The Art of Social Enterprise : Business as if People Mattered 9781550925340, 9780865717305

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Praise for

The Art of Social Enterprise Reading The Art of Social Enterprise is like sitting down at the bar for a nobull session with a couple of old hands — the language is lively, the advice sage and personal. If you are looking for accessible wisdom when it comes to starting your own social enterprise, buy this book. — Eban Goodstein, Economist and Director, Bard MBA in Sustainability

A book about business with heart, written by two lawyers with heart. It’s entertaining, wise and eminently useful. — Gil Friend, CEO Natural Logic Inc., Inaugural Member, Sustainability Hall of Fame, author, The Truth About Green Business

An accessible introduction to social enterprise and its potential for taking innovation from idea to impact. In an easy-to-read style, the authors take readers from A to Z, reviewing key concepts and principles of successfully launching sustainable ventures. A great addition to any library! — Jed Emerson, Founding Director, Roberts Enterprise Development Fund (REDF)

Each new page offers profound insight and inspiration couched in simple guidance. Here at last is the essential tool for social entrepreneurs to succeed. A must-read work of art about the art of social enterprise. — Doug Hammond, founding partner, Burns & Hammond, and former executive director, the Business Alliance for Local Living Economies

A lively book about the real stuff of social enterprise — legally, financially, and spiritually. Social entrepreneurs will find themselves not just reading the book avidly, but keeping it on their desk to consult whenever dilemmas arise. — Bill Torbert, Principal, Action Inquiry Fellowship, and Leadership Professor Emeritus, Boston College

Frankel and Bromberger have been through it all and emerged with compelling wisdom. The Art of Social Enterprise offers great advice about intention, money, emotions, law, relationships, teamwork, self-awareness and more. It is a very well researched and artfully written book covering all aspects of how to start, run and live a social enterprise. — Gifford Pinchot, President and co-founder, the Bainbridge Graduate Institute

The world urgently needs new ways of doing business. The Art of Social Enterprise shows the way with clarity, insight and humor. A first-rate guide for people who are pioneering the entrepreneurship of the future. — Paul Gilding, author, The Great Disruption

The Art of Social Enterprise provides the framework and the strategies in a highly accessible book that will advance this field at a time when our society needs these enterprises more than ever. — David Levine, cofounder and CEO, American Sustainable Business Council

Frankel and Bromberger have delivered a gem in The Art of Social Enterprise. They reveal the simple but profound truth that being a successful social entrepreneur is as much about getting your interior (mental) house in order as it is about external strategy and financing. In the end, it is about reducing the amount of suffering in the world — for yourself as well as for the poor and the environment. — Stuart L. Hart, S. C. Johnson Chair in Sustainable Global Enterprise, Cornell University

Our only sustainable competitive advantage against injustice, environmental ruin, and economic decay is our ability to rapidly evolve ourselves, our systems, and our cultures. This book is an evolutionary accelerator for those committed to cultivating an unprecedented flourishing of humanity and nature. — Barrett C. Brown, PhD, president, Metalntegral Academy, and executive director, Integral Sustainability Center

A thoroughly insightful depiction of the ins and outs of social enterprise. This book will also provide you with a deep sense of this important emerging enterprise that busts the doors down the traditional business model. It is a must read for anyone interested in delving into the realm of social enterprise, or starting their own venture to create good. ­— Jeffrey Hollender, co-founder and former CEO, Seventh Generation

Copyright © 2013 by Carl Frankel and Allen Bromberger. All rights reserved. Cover design by Diane McIntosh. © iStock Printed in Canada. First printing March 2013. Paperback ISBN: 978-0-86571-730-5 eISBN: 978-1-55092-534-0 In some cases, names of individuals and enterprises have been changed to protect privacy. Inquiries regarding requests to reprint all or part of The Art of Social Enterprise should be addressed to New Society Publishers at the address below. To order directly from the publishers, please call toll-free (North America) 1-800-567-6772, or order online at www.newsociety.com Any other inquiries can be directed by mail to: New Society Publishers P.O. Box 189, Gabriola Island, BC V0R 1X0, Canada (250) 247-9737 New Society Publishers’ mission is to publish books that contribute in fundamental ways to building an ecologically sustainable and just society, and to do so with the least possible impact on the environment, in a manner that models this vision. We are committed to doing this not just through education, but through action. The interior pages of our bound books are printed on Forest Stewardship Council®-registered acid-free paper that is 100% post-consumer recycled (100% old growth forest-free), processed chlorine free, and printed with vegetable-based, low-VOC inks, with covers produced using FSC®-registered stock. New Society also works to reduce its carbon footprint, and purchases carbon offsets based on an annual audit to ensure a carbon neutral footprint. For further information, or to browse our full list of books and purchase securely, visit our website at: www.newsociety.com Library and Archives Canada Cataloguing in Publication Frankel, Carl, 1950The art of social enterprise : business as if people mattered / Carl Frankel and Allen Bromberger. Includes bibliographical references and index. ISBN 978-0-86571-730-5 1. Social entrepreneurship. 2. Social responsibility of business. I. Bromberger, Allen R II. Title. HD60.F73 2013

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This book is dedicated to the millions of social entrepreneurs around the globe and their supporters who are working to make the world a better place.

You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete. — R. Buckminster Fuller

Contents

Acknowledgments...........................................................................xi

Section One: This Thing Called Social Enterprise...................1 Chapter 1 — New World, New Rules.............................................3 Why Social Enterprise?..............................................................4 Why Now?.................................................................................7 About This Book......................................................................10 About the Authors...................................................................13 Chapter 2 — Portrait of a Tribe-in-Progress.................................17 Defining Social Enterprise........................................................18 Not Left or Right.....................................................................20 Variations on a Theme..............................................................23 Species of Social Enterprise......................................................26 Chapter 3 — Battle of the Worldviews..........................................35 Is Social Enterprise Subversive?................................................43 A Transitional Phase.................................................................46

Section Two: Key IMP-gredients..............................................49 Chapter 4 — Intention Is Where the Heart Is...............................51 The Primacy of Intention.........................................................52 Establishing Intention..............................................................54 vii

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Communicating Intention.......................................................61 Preserving Intention.................................................................63 The Brand’s the Thing..............................................................67 Chapter 5 — Money Matters........................................................69 A Catch-22 for Hungries..........................................................70 Capital Market, Here We Come...............................................72 The Valuation Conundrum......................................................78 The Specter of Litigation..........................................................80 Is the Capital Market Less Capital for Social Entrepreneurs?.......................................................82 Sharing the Wealth...................................................................84 Chapter 6 — The Social Enterprise as People Person....................87 Make Like a Partner.................................................................89 Partnership Principles...............................................................91 Building a Strong Team............................................................97 Chapter 7 — Decisions, Decisions, Decisions.............................101 Early Stage Start-Up — The Compass of the Heart..............102 Interview with a Hungry — Getting the Horses Lined up in the Gate.....................................................................109 Do Me a Solid — Preserving the Mission with Investors........115 An Adapter Comes in from the Cold.....................................120

Section Three: The Social Zentrepreneur..............................127 Chapter 8 — The Myth America Pageant...................................129 Mainstream Myths About Business........................................133 Counternarratives About Power and Leadership.....................138 The Coachman and the Narratives.........................................142 Chapter 9 — Carl and Allen’s Ten Commandments...................145 Commandment One: Respect Money....................................147 Commandment Two: Be Intensely Strategic...........................149 Commandment Three: Insist on Quality................................153

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Commandment Four: KISS (Keep It Simple, Stupid)............154 Commandment Five: Be Willing to Compromise on Everything but Your Integrity.........................................155 Commandment Six: Know Thyself........................................158 Commandment Seven: Get Support......................................158 Commandment Eight: Cultivate a Healthy Relationship with Your (Ad)Venture........................................................160 Commandment Nine: Take Care of Yourself..........................161 Commandment Ten: Keep Dancing on the High Wire..........162 Chapter 10 — Overcoming Entrepreneur’s Disease....................165 Please Let Me Bring You Down..............................................168 An Anxiety Management Protocol.........................................171 Appendix A: Comparison of Characteristics of Basic Business Entities..................................................178 Appendix B: Everything You Want to Know About Social Enterprise but Were Afraid to Ask...........................180 Notes...........................................................................................184 Index ...........................................................................................188 About the Authors.......................................................................195

Acknowledgments

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ecause I’ve been working in the field of socially responsible business and social enterprise for over two decades, I have to scan a broad swath of time to bring up all the people I might acknowledge. Inevitably, some of my teachers and colleagues will go missing. This is a failure of memory, not gratitude. Meanwhile I want to thank the following individuals for believing in me learning with me, and helping me develop what expertise I have: Tony Cortese, Gil Friend, Paul Gilding, Stuart Hart, Brian Kelly, Kim Loughran, Joel Makower, Bob Massie, Nipun Mehta, Heerad Sabeti, Andrea Spencer-Cooke, the late Michael Ward and Martin Wright. I am grateful to the people who made time in their busy lives to be interviewed for this book: Linda Alvarez, David Case, Christina Dean, Phil Harvey, Linda Law, Rob Lederer, Tom Lee, Michael Pirron, George Polisner, Heerad Sabeti, Michelle St. Jane, Houghton Wan and Andrew Williams. My apologies to those on this list who through no fault of their own did not make it into the final pages. A special shout-out to social enterprise expert Mitchell Pines for feedback that made possible some important fine-tuning. Sheri and Deb, thanks for your excellent guidance, too. Many friends have sustained me along the way. I will name the first few that come to mind: Brent, Bryan, David, Deb, Eric, Hudson, Mitch, Paul, Rob, Val and Wendy. The rest of you know who you are. xi

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I am also grateful to my immediate family: Aaron, Emily, Hunter, Mark, Sue, Woody and the mysterious newcomer. I am grateful to my co-author, Allen Bromberger, for his indispensable contributions. Finally, I want to thank the extraordinary Sheri Winston for her love and support. Sheri, I’m grateful to be sharing life’s journey with you. — Carl Frankel A book like this is inevitably the product of the work of many pioneers who share ideas and experiment — and who generously share the results of those experiments. Some but not all of them are listed here. I am especially indebted to my co-author Carl Frankel, who gave voice to some very complicated material. I’d like to acknowledge my law partners, Seth and Cliff Perlman and Barbara Nagel, and our amazing colleagues Karen Wu, Casey Oetgen, Carly Leinheiser and Janelle Joseph, who have been through many deals with me. I also want to thank Terry Mollner, Wayne Silby, Todd Johnson, Joy Anderson, Jay Cohn Gilbert, Andrew Kassoy and Bart Houlahan (the creators of B Lab), Heerad Sabeti, Woody Tasch, Deb Nelson, David Levine, Jeffrey Hollender, Mark Lane, Bill Strathmann, Peter Swords, J. David Seay, Victor Rubino, Dan Pallotta, Eileen Heisman, Rob Wexler, Cass Brewer, Marc Owens, Mike Sanders, Evelyn Brody, Marion Fremont-Smith and Jim Fruchterman. Finally, thank you to those who supported me through thick and thin: my wife, Lauren Goldstein, and my daughters, Abigail and Eliza. — Allen Bromberger

Section One

This Thing Called Social Enterprise

Chapter 1

New World, New Rules

It is one of the most beautiful compensations of this life that no man can sincerely try to help another without helping himself. — Ralph Waldo Emerson

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reetings! This book is a guide to succeeding at social enterprise, an emerging approach to organized, productive human activity that seeks to make it easier for people to satisfy their parallel desires to do well personally and serve others. As lawyers and practitioners with a collective five decades of experience in socially responsible business and social enterprise, we want to help social entrepreneurs succeed — and we know how difficult that can be. A social entrepreneur is first and foremost an entrepreneur, and the vast majority of entrepreneurial ventures come up empty. Add “social” to the mix and the challenge gets even bigger. In part, this is because the social enterprise rules of engagement are inherently more complex. There are more masters to serve, more variables to consider. In addition, the rules are less clear — social enterprise is still in its adolescence, and success maps get built over time. There’s a lot of fog in the air. This is why we wrote this book — to do what we can to dispel it. 3

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Challenging, yes — but definitely a game worth playing. Not only is social enterprise an inherently high-minded and worthy activity — the “best we can be,” as it were — but as a practical matter, it can also increase your chances of success … if you play your cards right. Now more than ever, people long for what the visionary futurist R. Buckminster Fuller called a world that works for all. This yearning is every social entrepreneur’s trump card. Harness this energy, channel it into your particular project, and it will be the wind in your sails that speeds you to success.

