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.”