefit corporation,” announcing $7.6 million in funding from Omidyar Network and Benchmark Capital as it made the transition.

In the cookie cutter legal world of Silicon Valley, where the overwhelming majority of companies are organized as C-Corps, CouchSurfing’s new corporate status was a novelty. Was this some new trend?

Yes, actually. B Corps – socially responsible businesses certified by a non-profit organization called B Lab – are beginning to gain momentum. In fact, legislation for B Corps and another variant called “flexible purpose companies” took effect January 1 in California to give entrepreneurs legal protection from investors who are interested in profitability alone. Next month, New York will begin legally recognizing B Corps, too.

Plenty of companies are seizing on the new laws. Among them is privately held clothing brand Patagonia, which is based in Ventura, Calif., and became a B Corp last week. (Founder Yvon Chouinard, who formed the company 30 years ago, wants to ensure that its focus on social goals continues after his death.)

Not so traditional, Silicon Valley startups. Several prominent startup attorneys approached for this story knew nothing about B Corps, while another told me: “I’ve never had a client ask me about them or seen them in actual operation.”

Perhaps that’s because “[n]ot one VC who I’ve spoken to about the models would be willing to sit on the board of a benefit corporation,” says Drew Markham, an associate in the Seattle office of powerhouse law firm Wilson Sonsini Goodrich & Rosati. “Most VCs take a seat on the board of directors when they invest, and the burden on directors and potential liability is too great under the benefit statute.”

(CouchSurfing did not respond to interview requests for this story, and Benchmark’s Matt Cohler, who now sits on its board, declined to discuss the deal.)

Such attitudes may slowly change.  Clean Currents, a seven-year-old wind and solar power supplier based in Rockville, Maryland, also raised money after structuring itself as a B Corp. (The firm jumped at the chance in 2010, when Maryland became the first of the seven states to now legally back B Corps.) With “just under $2 million” in seed funding and ongoing talks with at least one venture firm, the company’s B Corp status “hasn’t hurt us in our conversations” with investors, says co-founder Leon Keshishian.

Still, Markham and Todd Johnson, a partner in the Palo Alto office of Jones Day, think “flexible purpose” companies are more likely to take off in the tech industry, because flexible purpose startups have greater freedom to define their respective missions. (Rather than work with B Lab and its own broad standards, a flexible purpose startup can, for example, focus exclusively on carbon offsets or on becoming a zero waste company.)

Others find it hard to believe the tech industry will make use of either structure, or that it needs to.

“I suppose B Corps or flexible purpose companies could catch on over time if they become the new thing,” says attorney Steve Browne, who co-leads the corporate practice group of Bingham McCutchen. “But if you look at most companies, they [already] do charitable giving. I don’t know whether you call that good corporate citizenship. But I’m not aware of any shareholders who’ve sued a company for being too socially conscious.”

UPDATE: Apologies, readers. I tried cramming too much information into a 600-word column and some inaccuracies resulted. For startups interested in knowing a bit more about B Corps, benefit corps, and flexible purpose corps, you should know (care of Wilson Sonsini’s Drew Markham):

1.) “There is a difference between a certified ‘B Corporation” and a company that is incorporated as a “benefit corporation.”  The B Corp is certified as attaining a certain score under B Lab’s rating system; the company pays B Lab a fee (based on its revenues, I believe) for such certification.  The certification has no legal status.  Any entity can be a certified B Corp (e.g., a C corp, LLC, partnership, nonprofit).  B Labs started certifying B Corps a number of years ago.”

2.) “The benefit corporation is a new legal structure that is now available to for-profit corporations in seven states. Only a C corporation can be a benefit corporation (i.e., not an LLC, partnership or nonprofit).  A benefit corporation can become a certified B Corp, but is not required to do so.  From a legal perspective, the benefit corporation structure changes the fiduciary duties of directors.  The first benefit corporation law was passed in Maryland in 2010.”

3.) “The flexible purpose corporation (not “company”) is also a new legal form, but is only available in California.”

Thanks, Drew.

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5 Comments

  • Hey Connie – you are mixing up a couple of different concepts here. “B-corp” is NOT a different form of Corporation (as in C-corp or S-corp) but is, instead a CERTIFICATION. It means that the entity (which could be a corporation, such as a C-corp, or an LLC or some other type of entity) has adopted certain “socially conscious” positions into its charter (where possible) or into its “philosophy” (supporting all stakeholders, not just shareholders). There is a certification process managed by B-labs, that an entity must complete to obtain this certification. Think of it as the “Good Housekeeping Seal of Approval”.

    This is VERY DIFFERENT from the two new types of corporate entities that were recently signed into law by the CA govenor. These two new entities: The Benefit Corporation (which is NOT the same as a B-corp) and the Flexible Purpose Corporation. These two are actual different forms of corporation entities that have, as part of their purpose, to create positive impact on society/environment and/or specific charitable and public purpose activities. These entities are attractive to certain investors, foundations, and others who are interested in “impact investing”.

    Katovich & Kassan Law Group is a certified B corp (in the SF East Bay/Oakland) , and focuses on providing legal services to these types of entities. This is a rapidly growing area!

  • Hi, Susan, thanks. I think you might have missed the update above. But interesting that your law firm is a certified B corp itself. I’m working on a larger story about this — shoot me an email if you’d like to talk.

  • You might also note that CouchSurfing did not “drop” its nonprofit status. Rather it was refused nonprofit status due to it being run for the personal profit of its management, and its failure to respect any of the commitments it made to the IRS regarding the pursuit of charitable actvities.

    CouchSurfing will NOT be pursuing Benefit Corporation status, since its ownership has no interest in doing so. CouchSurfing’s major source of VC capital, Benchmark Capital (represented on the CS board by BC partner Matt Cohler), once had the B-Lab seal of approval, but disengaged from certification.

    B-Lab, the organization which gives its voluntary seal of approval, is at present investigating CS’s application, which presents several abnormalities, including demanding certification for a C Corporation based on the details of a nonprofit organization, as well as several other false statements in CS’s application process.

    It is no wonder that CS and Cohler refused to comment for your article.

  • > .. which presents several abnormalities, including demanding certification for a C Corporation based on the details of a nonprofit organization ..

    IRS declined the non-profit status, company switched to full C-corp and applied for certification with the existing track record of the past as a non-profit. I’m an attorney for business laws – and to be honest – don’t see any abnormalities with that.

    Just because a company changes its legal form doesn’t mean its past is erased out of the fiscal memory.

  • [...] just read an article from peHUB about B-Corps and benefit corporations and really don’t know much about this form of business entity. Only legally recognized in 7 [...]

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