Why Social Enterprise? Before getting into the mechanics of social enterprise, let’s explore why social enterprise is getting so much traction in the world. Ideas are like sperm in this one sense — for every billion, only one or two actually become manifest in the world. Why has social enterprise succeeded where so many ideas have failed? We believe social enterprise has caught on because it speaks to a deep human longing, as it happens the same one that inspires all the great religions — the desire to eliminate human suffering. Say what? That’s quite a leap, isn’t it? Yes, so let us explain. If you’re like us, you’d like to see an end to suffering. We can start with modest goals like, say, the elimination of poverty and disease. Since suffering isn’t only physical, you’d also like things to be fairer. You’d prefer a more equitable distribution of resources between haves and have-nots. You’d like women around the world to have rights equal to men. You’d like to see races and religions equally honored and respected. If you’re at all strategic, you also yearn for a change in the conditions that give rise to suffering. You’d like our ecological systems to be healthy, not just for their own sake but because a healthy environment is also bounteous and can reduce poverty and disease. You’d like our political systems to benefit all, not just a fortunate few. You’d like our



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social systems to be driven more by caring and less by the lust for power. You’d like to see more beauty and nobility in the world. But — again, if you’re like us — it’s not just conditions “out there” that you’re concerned about. There’s also you — the conditions “in here,” as it were. When we contemplate the reality of suffering in the world, we suffer too — and none of us wants that. We really don’t want that! Let’s be honest: our altruistic yearnings have a selfish aspect. It’s not all about us, but it is a lot about us. This isn’t a bad thing and certainly nothing to chastise ourselves about. Even those of us who aren’t particularly selfish are self-centered — focused on ourselves. We’re all primarily concerned with our own well-being. The fact is, if there’s one thing our species is good at, it’s suffering. We feel pain when we look outside at the state of the world. We feel pain when we look inside and conclude that we’ve been operating from less than our highest self, or that we haven’t been doing as much as we could to reduce the amount of suffering in the world. It also hurts when we don’t achieve the results we’re hoping for. Sometimes we get in our own way, sometimes the world gets in our way, and sometimes it’s a combination. Whatever the cause, it’s vexing when there’s a gap between our intentions and our achievements — and vexation doesn’t feel good. More generally, whenever our awareness is split, we suffer. If I long to feel noble and view my behavior as base, that’s a split. If I envision seamless success but the reality is mixed, that’s a split. If I yearn for an end to poverty and see shantytowns everywhere, that’s a split, and into that split — into all splits — creeps suffering. With these thoughts for background, let’s return to social enterprise. As currently structured, our organizational forms encourage suffering. The rules of the road for business tend to encourage “mefirst” selfishness, a perspective that conflicts with people’s desire to view themselves as high-minded. The rules of the road for the nonprofit sector tend to discourage bold, effective action, and risk taking,

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and since achieving great results is as sought after as nobility of spirit, this, too, is frustrating for many people. The result: people are left feeling torn between two unsatisfactory choices — damned if they do and damned if they don’t. This is where social enterprise comes in. It’s about reducing the amount of suffering in the world — physical, spiritual and emotional. It’s about reducing the amount of suffering inside ourselves. It’s about feeling good about the work we do — and being effective, too. It’s about bringing an end to the split in organizational forms that forces us to choose between doing good and doing well, thereby increasing our internal suffering, while also making it more difficult to reduce the amount of suffering in the world. Ask your typical social entrepreneur and they won’t say, “I’m doing this because I want to end suffering.” They’re likelier to focus on their particular cause: “I want to support the emergence of urban agriculture.” “I want to get eyeglasses to people who can’t afford them.” Still, if you keep peeling back the layers of the onion, you’ll eventually get to the same basic longing — the desire to end suffering, inside and out. Roll over, Buddha! But in this case meditation is optional. Instead, social enterprise requires us to jettison our old mental models about for-profit and non-profit boxes and to replace them with new and more integrated notions about how to do good work in the world.

There is a supposition here, and it’s a very exciting one. It’s that a modest tinkering with our “reality tunnels” can trigger a dramatically disproportionate change for the better in the world. Seen from this level, there is grandness — some might say grandiosity — in the concept of social enterprise. What else can one say about a project that, at the end of the day — at the beginning of the dream — seeks to end all suffering? And to do so, moreover, on a totally non-sectarian basis, with regard to one thing only — the welfare of all beings?



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It’s an inspiring vision. No wonder it’s caught on! Can it be achieved? This is an inevitable question — like a runaway horse, the mind just gallops down this highway — but it’s not especially useful. The more pertinent question is, can you and I can make a positive difference as individuals? If we can, that’s reason enough to take action. We needn’t belabor higher-level questions about how close we can come to creating a utopia. Yet it’s also true that we need big dreams. Not because they might come true. Because they fire us up. Because they set us into motion. And action makes all the difference.

Why Now? Big visions are nothing new. Christianity was a big idea, and it’s over two thousand years old. Communism was a big 19th century idea. But why social enterprise? And why now? The short answer is, it’s an idea whose time has come. The world needs social enterprise. These are unprecedented times. The global population is connected as never before, with access to unparalleled volumes of information — much of it trivial and pernicious, but never mind that. Scientific and technological breakthroughs are transforming our world at a mindboggling pace. Our inner sense of time — of urgency — is speeding up to match it. We’re all becoming speed freaks — with a side of attention deficit disorder. Meanwhile, wherever you look, the walls are coming tumbling down. The signs of collapse are everywhere — in our imploding financial system, our stressed natural systems, our failing economies and our hopeless and helpless politicians as they embarrass themselves inside a political system that attracts charlatans and blowhards and where not even the best can succeed. In the face of all this, the old familiar strategies are looking pretty rickety. Will free-market capitalism in its current global incarnation

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help us out of this mess? Not likely. How about our democratic form of government? Er, what democratic form of government? Then how about the power of the people? Don’t bother us; we’re watching American Idol. Obsolescence, decadence and indifference rule the day. Those with a desire to make a difference are hampered by organizational forms whose origins date back to the 19th century, an almost unimaginably different era. As it’s evolved, the for-profit organizational form rewards short-term thinking and a profits-first, social-and-environmental-damage-be-damned attitude. While this is especially true at the global corporate level, the rules of the road for small businesses aren’t much better. Most small businesses lack the resources to do anything more than pursue their narrow self-interest. The non-profit organizational form is similarly ill-suited for our current challenges. Historically, non-profits have counted on grants and donations to sustain their existence. Their metrics for defining success are often fuzzy or non-existent. When the correlation between revenue and performance is less than strict, true innovation is rare. The unfortunate reality is that the non-profit rules of the road tend to discourage the kind of all-or-nothing risk taking that leads to real change. Piled onto this is a new challenge — the grants and donations that used to sustain non-profits are drying up. Not only are the rules of the road problematic, but the road is now pockmarked with sinkholes! For many non-profits, it’s either close the doors or come up with new ways to generate revenue — and typically the only option is to play by business’s rules and pursue earned-income strategies. But when they go down that path, non-profits are accused of being just like businesses — and their tax-exempt status is then called into question, which in turn threatens their existence. With things collapsing all around us and the old ways not up to the task of making things right again, are things hopeless? No. When things fall apart, something new must rise up to replace it. It may take a while — there may be chaos for a while — but eventually new



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strategies and structures emerge. Collapse does not only mean devastation. It also means opportunity. The phoenix arising from the ashes can take one of three possible forms. The first is technological. It’s a safe bet that dramatic technological developments will keep coming down the pike. This is a fine thing — and also a mixed blessing. As the last century has taught us all too well, technological advances can produce catastrophic unintended consequences. The second possibility involves the evolution of consciousness. Some people — carriers, we suspect, of the infamous Woodstock virus — foresee a transformation in global consciousness that will usher in an era of unprecedented caring, sharing and love. We don’t think so: maybe it’s the lawyer in us. But we do anticipate more modest shifts in our mental models. As a species, we already think much more globally than we did a half-century ago — similar adaptations are sure to come along. These shifts in our dominant reality tunnel, along with the inevitable technological developments, are sure to produce new strategies for organizing human activity. In other words — and this is the third option — structural change. These structural transformations in our social systems are already hard upon us. Just think social media! Meanwhile similar though less dramatic innovations are occurring in our approach to structuring how people work together. For centuries we’ve divided private sector organizations into two branches: for-profit and non-profit. Now a hybrid form — the social enterprise — is emerging that combines for-profit revenue-generation strategies with the non-profit’s commitment to solving social problems. This structural shift is emerging from the grassroots up. The rate of adoption, though nothing like social media, is impressive. The term “social enterprise” first came into widespread use in the 1980s. As of this writing, a little more than two decades later, 11 states have enacted laws giving formal legal status to businesses that embed social commitments in their charter. A twelfth (Pennsylvania) is about to do

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the same, and Benefit Corporation statutes are on the docket in 16 more states for 2013. By any reasonable measure, this is rapid uptake. The social enterprise meme is thus emerging in the vacuum created by the breakdown of our social structures and institutions. Still, as we noted earlier, not every good idea catches on. Why social enterprise and not some alternative approach? What makes social enterprise, like a kitten at the ASPCA, so adoption-friendly? We suggest the following: • It is unambiguously positive. It takes the best of A and the best of B and makes them even better. It encourages high-mindedness and plays to our idealism. It is emotionally uplifting. • It is actionable. Anyone who wants to can go out and start a social enterprise. You don’t need a million dollars (though that helps). You don’t need to cozy up to regulators or have access to the rich and powerful. All you need, as they say, is a dream. • It is luminously preferable to the alternatives. It’s in people’s nature to comparison shop: social enterprise wins this one going away. “You never change things by fighting the existing reality,” wrote Buckminster Fuller. “To change something, build a new model that makes the existing model obsolete.” The world is in a heap of trouble. The global emotional forecast looks something like this: suffering today, intense at times, with a likelihood of even more intense suffering tomorrow. Not a happy prospect. What’s to be done? For more and more people around the world, the answer is social enterprise.

About This Book We’ve written this book because we want social enterprise as an institution to succeed and because we want individual social entrepreneurs to succeed, too. We wouldn’t have written it if we didn’t think we could help you.



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The approach we’ve adopted is somewhat unconventional. Most business books focus on either strategy and tactics, or on leadership — the outer and inner games, as it were. To be a successful entrepreneur, you need to be skilled at both — you need to be both savvy and wise — and so we’ve allocated roughly equal space to each topic. The book is divided into three sections. The first section (This Thing Called Social Enterprise) provides an overview of an emergent that, with only a hint of hyperbole, we can say is taking the world by storm. There are both outer and inner — or, if you prefer, objective and subjective — reasons why we launched the book this way. As a practical matter, the section provides a framework for the more granular material that follows. It is also useful for current and prospective practitioners to have a sense of the pond in which they swim. As for the subjective reason, when I say to myself, “I am a social entrepreneur,” a question inevitably arises: What does this mean? When I look in the mirror, who do I see looking back at me? Thus this section addresses that most basic of human questions, Who am I? And, because we are a social species, it addresses a related inquiry as well: What tribe do I belong to? Section one has three chapters: • “New World, New Rules,” the one you’re reading now. • “Portrait of a Tribe-in-Progress,” which offers an informal taxonomy of the current field of practice along with a 30,000-foot view of this complex and multi-faceted emergent. • “Battle of the Worldviews,” in which we examine how social enterprise fits into the competition between the established and emerging mental models about the best way to show up in the world. In section two (Key IMP-gredients), we turn our attention to the mechanics of running a social enterprise. At the end of the day, social entrepreneurs have three separate areas of focus: intention (what they’re setting out to accomplish), money (which supplies the energy that enables them to pursue their goals) and people (not even the most

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brilliant person can build a successful social enterprise on their own). Section two has four chapters: • “Intention Is Where the Heart Is” (about intention). • “Money Matters” (about money). • “The Social Enterprise as People Person” (about people). • “Decisions, Decisions, Decisions,” which walks the reader through Allen’s process as he problem solves with social entrepreneurs. We included this chapter because social entrepreneurs need to be adept at working with their strategic and tactical options. If you’re playing chess, you need to understand the pieces. Similarly with social enterprise — and Allen’s been playing the game for years. Section three (The Social Zentrepreneur) focuses on the inner game. It provides guidance on how to stay present and balanced while riding the inevitable rapids of social enterprise. It has three chapters: • “The Myth America Pageant” debunks conventional (and counterconventional) memes about business, power and leadership. • “Carl and Allen’s Ten Commandments” discusses inviolable success principles. • “Overcoming Entrepreneur’s Disease” addresses the special challenges that are a frequent if not inevitable result of the entrepreneurial (and social entrepreneurial) temperament. A few more observations about the book may be useful. First, we’ve included material that’s relevant for conventional as well as social entrepreneurs (and for investors, too). Every entrepreneur, social or not, needs to raise capital and risks falling prey to “visionholism.” We also discuss leadership — and that’s a life skill, not something for social entrepreneurs only. Second, we’ve tried to keep this book short, digestible and entertaining. People these days don’t have time to read: we’ve tried to follow the writer Elmore Leonard’s admonition to writers to “leave out the part that readers tend to skip.” We’ve also tried to organize the book so you’ll get lots of value even if you just dip in and out.



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Third, the main geographic focus of this book is the United States, for the simple reason that this is the country — and law — we know the most about. Activities in other countries are mentioned, as is only appropriate given the global nature of the social enterprise phenomenon. Last but not least, this book, while surely not about spirituality, is informed by spiritual intuitions. We believe that, to be truly expert at social enterprise, you need to be present and self-aware. You need to be both subjectively attuned and objectively adept. You need to cultivate skills like being comfortable with uncertainty. You need to balance ego with egolessness, self-interest with service, confidence with humility. You can legitimately view this as a spiritual practice or as a requirement of leadership. In our view, there’s much overlap between the two. With these preliminary observations out of the way, let’s move on to the important stuff. Let’s talk about us.

About the Authors In a trial, expert witnesses are expected to establish their bona fides at the outset. It’s a reasonable requirement and one that’s appropriate for authors, too. It’s also the case that all books are, at the end of the day, conversations. On the twin assumptions that you’ll experience these pages as more personal — and personable — if you know a bit more about us and that you’ll also be likelier to credit what we say if you know our qualifications, here is some background about us.

Allen Bromberger My work as a lawyer is motivated by a desire to do good and do well — the very same instincts that most of my clients share. This alignment between my own ambitions and the goals of my clients has allowed me to build a unique practice that focuses on ways that

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“charity” and “business” can work in synergy to accomplish goals that can’t be accomplished using traditional legal forms. Just as my clients have to be creative and develop new approaches to old problems, so do I. When you want to do things differently, creativity and adaptation are essential. I started my career in 1982 as a public interest lawyer working in areas ranging from prisoners’ rights and domestic violence to affordable housing and social services. Before that I was a housing and political organizer. Within a few years of legal practice, I began to focus specifically on the needs of non-profit organizations with respect to their own business affairs: fundraising, governance, legal compliance, tax exemption, political activity and commercial activity. It was during this time that I wrote and co-authored two publications that are widely used among New York lawyers: Getting Organized,1 and Advising Nonprofits.2 These how-to books were intended to help inexperienced lawyers handle non-profit legal problems efficiently. At that time, the commercial component of the non-profit sector was growing quickly as non-profits sought to find new sources of revenue and test the value of their services in the marketplace. I soon discovered that the line between business and charity made it hard for non-profits to engage effectively in commercial activities, but it also made it hard for for-profit companies to partner effectively with charities. Many is the time that business executives expressed frustration with the way charities work and all the restrictions that seem to apply. Little did they realize my non-profit clients were complaining about the same things. I soon became acquainted with socially minded business leaders and began to discuss with them how they could use their companies for good without losing their focus or profitability. I learned about how companies are started and grow, how strategic decisions are made and how the interests of executives, directors, investors, customers, suppliers and employees are juggled and reconciled. I learned how to counsel clients in a way that made their lives easier, not harder.



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Since then I have sat on a number of boards and committees, advised the federal government on ways to support social enterprise and regulate social enterprise, and written numerous articles on ways that charity and business can work together. I’m a frequent lecturer. I blog. Some very smart people seek out my advice on a regular basis, so I must be doing something right. This book is a way to take some of the lessons I’ve learned and share them in a way that is entertaining and accessible, but also deep and practical enough to be of use to its readers. The times they are achangin’, and I’m glad to be a part of it.

Carl Frankel I’m trained as a lawyer, am a member of the New York State bar and have been working in the green and socially responsible business space for over two decades as a writer, consultant and entrepreneur. Way back in eco-business prehistory — this would be in the late 1980s — I wrote the first-ever market study of green consumerism. From 1990 to 1994, I published and wrote a trade newsletter, Green MarketAlert, which tracked developments in green consumerism, socially responsible business and corporate environmentalism. For the next half dozen years or so, my focus continued to be business and sustainability. I was the North American editor for a magazine that focused on corporate environmentalism, authored a well-received book (In Earth’s Company: Business, Environment and the Challenge of Sustainability 3), consulted with numerous profits and non-profits, spoke at conferences and generally engaged with this community in the mode of expert and thought leader. As we made the turn into the new century, my attention began to shift. For years I’d been tracking and working with mostly established organizations, and I was starting to feel as if I was caught in the movie Groundhog Day. I kept seeing the same mistakes happening, I wasn’t learning anything new, and progress was painfully slow. Meanwhile we were hurtling toward the social and ecological abyss. Could the

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rate of change be accelerated? This struck me as the most important strategic challenge of our time. As I pondered this question, I found my way to two answers. First, we had to go deeper in our understanding of the root causes of the sustainability crisis. This included, among other things, integrating its inner and outer dimensions. This perspective was what inspired my 2004 book, Out of the Labyrinth: Who We Are, How We Go Wrong, and What We Can Do About It,4 which analyzed what I called the “deep structures” of the sustainability crisis. Second, since the old ways weren’t working, we needed new rules of the road. With this realization, my attention turned to social enterprise, both as a writer and practitioner. I spent many months working on a white paper on social enterprise that was commissioned by The Aspen Institute. For 18 months, I served on the management team of ManyOne Networks, an ambitious and ultimately unsuccessful social enterprise that aimed to create what founder Joseph Firmage called a “PBS for the Web.” I designed and for three years ran my own social enterprise, Our Community Networks. Think craigslist marries Groupon, ahead of its time. Since 2009 I’ve been managing director of a sex education social enterprise, The Center for the Intimate Arts. I’m deeply steeped in green business and social enterprise and look forward to sharing this brew with you.

Chapter 2

Portrait of a Tribe-in-Progress

Social enterprise is the great institutional innovation of our time. — British Prime Minister David Cameron

L

et’s get one point out of the way at this chapter’s outset: we’re not enamored of the term “social enterprise.” For one thing, its meaning isn’t intuitively clear. For those unfamiliar with the term, “social enterprise” is a conversation starter, not an explanation unto itself. For another, it suggests there’s an alternative — the “anti-social enterprise.” We’re unaware of any businesses whose employees are expected to walk around with their middle fingers hoisted in the air. Last but not least, the term practically begs to be confused with “social marketing.” Google “social enterprise” and you’ll get multiple hits about Facebook, Twitter et al. The term does have two redeeming virtues, though. The first is a weak one: the alternatives aren’t any better. The pioneering social entrepreneur Muhammad Yunus prefers the term “social business,” 5 but not all social enterprises are businesses — some are non-profits. Then there are terms like “blended value enterprise” — not a whole lot more intuitive than “social enterprise” — and “philanthro-capitalism,” which doesn’t exactly trip off the tongue. 17

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More importantly — and this is the second virtue — “social enterprise” has traction. It hasn’t quite won the semantic competition yet, but it’s in the lead, and that’s good enough for us. Long live “social enterprise!”

Defining Social Enterprise Like its cousin “sustainability,” the term “social enterprise” thrives on imprecision. Everyone uses it, no one knows exactly what it means. Not even the experts agree on what a social enterprise is. Especially not the experts! — who regularly fuss over boundary issues like the following: • Must a social enterprise be a for-profit, or do non-profits qualify? • Must a social enterprise use earned-income strategies, or can it rely solely on grants and donations? • Can a social enterprise be part of a larger conventional organization? Can a social enterprise, in other words, be intrapreneurial? • Must a social commitment be baked into the organization’s formal documents? • Must a social entrepreneur be innovative as well as entrepreneurial, and if so, how much and in what ways? The definitional debate has been going on for years and may never be resolved. There are a lot of reasonable views out there — and a lot of dug-in egos, too. At which point, it becomes worth asking why we need a consensus definition at all. Would it change behavior? Would people make little laminated cards out of the definition and carry them around in their wallets, ever at the ready for speedy reference? Probably not. Things would go on pretty much as they are today, except for one thing: a small herd of academics would need to find new grazing territory. Not that we need to spend a lot of time fretting about this. Let’s get real: no matter how much we debate the subject, we’ll never arrive at a consensus legalistic definition of social enterprise. For one thing, there’s no truth to discover here, only opinions, and the opinions will



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keep coming for as long as there are people to have them. For another, social enterprise is a vital, organic cultural emergent with precisely the sort of sprawling, grassroots energy that resists tight definition. Longtime social enterprise authority Jed Emerson hinted at this in a 2011 speech at the Commonwealth Club of California: I think there’s no single definition of social entrepreneurship. It’s simply a flow across a matrix of a variety of different forms and themes and manifestations .... It goes from social enterprise to civic innovation, it goes from non-profit to for-profit to hybrid mix, and it goes through a variety of capital and equity structures .... I think we limit ourselves by drawing the boundaries too finely and by spending so much time debating how many social entrepreneurs can dance on the head of a pin.6 This is not to suggest that definitions are not useful, just that the best definitions don’t worry about the fine print. They hold on loosely and support the overall growth of the movement, never mind what God wrote on the tablet. With this for background, let’s move on to how we — Allen and Carl — define social enterprise. For the reasons cited above, we’ve deliberately made it simple and inclusive, and focused on the energy, not the encoding. It isn’t legalistic — quite the opposite, in fact. Our definition focuses on the motivation of the lead entrepreneur or entrepreneurs. If their prime purpose is to create positive social change through some kind of commercial enterprise — if that’s what drags their weary butts out of bed every morning — they’re social entrepreneurs. If it’s not, they’re not. This is an “innerscape” definition of social entrepreneurship. Look to the heart! If you’re driven by the passion to change the world, your style is entrepreneurial, and you’re using some kind of commercial enterprise to create social impact, you’re a social entrepreneur, period. Many companies do good in the world, either directly through their core activities or secondarily, out of a commitment to corporate

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social responsibility. Companies like Exxon and Verizon provide vital services that the world needs. Their formal raison d’être isn’t to create a better world, though: it’s to generate profits. Any concerns they have for the environment, human rights or other causes are driven primarily by the intention to comply with the law, protect the brand and maximize profits. This is why they’re not social enterprises, which exist for the purpose of doing good. There’s an asterisk here. Social enterprise isn’t only an individual passionate undertaking. It’s also a social phenomenon that’s surfacing during a specific moment in history. Increasingly, social entrepreneurs see themselves as members of a very contemporary social movement consisting of people who are actually doing something and not just complaining — a sort of union of change agents who are dedicated to transforming business and the world. Any reasonable definition of social enterprise should recognize its collective (and contextual) as well as individual (and eternal) identity. Can you be a social entrepreneur if you’ve never heard of the term and don’t identify with the broader movement? Absolutely. Many faith-based entrepreneurs move in circles where social enterprise is an unfamiliar term. That doesn’t keep them from being social entrepreneurs, albeit unwittingly. This leaves us with a two-part definition of social enterprise: A social enterprise is an organization formed by one or more people whose commercial activities are primarily driven by the desire to create economically sustainable positive social change, and who are increasingly (though not necessarily) likely to identify themselves as part of a growing social movement.

Not Left or Right You may have missed this, but we buried a big ol’ can of worms in our definition. It’s to be found in our allusion to positive social change. Would someone out there define this, please? What constitutes positive



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social change is a totally subjective judgment call about which reasonable people can differ. One could make a plausible case that drilling for more oil supports positive social change — more jobs, more prosperity! Or that selling guns to householders is a good thing — reduces crime, preserves the Second Amendment! Yet these activities are not typically associated with social enterprise. There is a historical reason for this. Social enterprise is a secondgeneration phenomenon, following hard on the heels of the “socially responsible business” movement. Companies like Ben & Jerry’s and the Body Shop set out to prove that you could succeed at business while adhering to a higher moral and ethical standard than your average corporate bear. They emerged from a mental model that viewed traditional big corporations as ethically suspect if not downright evil. They were proudly progressive in their politics and corrective in their attitude toward business. The term “social enterprise” subsequently came into vogue as people started to tackle the fact that our organizational forms, as currently constructed, are an impediment to achieving positive social change. Social enterprise was an add-on of sorts. To succeed, you needed to be a “Ben & Jerry’s, plus.” It’s totally understandable for people to assume that the social enterprise apple doesn’t fall far from the socially responsible business tree — and it also misses the mark. While there are still a good many left-leaning social enterprises out there, you don’t have to be a political progressive to be a social entrepreneur. A 2009 article in the Baptist Standard, the Texas Baptist news journal, was titled “Christian Social Not all politically active businesses are progressive. For a time, the now-defunct company Star Spangled Ice Cream offered conservatives a flag-waving alternative to Ben & Jerry’s. Their flavors had names like Smaller GovernMint, Choc & Awe, Nutty Environmentalist and I Hate the French Vanilla. Ten percent of profits went to organizations that supported the US military. We don’t know how their ice cream tasted, but they did have a sense of humor.

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Entrepreneurs Measure Success by a Different Yardstick.” It told the story of Sam Say, “a Baptist layman in Hong Kong”: For [Say] ... the starting point in launching a social venture enterprise was asking how to “capture kingdom dollars for kingdom purposes.” In his case, the answer was simple. Christians buy coffee. His plan focused on developing a way they could buy a product they already planned to purchase from a provider who could help the poor farmers in his native Laos improve their lives .... Less than two years ago, he launched Bolaven Farms — an organic coffee farm that markets its product to churches and individuals in the United States .... Bolaven Farms is “a for-profit business with the mandate to act justly, love kindness and to walk humbly with God,” Say explained.7 The Applied Science Foundation for Homeland Security (ASFHS)8 is another social enterprise that’s cut from dramatically different cloth than Ben & Jerry’s. A 501(c)(3) non-profit, ASFHS’s mission, according to its website, is to “help protect the United States from man-made and natural disasters by 1. bringing together the public and private sectors and academia to develop and commercialize resilient and sustainable homeland security products and services; 2. providing a state-of-art command and control center for government entities; and, 3. offering the most up-to-date training and exercise programs for first responders and other homeland security end-users.” ASFHS pursues this mission by focusing on “accelerating the transfer of technology into end-user-driven products and systems in support of first responders and other homeland security personnel.” It does so through innovative entrepreneurial strategies such as



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the creation of a “‘living lab’ environment in its Morrelly Homeland Security Center ... that allows for unprecedented collaboration between the public and private sectors. The result: A more efficient way of developing and commercializing products and services that homeland security end-users need and can afford.” What makes ASFHS a social enterprise? Simply this: it’s an organization formed by one or more people whose commercial activities are primarily driven by the desire to create positive social change — and therefore, as per our definition, a social enterprise. If this doesn’t feel quite right to you, here’s a possible explanation. When we envision the prototypical social enterprise, we tend to imagine an entrepreneur whose heart is filled by what the Greeks called agape — love of humanity. Heal the sick, feed the hungry! That’s not ASFHS’s energy. It’s a warrior organization — all about protecting the tribe — and warriors need to clamp down on their heart — you don’t want to go all weepy and pathetic when your life — and those of your buddies — is on the line. And yet ASFHS definitely qualifies. It’s entrepreneurial and driven by the desire to produce positive social change. General Pattons are welcome in the social enterprise club, along with Mother Teresas. Social enterprise is an inclusive tribe where all are welcome, regardless of race, creed, color or archetype. Despite its historical antecedents, it is politically unaffiliated, and that’s a good thing. Positive change doesn’t come from the left or the right; it comes from people of conscience doing good work. The more, the merrier.

Variations on a Theme As we’ve seen, the generic purpose of the social enterprise is to create a healthier, happier, saner world. Given the amount of suffering on the planet, that’s your basic infinitely expanding mandate — one more reason why social enterprise is perceived as an infinitely bounteous land of opportunity.

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Social entrepreneurs tend to intervene in three ways. First, they attempt to reach underserved markets. About two-thirds of the world’s population earns four dollars a day or less and is essentially shut out of the consumer economy. Yet collectively these people comprise a huge market. Let’s see, about five billion people times four dollars per person times 365 days per year equals, wow, $7.3 trillion! Which is only sort of the point. What really matters is that these people have a burning need for services that those higher on the income pyramid take for granted, and there are ways to reach them. An example of a social enterprise in this space is the currently very early-stage LuminAID, which has developed a solar light that produces a quality of light similar to a lantern. It provides five hours of light and fully charges in six hours. One of the main potential applications for the LuminAID light is as a replacement for kerosene. According to the LuminAID website, “one in six people in the world lack stable access to electricity. Many people must rely on dangerous and toxic kerosene lamps as a primary source of light and spend upwards of 30% of their income on this kerosene. With the increasing developments in small scale solar technology, there is no reason why individuals and families should not have a safer, less expensive, and more reliable source of light. The LuminAID solar light is a cheaper, safer alternative to kerosene lamps.”9 Second, social entrepreneurs identify and address market inefficiencies. This can involve either of two approaches. The first is disintermediation — cutting out the middle person. Warby Parker,10 a New York City-based social enterprise, sells designer eyeglass frames directly to consumers. Its cost structure is such that it can afford to donate one free pair of eyeglasses to a person in need for every pair it sells. The second is intelligent intermediation — entering into a connecting/networking role in service to positive social change. The South African Social Investment Exchange (SASIX) is an example of this. South Africa’s first online social investment stock exchange — or, more precisely, a gift exchange — it facilitates contributions to selected organizations that are delivering a measurable social impact.



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These contributions are called “social investments” because, as per the SASIX website, “while they don’t offer a financial return, they do lead to real, measurable social change.”11 Basically, SASIX makes it easier for people who want to support social enterprises to do so. It prequalifies social enterprises, sparing prospective donors the need to do their own due diligence, and then provides one-stop giving. This is, in effect, its business: it generates and reinvests net revenues to fund future social impact rather than generate a financial return for investors. Finally, social entrepreneurs fix broken systems. Take the US health care system, for instance, which is flawed in ways that government regulation doesn’t address. For instance, most doctors spend an average of about five minutes per visit with their patients, which means they’re not providing compassionate care, they’re working an assembly line. This often produces inferior outcomes because when you cycle patients through your office that fast, you’ll sometimes miss information that could spell the difference between a sound and flawed diagnosis. With One Medical Group, internist and social entrepreneur Tom Lee12 set out to put the “caring” back into health care. His goal is ambitious — nothing less than affordable, high-quality, humanized health care for everyone in the United States. His company, which currently has offices in San Francisco, New York, Chicago and Washington, DC, features same-day appointments, no wait times and a healthy amount of time with one’s health care provider. The approach is integrative, with a focus on preventive health and the deployment of both Eastern and Western medical modalities. There is also extensive use of the Internet, with patients’ records available to them online and prescription renewal available via e-mail. The fee structure is strikingly reasonable. There is an annual fee of $149, plus — for uninsured patients — a $150 fee for a first visit and $100 per appointment thereafter. You probably won’t be astonished to learn that the customer response has been very favorable. “People are used to going to doctors in the old assembly-line model, so it’s a pretty low bar,” says Lee. “Still,

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they’re wowed — we often get a ‘this is too good to be true’ reaction. We want to bring humanity and personal attention back into the health care system.” That this approach could be profitable seems wildly counterintuitive, as Lee himself acknowledges. “Before I launched One Medical Group, I spent a lot of time digging into the inputs and outputs of our health care system,” he says. “From a very macro perspective, it became clear that there were enormous inefficiencies at the system that are both intra-organizational and transactional. Our operational model strips out these inefficiencies by using technology instead of paper — reducing our administrative labor costs to one-third what they would be in a conventional medical office. We reinvested those wasted dollars in the customer experience.” The business model is scalable and intended for the broad population in urban and rural areas at all income levels. Lee is committed to creating a corporate culture and ownership structure that rewards local connections and innovation. “Big corporations tend to standardize, homogenize and obliterate local environments,” he says. “We aspire to grow larger because there’s a huge need out there for our services, but at the same time, we don’t want to be corporate and obliterative.” With One Medical Group, Lee is leveraging system inefficiencies to build, so to speak, a better medical trap. His approach has been addition by subtraction — and the result is an undertaking that has the potential to dramatically improve the quality of health care service while routing around the quicksand of politics.

Species of Social Enterprise One would expect to find many organizational permutations and combinations in the sprawling emergent that is social enterprise, and indeed this is the case. If Carl Linnaeus, the father of binomial classification, were to happen along today, he might segment social enterprises along the following lines: funding levels, organizational form, business sophistication and lifecycle status.



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Funding levels As the Occupy Wall Street protests have reminded us, at the global economic level there is a clear separation between the haves and havenots. This is also true in the much smaller world of social enterprise, where there is a clear separation between those who are well intentioned and underfunded (the “Hungries”) and those who are well intentioned and adequately or well funded (the “Solids”). Needless to say, your odds of succeeding are vastly better if you’re a Solid. Gaining access to capital is always a challenge — especially when credit is tight — and it’s all the more difficult when you’re a social entrepreneur riding nothing but a dream. And — let’s make no mistake about this — nothing is more important in the game of social enterprise than gaining access to capital. There’s a simple — and, yes, banal — reason for this: money is power. Talented employees and advisors have this annoying habit of wanting to be paid for their time, and not with kisses. The “D” in “R&D” doesn’t stand for “dollars,” but it could. Capital is an attractor: it confers status, creates instant respectability and draws attention. It’s been said that it’s lonely at the top, but it’s lonelier at the bottom. Still, one can succeed on a shoestring. Not all businesses require a million-plus dollars in start-up capital — a compelling mobile application, for instance, can be brought to market for as little as $25K. As we shall see in chapter 5, Hungries also have a host of cost-cutting strategies to draw on, with revenue-sharing partnerships chief among them. Still, it’s the rare Hungry who doesn’t aspire to be a Solid: it’s where strategy meets social climbing. Organizational form Social entrepreneurs have a multitude of organizational forms to choose from. They can be segmented into four broad categories, the first two of which are statutory: established organizational forms, recent statutory creations, contract hybrids and certification programs.

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Established organizational forms. There are two main organizational forms, for-profit and non-profit. Non-profits have two main advantages: they can accept tax-deductible donations, and they are tax exempt (except when they operate businesses unrelated to their primary mission, in which case profits from those businesses are taxable). However, non-profits also have limits on compensation: they aren’t allowed to operate for the purpose of enriching individuals, and they don’t have shares, so they aren’t “owned” by anyone (profits have to stay in the non-profit). In contrast, for-profits can issue shares to raise equity capital and incentivize employees with compensation that would be considered excessive if paid by a non-profit. But they can’t accept tax-deductible contributions (at least, not directly — and indirect support is difficult to obtain), and directors have a fiduciary duty to maximize profits for shareholders. This exposes them to legal risk if their social mission reduces owners’ return on investment. Most social enterprises use one of three established for-profit legal forms: the C Corporation, the S Corporation and the Limited Liability Company (or LLC). All three forms insulate their owners from personal legal liability. The difference is in how shareholders are taxed: • With a C Corporation, the company’s profits are taxed, and when those profits are distributed to owners as a dividend, the dividends are taxed again at the owner’s personal tax rate for investments, which is lower than the rate for ordinary income. • S Corporation status does away with the corporate tax on profits. Revenues and expenses are passed through to the owners. Owners For simplicity’s sake, in this book we define non-profits as organizations that are tax exempt under Section 501(c)(3) of the Internal Revenue Code. Non-profits can also be tax exempt under other subsections of Section 501, in which case they are tax exempt but contributions aren’t tax deductible.



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are thus taxed once, at the personal level, rather than twice. However, there are special requirements to qualify as an S Corporation. The corporation cannot have more than 100 shareholders, all owners must be either a US citizen or permanent resident, the corporation cannot have more than 25 percent of its income derive from passive activities such as rents or investments and the corporation can have only one class of stock. • Like the C Corporation and S Corporation, the LLC protects its owners (known as members) against personal liability. And like in an S Corporation, profits are passed through to owners as ordinary income. However, the LLC offers more flexibility than an S Corporation in terms of economic and governance rights: anyone can be an owner, including another LLC, corporation or foreign citizen. Members can agree to divide voting rights and profits out of proportion to share ownership. See Appendix A for a chart providing a detailed comparison of the non-profit, C Corp, S Corp and LLC forms. Recent statutory creations. In recent years, legislators have enacted a host of statutory options that are intended to reduce or eliminate the tension between mission and money for for-profit companies. The low-profit limited liability company, or L3C, has been legally recognized in several states and is under consideration in others. Its purpose is to operate “low profit” activities that further a charitable purpose. The generation of income cannot be a significant purpose of the venture, and it may not engage in lobbying or political activity. The L3C was originally designed to be a special purpose vehicle to which private foundations could more easily make program-related investments (PRIs). In practice, however, very few L3Cs get programrelated investments. Most of them simply operate businesses that are Preferred stock is not allowed, but there may be voting and non-voting common stock.

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financed just like any other LLC would be, but they use the L3C “brand” to distinguish themselves in the marketplace. Aside from program investments and marketing, the L3C may be useful for wholly owned subsidiaries of non-profits that want the obligation to further charitable purposes to be baked into the organizing documents (see further discussion in chapter 4). Overall, however, most practitioners agree that the disadvantages of an L3C usually outweigh its advantages. The L3C is, therefore, considered a lesser player in the world of social enterprise. We do not expect its role to increase significantly in the years ahead. The Benefit Corporation, which as of this writing is recognized in 11 states, publicly commits to accomplishing one or more public purposes. It must specify in its charter that it is formed to pursue a general or specific public purpose, measured against an independent third-party standard. It must also produce an annual report that explains what it has done during the prior year to accomplish its social mission. If it does this, the corporation’s directors are to give equal weight to mission and profits, so they are protected if they make business decisions that further mission but impair profits. More precisely, they are probably more protected than they would be if they incorporated under a more traditional legal form. While the conventional wisdom has it that directors in non-Benefit Corporations have no legal protection whatsoever if they don’t make the interests of their stakeholders paramount, the reality is more nuanced than that. Corporate constituency statutes and the business judgment rule give directors more than trivial flexibility. There are variations on the Benefit Corporation theme in a few states. California offers a “flexible purpose” corporation that can embed a social This situation has given rise to concern that Benefit Corporations will cause judges to interpret conventional corporate law more strictly, thereby reducing the amount of flexibility directors have in looking after the interest of non-stockholding shareholders.



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mission into its documents. If it does so, the directors are protected from liability if the pursuit of the social mission impairs profitability. Washington State recently passed a law authorizing “social purpose” corporations, which are similar. We expect to see more of these in the years ahead. Time will tell if one specific form becomes dominant. Contract hybrids. The contract hybrid is premised on the principle that no single entity, for-profit or non-profit, can by itself do everything a social venture needs to do. Instead, the contract hybrid uses a series of contracts and agreements to combine one or more independent businesses and non-profits into a flexible structure that allows them to conduct a wide range of activities and generate synergies that cannot be done with a single legal entity. The two (or more) entities that generally make up a hybrid — usually a non-profit and for-profit — are distinct for legal purposes, and each is responsible for compliance with the laws and regulations that govern it, but when properly structured, the legally distinct entities can behave much like a single entity, at least on the operational level. By sharing resources, including staff, intellectual property and other assets, they can cooperate and coordinate to a high degree, each in furtherance of its own purposes and interests. Care must be taken, however, to retain formal structural separation. Certification programs. Social entrepreneurs also have the option of committing to certain socially responsible behaviors independently of any statutory requirements. This is what the so-called B Corporation confers. The designation is a bit misleading because it’s not a “B corporation” so much as it is a “B certification.” The B Corporation is a brand, certified by B Lab (itself a non-profit), rather than a legal form. To be certified a B Corporation, the owners and managers of the business voluntarily submit to a rigorous battery of questions and tests that measure their commitment to social values and socially and environmentally responsible practices. B Lab makes the results of these tests public so that consumers can find out what these companies stand for and how their claims of social responsibility

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are put into practice. B Lab promotes B Corporations as a group, which gives them a marketing advantage and provides further incentive for them to justify social mission as a business strategy.

Business sophistication A smash-hit 80’s pop song by Tears for Fears proposed that “Everybody wants to rule the world.” True enough — and lots of people want to save the world, too, especially young people whose idealism hasn’t yet been sacrificed on the altar of life experience. What this means, in practical terms, is that social enterprise tends to attract a relatively high proportion of people without significant business experience. These are Hungries who need mentoring as much as money. Of course, social enterprise also attracts people with lots of business acumen. These people tend to cluster among the Solids, although there are experienced entrepreneurs among the Hungries, too. If there’s one area where there’s an across-the-board shortfall in experience, it’s in social enterprise, as distinguished from business or entrepreneurship per se. In every field, best practices emerge over time, and there simply hasn’t been enough time yet for the requisite collective wisdom about social enterprise to become fully ripe. Even the most seasoned entrepreneurs are feeling their way as they learn by experience about things like hybrid organizational forms and the pros and cons of becoming a B Corporation.

Lifecycle status Not every social enterprise is a start-up or early stage. Established nonprofits sometimes chart a later-in-life course toward social enterprise by embracing earned-income strategies. The Cara Program13 is one of these “Adapters.” The organization was founded in 1991 to provide life skills and career training, placement and retention services to Chicago-area individuals affected by homelessness and poverty. The UK has a similar brand: the Social Enterprise Mark.



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For 14 years, it followed a traditional non-profit model, raising funds through grants and donations. In 2005, the organization expanded on its mission with the launch of Cleanslate, a social enterprise that provides job training and employment for those with high obstacles to employment such as a criminal record. By 2010, Cleanslate was providing litter abatement, landscaping, snow removal, special event and property preservation services to 14 communities in Chicago, had provided transitional jobs to 220 people and had reached over $2M in revenue.

The Social Enterprise Class Structure Hungries: underfunded and often facing an uphill climb. Solids: well funded and with the wind at their back. Adapters: established enterprises that find themselves needing to learn new (social) entrepreneurial skills.

Social enterprises can also be birthed inside large corporations, in which case the better designation is social intrapreneurship. A prominent example comes courtesy of the $167B Allianz Group,14 which has developed microinsurance programs for people in India, Indonesia, Africa and Latin America living at the bottom of the income pyramid. By year-end 2010, the company had written 3.8 million of these life, property and health insurance policies. Another example: Vodaphone, the world’s largest mobile telecommunications company, spearheaded the development of M-PESA,15 which uses mobile telephony to offer banking services to people in Kenya, Tanzania, South Africa and Afghanistan who wouldn’t otherwise have access to financial services. M-PESA has been hugely successful, with 10 million people in Kenya using M-PESA, compared to only 4 million with bank accounts. Beyond this brief mention, we don’t cover social intrapreneurship in these pages. This is largely because the challenges it poses are

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dramatically different from the ones social entrepreneurs face. First and foremost, social intrapreneurs must get buy-in from executives who may have not an ounce of social-enterprise blood flowing in their veins. This is its very own art form, and a very important one at that. But it is unique to social intrapreneurs.16 Social intrapreneurship has the potential to bring enormous benefits to the world, if only because money is power and big corporations have gobs of money — about half of the largest economies in the world are corporate, based on a comparison of corporate sales and country GDP. But it is social enterprise’s Australia — a land apart, with its very own flora and fauna. And, for this reason, not a focus of this book.

Chapter 3

Battle of the Worldviews

To break a mental model is harder than splitting the atom. — Albert Einstein

N

ow let’s turn our attention to social enterprise in the context of overarching cultural trends. We’ll begin with a caveat. These are generalizations we’re making. Individual mileage will vary. Some social entrepreneurs won’t identify with the observations in this section. For others, they will resonate. The anti-colonialist and civil rights movements emerged out of the insight that there are powerful, ethically unobjectionable ways to resist oppression. The environmental movement came into being when people began to understand that industrial culture was wreaking havoc on the planet’s natural systems. Like these other movements before it, social enterprise emerges out of a new mental model: it is the offspring — the love child, if you will — of an emerging value system. Because social enterprise is typically seen through the lens of organizational form as a marriage of the profit and non-profit structures, there’s a tendency to view it as a relatively superficial structural rewiring. Not so. Social enterprise is much more than the sum of its organizational parts, and deeply and fundamentally transformative. Globally, 35

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we’re in a massive clash of mental models that, stripped to its essentials, pits yesterday’s worldview against tomorrow’s. If you haven’t really registered this conflict, that may be because it’s gotten very little attention from the media, which is totally obsessed with the sound and fury of individual events and turns a blind eye to higher-level trends, especially ones that are abstract and, so to speak, invisible. This war is taking place, though, and social enterprise is an important emerging weapon in the arsenal of what we think of as the “forward-looking” camp. This battle covers two areas: boundaries and danger. The boundaries we have in mind are more variable and subjective than the ones that separate nations. They’re about who we identify with when we imagine who’s on “our side” — and the truth is we identify multiply. There is the me who is bounded by my skin — everyone else is on the “other side.” My family is another “us” — it’s the tribe I provide for. And then there’s my community, my country, my ethnic mates and so on, extending out to our shared status as planetary citizens. Only it turns out there’s a problem with this last one. If all humanity is one side, there’s no one left to be on the other side and there’s no need for boundaries: we’re all in the same encampment. This would seem like good news, indeed like a coup for world peace, unless your mental model requires an enemy, in which case the mind rebels against a world with no “other side.” Unfortunately, this is how it is for people with a tribal “us-against them” worldview. From a historical perspective, this attitude makes sense. In an environment characterized by scarce resources, it stands to reason that I must fight for me and mine. Exactly what this means will vary depending on the situation. It could mean I battle for myself alone, or for my family, my race, my religion or my country. Whatever the boundaries, there’s little place in this dog-eat-dog attitude for a mushy “us” that includes folks from across the fence. You can’t have an “us” without an “other.” For me to know who I am and what to do, I need an opponent, a bad guy, someone to overcome.



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The forward-looking worldview has lower and more porous boundaries. Because it emerged subsequent to the widespread dissemination of the iconic, culture-altering photo from space of our small blue planet, the perspective is more global than parochial. Its adherents share the sense that, on our fragile Spaceship Earth, we win or lose together. The emerging mental model has a deeply embedded sense of our shared humanity and sees the us-against-them tribal worldview as an anachronistic, self-perpetuating and ultimately self-destructive illusion. It’s an inclusive worldview that sees plenty of worthy work to be done outside an us-versus-them context. And then there’s danger — people’s baseline assumptions about the extent to which the world is a dark and menacing place. If, around every corner, there are enemies out to get you, of course you need to keep your boundaries high. Of course you need to band together to ensure you stay alive — and, if need be, to make sure your enemies don’t. You have your basic vicious circle here: the greater the presumption of threat, the more you need high boundaries, and the more you need high boundaries, the likelier you’ll feel compelled to keep your boot squarely on the throat of your enemy. And, of course, vice-versa. Thus the perception of danger creates, no surprise here, danger. Many fundamentally decent people opt for higher, less diffuse boundaries and relatively adversarial, aggressive behavior because they don’t feel they have a choice. They’ve taken it in with their mother’s milk that this is the setup and you disregard it at your peril. It ain’t necessarily so — not, at any rate, if a quorum of people (like, say, social entrepreneurs) buys into the kinder, gentler, more heart-centered worldview that elevates commonality over difference, collaboration over competition and community over conquest. Proponents of the old worldview see the enemy “over there,” on the other side. People aligned with the emerging worldview are more in Pogo’s camp: “We have met the enemy and he is us.” They would also resonate with the words of writer G.K. Chesterton who, when a

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newspaper posed the question, What’s wrong with the world? reputedly penned this brief letter in response: “Dear Sirs: I am. Sincerely yours, G.K. Chesterton.” For over a century, proponents of what we will call the danger worldview have used Darwin’s theory of evolution, or more precisely their version of it, to justify their position. Social Darwinism seeks to apply biological concepts to sociology and politics. Starting with the proposition that, as per Alfred, Lord Tennyson, nature is “red in tooth and claw,” it proceeds from there to justify the blood sport of laissezfaire capitalism as inevitable and “natural.” From this perspective, it’s God’s will to have massive injustice and inequality in the world. Kneel down and pray to the robber barons! But this misreads Darwin. In The Descent of Man, his second most important book, Darwin devoted considerable space to the presence of love and altruistic behavior among animals. He noted that many animals perform services for each other and that groups that collaborate altruistically often out-compete ones that don’t. While his main focus was on competition, his was a nuanced view that left considerable room for collaboration. As it happens, the social Darwinists also got biology wrong. Contemporary biologists increasingly recognize that species and indeed entire ecosystems interact cooperatively as well as competitively — and, beyond this, that collaboration is a key to evolutionary success. In the words of evolutionary biologist Elisabet Sahtouris, “again and again, our close looks at Nature show this sequence from intense competition to the discovery that peacefully trading with competitors, sharing with them, feeding them, providing homes for them, even helping them reproduce, all the while collectively recycling resources and ever enriching the shared environment, is the most efficient and effective way to survival and even thrival for all.”17 Proponents of the emerging worldview have little patience with social Darwinists (in a tolerant, “I hear you” kind of way, of course). An affinity for lower boundaries and decreased aggressiveness translates



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into a mental model that replaces an all-out kill-or-be-killed attitude with one that grants roughly equal space to competition and collaboration. Love, empathy, compassion, altruism — these are all seen as having evolutionary value. Slowly but surely, and despite fierce resistance from the inevitable hard core of change-resistant reactionaries, global business culture is migrating in the direction of the progressive worldview. We can find clear evidence of this in the evolution of stakeholder relations. As the name suggests, “stakeholders” are people with a stake in the company in question. For many decades, including the greater part of the last century, this term was limited to a single class of individuals — a company’s owners. This was the Nobel Prize-winning economist Milton Friedman’s view: a company existed to serve its shareholders, period. In recent decades, this attitude has been changing. Even the most conventional corporations now recognize that they have an ethical if not fiduciary duty to consider the effect of their actions on other stakeholder groups such as customers, suppliers, employees and the communities in which they operate. The gates are opening, albeit modestly. Where conventional business tiptoes cautiously, social enterprise steps forward boldly. The core values of social enterprise, understood as a broad movement, reflect the emerging worldview in three distinct ways. First, it’s very inclusive in its embrace of stakeholder communities. In a world where the fatty tissue of polar bears in the Arctic Circle contains PCBs from Texas, and where economic perturbations in Greece roil the Japanese economy, it’s beyond dispute that local events have far-reaching consequences. In a very real sense, every enterprise now has seven billion-plus stakeholders, plus the natural environment. “One planet, one problem.” While social entrepreneurs don’t go around mumbling this mantra, it’s a perceptual filter that informs many of their choices. Second, social enterprise prioritizes service, reflecting the belief of “sociable Darwinists” like Elisabet Sahtouris that we get by giving.

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There is a practical dimension to this — helping others feels good — and a spiritual one as well, if you believe in that sort of thing — helping others earns you points in the karmic sweepstakes. Choosing to be in service is also logical in a counter-intuitive sort of way. After all, if we are truly all in this together, then when I help you, I’m also helping me. Last but not least, social enterprise is intensely collaborative — not “us against them” so much as “one for all and all for one.” This, too, is a predictable response to the view that we’re all in this together. To be sure, this attitude is increasingly reflected in other areas as well. In recent years, we’ve witnessed the birth of Internet-driven phenomena such as crowdsourcing, crowdfunding and social media, all of which are characterized by horizontal, egalitarian organizational structures with porous boundaries that reinvent our understandings of community and collaboration. As noted earlier, if you google “social enterprise,” you’ll find myriad references to businesses like Twitter and Facebook, as well as to the kind of social enterprise that’s the subject of this book. There’s method to this lexical madness. As conventionally understood, the emerging hybrid form known as social enterprise earns its “social” by having a social purpose. The reality, though, is that “social” has a doublebarreled meaning. Many social enterprises are fueled by the same sort of collaborative, communitarian spirit that marks the current Internet generation of bottom-up, enthusiasm-driven undertakings. “Our” social enterprises are thus doubly social: they have a social purpose, and they’re driven by social, communitarian energy. Just as there’s a “Web 2.0,” there is also, in this sense, a “Social Business 2.0.” One additional quality makes social enterprise deeply different: let’s call it self-awareness. We are the self-referential animal: we act, we observe ourselves acting, we observe ourselves observing ourselves acting and so on ad infinitum. In this sense, we inhabit a hall of mirrors. This is always the case to some extent and especially pronounced when we’re doing something fresh and innovative, that is, when we’re



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doing something not only for us, but also for those who will follow in our path. Social entrepreneurs aren’t only doers; they’re also models and mentors. This is an extra responsibility, which takes the form of a new class of stakeholder — everyone who might be influenced by their choices and behavior. It’s not just social entrepreneurs who are models and mentors. We all are all the time: it’s the one role we can’t escape from. When Corporation X mistreats workers and despoils the environment, by implication they’re saying, “This behavior is acceptable.” This tends not to register in most executives’ consciousness, though. When behavior is habitual and culturally normative, one’s personal model and mentor program tends not to be activated. But when you’re trying to do things differently and better — when you’re holding yourself to an elevated ethical standard and doing so in a context of sharply lower boundaries — you’re likelier to be more sensitive to the ethical messages you’re delivering. Put this all together, and here’s what you get: • A sense of obligation to a very broad range of stakeholders, up to and including all people on our small planet, as well as the natural environment. Not that the mechanic in Mexico or cook in Kenya is factored into every decision, but there’s a sense that everyone matters, not just those in direct relationship with the enterprise. It’s the butterfly effect come to business. • A communitarian and inclusive attitude that is committed to generating active enthusiasm and support among people who are either affected by the enterprise’s actions or who want the enterprise to succeed. • A set of special duties arising out of the “model and mentor” awareness many social entrepreneurs bring to their work. • A sense of being part of a broad and growing movement that’s in the vanguard of cultural change, with all the responsibilities that entails — being an inspirational partner, bucking up the troops and so on.

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To repeat ourselves, not every social entrepreneur has these attitudes. There are exceptions — lots of them. But what we’re saying is generally true.

Operationally, having all these stakeholders makes the decisionmaking process much more complicated. There are so many more people to be accountable to! You don’t just need to have double vision — the social and financial bottom lines, which is complexity enough. You need to have triple vision, or quadruple vision, or however many

What Type of Social Entrepreneur Are You? As we’ve seen, social entrepreneurs come in many different flavors. Here are some variations: Hungry/Solid/Adapter — You may be financially in a hole (Hungry), financially secure (Solid) or a non-profit seeking to generate revenue using earned-income strategies (Adapter). Political Progressive — You may be part of the Ben & Jerry’s tradition — in other words, unabashedly political. Up with the Occupy movement! Down with Wall Street! And so on. Faith-Based — You may be purpose-driven in the sense coined by best-selling author Rick Warren — driven by the desire to serve God by being in service to humanity. Member, Union of Change Agents — You may see yourself as a member of a community of entrepreneurs who are seeking to transform capitalism into an indisputable force for good. Global Citizen — This describes you if you are steeped in the forward-looking mental model. Think Locally, Act Locally — And then, you may not think globally at all. Some social entrepreneurs are driven by a passion to serve the community where they were raised. Elsewhere is irrelevant. They are narrowly focused on a specific neighborhood. E



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Egalitarian — Your notion of mission may include a commitment to sharing the wealth more generously than is usual in business. If you’re committed to having a cooperative ownership structure or an Employee Stock Ownership Plan (ESOP), this describes you. Radical Innovator — If you’re inclined to test the boundaries of social enterprise, you fall into this category. For instance, most social entrepreneurs differentiate between actual owners — people with an actual equity interest — and “owners” — people with an emotional or non-equity financial stake in the success of the business. A Radical Innovator might choose to give all “owners” an actual equity stake in the business on the principle that the distinction between the two categories is outdated, exaggerated and not especially useful. Model and Mentor — How attuned are you to the fact that your choices and actions have an educational component — that they implicitly convey a message to others about what is right and appropriate? Staying Alive — You may be drawn to social enterprise for strictly pragmatic reasons — because you’re likelier to survive or thrive. Many Adapters fall into this category. These categories are mix-and-match: multiple memberships permitted!

“visions” you need to keep an eye out for all your stakeholders and integrate them into an ethically and commercially appropriate decision. And then, on top of that, there’s that dang “model and mentor” thing! Having a black belt in social conscience isn’t easy. Social enterprise is, in this sense, a fundamentally different undertaking — a fundamentally different art form — from conventional business.

Is Social Enterprise Subversive? Whether you believe social enterprise is subversive depends on whether you believe transformative is synonymous with subversive — and also on who you ask. For Milton Friedman, the concept of corporate social responsibility in any form was subversive:

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The doctrine of “social responsibility” taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. “Social responsibility” is a fundamentally subversive doctrine in a free society. In such a society, there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.18 If you’re in Friedman’s camp, all social enterprises are by definition subversive. It’s a variant on the gateway drug theory: just as some believe that marijuana usage takes you down a slippery slope to heroin, here you start off with social enterprise and, bam! next thing you know you’re living under socialism or communism. This view, which still has traction in some quarters, is outdated and, at this point, absurd. Capitalism won the 20th century’s Long War between capitalism and collectivism. Nowhere is this reality more fully reflected than among social entrepreneurs, whose commitment to social change has nothing whatsoever to do with socialism. Social entrepreneurs as a class are devout believers in the power of free enterprise. If they weren’t, they’d be looking to government or philanthropists to drive change instead of building entrepreneurial businesses. Were the ghost of Milton Friedman to emerge from the grave, and if by some fluke we found ourselves next to him at a bar, this is what we’d tell him: “We have good news and bad news for you, Professor. The good news is that you won the battle: capitalism gave socialism and communism a good old-fashioned whuppin’. The bad news is that you lost the war: the notion that profits are the only thing that



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matters has been thoroughly discredited. It’s actually harmful to our economy, the environment and our quality of life. This ‘new view’ isn’t taking us down a slippery slope toward socialism — and it’s not going away, either. We’re headed in a positive direction. Now please stop haunting us and go back to your grave.” In another sense, though, social enterprise is subversive. As we’ve seen, social enterprise arose out of what we’ve called the forwardlooking mental model. This worldview is deeply transformative and arguably subversive. Treating every person on the planet as your brother or sister is as revolutionary as, well, Christ’s message. And His message was totally subversive, if His fate is any indication. In addition, intentionally or not, every social entrepreneur is indirectly delivering a message to everyone in mainstream business (and non-profit work, too): you can do it differently. There are other options. Over a half century ago, the economist Joseph Schumpeter wrote about the power of creative destruction — the process that occurs when innovators introduce products or services that transform existing paradigms. Anything that is creatively destructive in the Schumpeterian sense is by definition subversive — out with the old, in with the new! And this, even if only as a secondary effect, is what social enterprise is doing. If we take a moment to unpack the word “subversive,” we find it has two meanings. One we might call “lower-case subversive,” with Schumpeterian creative destruction as a secondary side effect. And then there is “capital-S Subversive,” when a person deliberately sets out to bring down elements of the existing power structure. This is the sense in which Communist agents in the 1930s were subversive. (Oops, Subversive.) Being capital-S Subversive requires a bad guy — an enemy. The vast majority of “non-political” social entrepreneurs do not go down this road. In fact, they steer clear of enemies — and politics — altogether. For one thing, they tend to operate out of the inclusive, low-boundary mental model we described previously. For another,

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they’ve concluded, not without reason, that it’s next to impossible to get anything truly consequential done inside the political system and that one must route around it in order to make a real difference. A provocative 2011 New York Times op-ed by Anand Giridharadas noted that “picking fights is rarely the social entrepreneur’s way” and that “the avoidance of politics by many social entrepreneurs would not matter if politics abounded in people as bright, sincere and intelligent as they. But it does not. Politics needs their verve and their drive, whether they serve in government itself or pick fights from outside.”19 Maybe so, but social enterprise is premised on the notion that you can make a difference without splitting the world into good guys and bad guys or suffocating inside a bureaucracy. For many social entrepreneurs, politics smacks of gratuitous conflict — ignoble in and of itself — and bears a high likelihood of disappointment and defeat. Social enterprise, by contrast, comes across as capacious and noncombative: it’s a vast Land of Opportunity, a place of eternal sunshine with a big ol’ welcome mat laid out for entrepreneurial homesteaders. Whereas politics, as the cliché has it, makes for strange bedfellows, social enterprise doesn’t require any such compromises. Social enterprise is — or at least appears to be — an honorable and uplifting field of endeavor where you don’t have to dumb yourself down or make deals with people you don’t respect, and where nothing intrudes on your heart’s desire or stymies your creative energy. No wonder, then, that just as moths are attracted to a bright light, social enterprise draws bright people to its glow. If this happens to be subversive, so be it.

A Transitional Phase Social enterprise has established itself remarkably rapidly as a credible, legitimate domain of activity. Scarcely two decades ago, hardly anyone had heard the term. Now it is almost, though not quite, mainstream. A September 2011 issue of Sports Illustrated magazine ran a 5,300word feature on sports as a way to address social problems.20 While the



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term “social enterprise” didn’t make a single appearance in the text, this didn’t make it any less the subject of the article. The editors at SI were spot-on with their reading of the cultural pulse: they knew the story was timely and that the specific descriptor “social enterprise” was not. Almost, but not quite. In its own starry-eyed, mostly small-business way, social enterprise has become a global industry. Estimates in 2007 placed the number of people employed globally by the social enterprise sector at around 40 million people, with 200 million volunteers.21 That was six years ago; the numbers are surely larger now. In the United States, most of the leading business schools offer programs or electives in social enterprise. In the time-honored business tradition, this is a straightforward response to demand. The Social Enterprise Club has become one of the largest clubs at Harvard Business School, with over 400 members, while the proportion of MBA applicants to the hugely successful social enterprise Teach for America tripled from 2007 to 2010.22 Social enterprise has even made its way into the often impenetrable corridors of political power. As we’ve seen, the rate at which state legislatures have created social enterprise-friendly organizational forms is eye-opening. Social enterprise has also been welcomed with open arms by the Obama White House, which in 2009 established an Office of Social Innovation and Civic Participation that includes among its mandates the support of social enterprise. Social enterprise’s accelerated growth phase shows no signs of abating any time soon. In five years, the rules of the road will be very different for social entrepreneurs than they are today. Legal and financial constraints will be much reduced, and there will be more clarity about best practices. It’s something to hold on to: in a world in accelerating decline, social enterprise is “winning.”

Section Two

Key IMP-gredients

Chapter 4

Intention Is Where the Heart Is

It has been more wittily than charitably said that hell is paved with good intentions; they have their place in heaven also. — Robert Southey

B

eing a social entrepreneur is kind of like being a chef. To be masterful — artistic, really — you can’t simply rely on recipes. You need to know your ingredients and be able to use them creatively. Social enterprises have three main elements: intentions, money and people. Each of the chapters in this section focuses on one of these essential ingredients:

• Every undertaking starts with a goal, an intention: I want to get rich; I want to provide affordable energy; I want to get rich and provide affordable energy. Every entrepreneur wants to journey from a here to a distant there. Every undertaking has this in its DNA. Intention is direction. • You can’t get from here to there on will alone or wishful thinking. You need fuel. If you’re walking, you need food. If you’re driving, you need gasoline. This is what money contributes. Money is energy. 51

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• You can’t get from here to there alone. You’ll need advisors, customers, teammates (including employees and consultants), funders, suppliers. Social enterprises are social enterprises. People make it possible. Intention, money and people are the foundational “big three” for all entrepreneurs. The intention set for social entrepreneurs is markedly different, though. Partly this is because they have dual social and financial missions, which alone is enough to make the decision-making process more complex. In addition, and as we saw in the previous chapter, many social entrepreneurs feel responsible to a much more extensive stakeholder matrix than conventional entrepreneurs. To be a skilled social entrepreneur, then, you need to be adept in two distinct though related areas. You need to make smart decisions vis-à-vis intentions, money and people. And you also need to sort out the complexities that at a minimum are a function of having dual financial and social missions and that often arise out of feeling accountable to an expanded stakeholder network. Social enterprise — it’s complicated. But it’s worth the extra time and effort, not least of all because of the gratification you get from knowing that you’re working to make the world a better place.

The Primacy of Intention While a clear sense of purpose is essential for all enterprises, it’s especially so for social enterprises. This is because a social enterprise’s intentions are central to its brand. Conventional businesses exist to make money. Lots of it. From a communications standpoint, this basic truth can comfortably inhabit the background — it doesn’t require elaboration. Apple’s brand is about elegance, ease of use and innovation. No one needs to be reminded of its underlying purpose, which is to turn a fat profit. For social enterprises, intention is identity — or, at a minimum, a significant aspect of its identity. We are here to serve people. We are here to model a kinder, gentler form of capitalism. If at some point



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you strip these intentions from the brand, you’re left with a conventional business and, possibly, a community of disillusioned supporters and a reputation crisis on your hands. You will be viewed as having broken faith. In 2007, CouchSurfing, a social network (and certified B Corporation) whose members open their homes to travelers, learned this the hard way when it shifted from non-profit to for-profit status and raised over $7M from venture capitalists.1 The management team didn’t have much of a choice: the IRS had turned down its application for tax-exempt 501(c)(3) status, doing away with the organization’s main reason for non-profit status. This didn’t keep a stakeholder outcry from occurring, though. A vocal minority of CouchSurfing community members objected to the move, partly because they felt a bit fleeced — in open-source spirit, they’d contributed time and money to the then non-profit — and partly because the enterprise’s embrace of for-profit status and venture capitalist dollars appeared to take it out of the “alternative” ranks of people-against-the-system and make it just another soulless venture. This was probably harsh, but it’s what you get when people feel betrayed. We can safely assume there were mixed motives for the managerial shift in direction: the unavailability of 501(c)(3) status, the belief that the organization’s B Corporation status would supply sufficient proof of its ongoing commitment to being in service to its community, the need for capital to grow the business — and probably a dollop of good ol’ capitalist greed as well, at least for the investors. That’s more complexity than many people are comfortable with — it’s much easier to view things in black-and-white terms: CouchSurfing is one of us; CouchSurfing is one of them. This reasoning may be misbegotten, but it’s the sort of reaction that a shift in organizational form can trigger. Unlike formal corporate documents, which tend to be somewhere between low profile and invisible, a social enterprise’s organizational form is publicly visible and impactful: it’s baked into the brand.

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For better and for worse, people have higher expectations for social enterprises than they do for conventional businesses. One result is that enormous care has to be taken throughout your enterprise’s life cycle with regard to how you establish, communicate and preserve your intention. Let’s examine each in turn.

Establishing Intention Let’s follow the advice of the King to the White Rabbit in Alice in Wonderland and begin at the beginning. Before anything else, you need to get clear about what your own intentions are. You can do this superficially or more thoroughly. At one level, your social mission is a one-line sentence: We will create jobs with dignity for women in Monrovia. People are complex, though, and your intentions probably are, too. For this reason, consider asking yourself questions like the following: • Does your intention set include helping to bring into being a new form of capitalism that marries service with profits? • How about modeling ethical behavior for other entrepreneurs? • How much extra time and effort are you willing to put into having a workforce that’s diverse in gender and ethnicity? • Do you believe all your employees from your CEO down to the hourly worker on the factory floor merit an ownership interest in your company? • How groundbreakingly innovative, how cutting-edge, do you aspire to be? Questions like these go directly to your values and core identity. Somewhere down inside, we each have a sense of who we are, but it’s often vague and preverbal. There’s value in taking those intuitions and We don’t include a separate discussion of manifesting intention in this chapter. This is, of course, what every business exists to do — manifest intention. And they do it through their business strategy.



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unpacking them so that knowledge becomes explicit. After all, before you can effectively explore your intentions with others, you need to have clarity about them inside yourself. You need to know which intentions are paramount and which are secondary. You need to know which are negotiable and which are not. You need to know which of your values you require your teammates to share. All this requires you to spend some quiet time contemplating the image in your mirror — and not just any mirror, but a soul-mirror that reveals your desires, values and intentions in their inevitable depth and complexity. Once you’ve done this, it’s on to other people. No social entrepreneur is an island. You need a team to build a business — partners, employees, financial supporters and so on. When these key stakeholder groups aren’t aligned around your intention, your business will inevitably suffer. Valuable time will be wasted internally sorting through issues that wouldn’t have surfaced in the first place if there had been better communication. External messaging will be unreliable. You are likelier to have unhappy investors if it turns out that they didn’t really understand the enterprise’s core intention. Aligning key stakeholders doesn’t just happen, though. It takes work. How you go about achieving this alignment depends on which stakeholder group you’re reaching out to. Let’s start with founders, who for purposes of this discussion we’ll define as the people who are heavily involved in planning and setting up the enterprise during its earliest days and who legitimately feel as if the enterprise is their baby. A social enterprise may have only one founder; it may have several; there may be an entire posse. Whatever the number, it’s essential to have alignment around the enterprise’s reason for being. As a rule, this is best achieved through dialogue, not legal documents. And indeed, coming to clear shared understandings is a key purpose of the business planning process. Every social entrepreneur starts with a bright idea: I want to set up dental clinics for children in inner cities; I want to convert rooftops to urban farms. Next, they

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need to put flesh on the bones of this intention. They need to develop a viable business plan, estimate revenue and expenses, conceive a marketing and sales strategy, do a competitive analysis, identify and assess other business risks and lay out a path to funding. The outcome of a business planning process is, you guessed it, a business plan. It’s an important document for two reasons. First, because it’s Exhibit A in the sheaf of documents you’ll be handing prospective investors. Even if they don’t actually read it — and most of them will — your credibility is zilch without it. The second — and equally important — reason is that it gets team members talking and thinking things through, especially in getting clear about the business model and the things that have to be done right in order to succeed. We’ve all learned the hard way that dialogue doesn’t always produce consensus and alignment. The odds go up enormously, though, when the participants enter the conversation intending to produce a consensus document. Business plans are never really finished. They’re snapshots that are subject to constant updating as a business’s operating environment and strategies evolve. That’s an annoying reality — they require a lot of work — but also a blessing in disguise because they’re engines for ongoing consensus and alignment. Founders don’t need to reach complete agreement on every issue. Which is a good thing, because it’ll never happen. For instance, you may agree on the core intention to manufacture an environmentally friendly product but differ on whether to manufacture locally or use less costly foreign labor. Disagreement is inevitable and ultimately healthy. It’s what keeps a company creative and dynamic. But you do need to maintain alignment around the enterprise’s core intention, values and identity. The alternative is incoherence or even chaos. Is it best to reduce these understandings to writing? File this one under “optional.” Intentions inhabit the mind, and minds are always changing, which makes a case for not bothering. Yet there’s also a compelling case to be made for setting your understandings down on



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paper, especially when there are outside investors. “Written in stone” (or bytes) declarations may provide a useful reminder during a heated argument about corporate strategy or intentions. For the most part, though, this sort of writing tends to devolve into one of those dusty artifacts you know you’ve filed somewhere but can’t quite remember what it said. Businesses are living entities. Ultimately, any understandings live in real time and are constantly refreshed in the social matrix of its stakeholders. If you do decide to put your enterprise’s core intention into a legally binding document, the shareholder’s agreement or, in the case of an LLC, the operating agreement, which lay out the rights and responsibilities of the enterprise’s owners, are the likeliest vehicles for this. Social entrepreneurs also need to be aligned with their investors, a group that may or may not overlap with the founders. The main business risk here is that the enterprise will elect to pursue a path that reduces profits and an investor takes issue with this, up to the point of litigation. The best way to ensure this scenario never happens is by managing expectations from the outset. If your investors know your business may not seek to maximize profits because of its social mission, they can’t fairly complain about the policy later. How formal this understanding needs to be depends on what type of investor you’re dealing with. If your investors are friends and family, you probably don’t need a formal document. These people typically invest small sums of money because they care for you, not because they’ve made a cold-blooded calculation of expected profits. The odds that they’ll sue you are somewhere between minimal and nil. While it’s important to communicate clearly to them what your business is about, you probably don’t need to go to the time and expense of creating formal, legally binding documents. But beware: the Securities and Exchange Commission (SEC) has a lot of detailed rules that govern the ways companies can raise money from investors, and you need to follow those rules if you want to stay out of trouble. In particular, the exemption for raising money from “friends and family” is fairly

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narrow. Most importantly, you have to have a close personal relationship with these investors: friends of friends don’t count. Climb up the ladder to arm’s-length angel investors and different rules apply. When angel investors are involved, the typical ask is in the six or low seven figures, usually in individual units of $10,000 up to $250,000. The underlying document that’s used here is the private placement memorandum, or PPM, with a strong business plan as its centerpiece. The PPM is where founders should lay out the enterprise’s core intentions, including whether they might accept reduced profits because of the social mission. The business plan is the source of information that goes into the PPM, but it is a different document. The PPM is also where material risks are disclosed and the terms of the investment are spelled out. SEC rules come into play here. If you don’t make the required disclosures, you may be liable for securities fraud. Transparency is critically important from the first conversation: you don’t want to deliver rude shocks to your investors down the road, nor do you want to mislead anyone as to what you are doing, how you are doing it, or what your stakeholders can reasonably expect. On the principle that it’s better to err on the side of caution, it’s almost always best to work with legal counsel in preparing the PPM. If your financial backers have a high-enough net worth to qualify for the lofty legal status of “accredited investor,” a basic PPM is usually sufficient. You can also approach non-accredited investors, although we tend not to recommend it because securities law requirements make it more complicated and risky. As a rule, we also counsel against mixing accredited and non-accredited investors, even though it’s permitted legally. There are always exceptions, though. It all depends on the participants and how the PPM is drafted. If you do pitch non-accredited investors, you’ll probably need to make more detailed disclosures in the PPM and also warn potential investors in much more prominent terms of the risks. Regulators justifiably treat non-accredited investors as requiring more legal protection for two reasons — because they have less capital to risk and because



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by definition they are less sophisticated than their “accredited” counterparts. You can be more flexible in drafting your PPM for accredited than for non-accredited investors. For the latter, a more rigid and detailed format must be used. This is where the phenomenon known as mission/money tension often first rears its head. An entirely profit-oriented investor may push back at the prospect of accepting a reduced return on investment by declining to participate or demanding more favorable terms. This in turn may force the founders to choose between full commitment to their social mission and raising all the money they need. It’s a recurrent challenge for social entrepreneurs. Another common occurrence is investor/advisor tension. Sometimes an investor is fine with accepting a lower return on investment because of the social mission. However, the investor’s professional advisors may feel otherwise. As the organizational new kid on the block, social enterprise is something many mainstream investment counselors neither understand nor appreciate. We know of at least one occasion where the investor had to fire his lawyer in order to get the deal done. Another possible funding road for social entrepreneurs is venture capital. It’s far from ideal, though. The vast majority of venture capitalists are totally money-centric. They use rigid measures of financial performance to define success. A company’s social mission is relevant only to the extent that it impinges positively or negatively on financial performance. Venture capitalists also tend to keep a short leash on management. As serious professional investors, they often insist on the right to intervene if they believe their investment may be headed south. Social entrepreneurs who seek venture capital support are probably putting their social purpose at risk. You’re usually better off not going down this path unless your social mission is negotiable or it incontrovertibly adds financial value to the enterprise. There’s an important caveat here. In recent years, a niche of socially oriented venture capitalists has emerged. One of these organizations,

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Omidyar Network, was established in 2004 by eBay founder Pierre Omidyar and his wife Pam. “As a philanthropic investment firm,” the organization’s website states, “we support market-based approaches with the potential for large-scale, catalytic impact. Toward that end, our investing style transcends typical boundaries that separate forprofit investing and traditional philanthropy. Because we believe that each sector has a role, we make investments in for-profit companies as well as grants to non-profit organizations.”2 To date, Omidyar Network has committed over $290 million to for-profit companies and non-profit organizations across multiple areas, including financial inclusion, entrepreneurship, property rights, consumer internet and mobile, and government transparency. Other socially oriented venture capital organizations include the Skoll Foundation, Good Capital, City Light Capital, RSF Social Fund, Renewal Partners and Underdog Ventures. Funders from this niche will be supportive vis-à-vis your social mission. The social capital market, while still relatively small, is growing rapidly, aided and abetted by leading-edge organizations like Mission Markets, whose Sustainable and Impact Investment Exchange (SIIX) offers members access to funding among other services. Another example is Social Capital Markets, or SOCAP, which sponsors an annual event series that connects leading global innovators — investors, foundations, institutions and social entrepreneurs — with a view toward building what its website describes as “this market at the intersection of money and meaning.”3 Investors Circle, Social Venture Partners and Social Venture Network are similar. In two or three years, look for the social capital market to be considerably larger than it is currently. A fourth category of investor has recently emerged in addition to friends/family, angel investors and venture capital. Under the recently enacted Jumpstart Our Business Startups (JOBS) Act, small businesses in the United States may seek up to $1M in equity funding from small investors through accredited crowdsource portals on the Internet. Although the JOBS Act has generated legitimate concern



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about the opportunity it generates for scam artists, it also creates a badly needed investment pathway for the many small businesses that have sizable communities of supporters but lack affordable access to high net-worth individuals. It also makes it possible for most people to invest modestly in small businesses they like. As of this writing, the details about this new crowdfunding pathway have yet to be sorted out — the SEC is working on regulations to implement the new law. It’s a space to watch closely, though, especially if you’re a small business that would benefit from having your supporters be more than figuratively invested.

Communicating Intention There are basically three ways to communicate your intentions. First, you can bake them into legally binding corporate documents such as the PPM or shareholder’s agreement. While this is an effective way to communicate the seriousness of your intention, it has its shortcomings, too. As we’ve noted, documents like these don’t get out much: they tend to live in file drawers (or, these days, on hard drives). They’re insider material and are only remotely connected to the public-facing brand. Another shortcoming is that, despite appearances, corporate documents are not forever. Today’s understanding may be tomorrow’s disagreement. Legally binding documents can be (and often are) amended — and, for this reason, can feel more permanent than they are. A second option is organizational form. By becoming a 501(c) (3) non-profit, you are making a public declaration that your charitable or educational purpose is paramount. If you become a Benefit Corporation, you are proudly proclaiming that you are a social enterprise with all that implies about your readiness to subordinate profits to the social mission. Similarly, if you seek third-party B Corp certification, stakeholders will correctly interpret this to mean that management and the board may intend to put the social mission at the same level as profits and, more broadly, run a “different” kind of company.

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The third way to communicate about your organizational intentions is through your ongoing communications. Internally, you need to make sure your employees are fully aligned with your intentions. If they are, there will be less internal conflict and external messaging will be consistent. Ideally, there will be training for employees that includes a discussion of identity and intentions, and this material will be continually reinforced through oral and written communications. And then there’s the brand. Yes, you want to communicate your social mission, but there’s something that precedes that. Your credibility. Your integrity. Before anything else, you need to establish trust. Compared to this, everything else is fine-tuning. So how do you go about building trust? You have to actually be trustworthy. (We know: duh! And yet the world is full of folks who seem to have been staring out the window during this chunk of ethics training.) You need to demonstrate a commitment to excellence. A passion for excellence, really. This quality needs to shine through your words and be reflected in all your products and policies. Trustworthy people hold themselves to high standards. This is what makes them reliable. You need to demonstrate cultural alignment with your key stakeholder groups, both in what you say and what you do. You need to speak the language of the tribe. It’s not easy to fake this because a language is more than words. It’s full of connotations as well as denotations: it contains a multitude of subtle unspoken assumptions about the nature of right relationships and right communication. Since you’re running a social enterprise, this usually requires you to communicate from what we’ve called the forward-looking mental model with its bias for lower boundaries and more disclosure. Which brings us to our next point ... You have to be transparent. Owning your successes is easy. Owning your failures — and they will happen! — is more challenging. Yet it’s possible to do so in a way that builds trust. You must discuss the issue in a manner that’s candid, direct and luminously clear. You must



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acknowledge where you went wrong and state how your behavior will change. As the 2012 Susan Komen for the Cure public relations debacle shows, dissembling only compounds the problem. Owning up has the opposite effect. When you admit to chopping down the cherry tree, it sets you up to be the father of your country, not to get a whup­pin’ back behind the barn. Nor will it serve you to spill your guts — communicating from weakness is another bad idea. Even the best people (and companies) screw up occasionally. Own up from a place of humility and dignity. You need to display well-honed social skills — anticipatory attunement to how people might respond, genuine respect for those who aren’t culturally aligned and so on. In a word, you need to be considerate. Perfection not required! From the vantage point of the forwardlooking mental model, we are all on a learning journey — all on an ongoing quest for continuous improvement, all of us permanent works-in-progress. The familiar hero or zero paradigm, which many of us have been steeped in, is passé. There’s a new communication game in town, one that lets you make a mistake, cop to it, state what you’ve learned and how you’ve grown — and come out relatively unscathed. As a social entrepreneur, your first priority must always be to communicate in a manner that inspires trust. Without that, your social purpose won’t serve you regardless of how prominently it’s integrated into your brand.

Preserving Intention Before anything else, a social mission lives inside the social entrepreneur. The founder (or founders) and mission are one. The very point of creating an enterprise, however, is to give it an identity and existence that’s independent of any individual or individuals. Like a child, it’s programmed for independence. The challenge for social entrepreneurs thus becomes to embed the mission in the institution — to ensure its perpetuation even if the founders are no longer there to hold that mission snug against their breast.

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Broadly stated, three scenarios can cause the founder’s initial social purpose to be diluted or distorted. The first occurs when outside investors are brought in whose interest in sustaining the financial mission competes with or trumps their commitment to the social purpose. Not every investor comes in thrilled by the social mission and stays that way through the inevitable ups and downs of the business. The second scenario occurs when the founder decides to exit the enterprise or dies, or when the investors decide he or she needs to be “exited.” If the mother’s no longer got her watchful eye out, how can she be sure her child will toe the line? There are dangers in independence. It’s a peril of parenthood — and social enterprise, too. The third scenario is less obvious: the founder or founders change their mind. They get burned out and decide to gut the social mission; they get a wee case of the psychotics and one bright morning declare that their company’s new social mission will be to supply everyone on the planet with pointy aluminum-foil caps to ward off the CIA’s death rays. While the example is absurd, so are people, sometimes. Sometimes we need protecting from ourselves. In setting out to preserve the social mission, two threshold questions must be addressed. First, how tightly do you want to lock in the social mission? Tighter isn’t always better: there are competing considerations here. On the one hand, social enterprises aren’t just labors of love; they’re labors of passion. It’s important to recognize and honor this dedication by taking steps to secure the social mission the founders have worked so hard to establish. Yet it’s also the case that flexibility is a business asset and something you don’t want to constrain gratuitously. Business environments are constantly in flux: there may come a time when prudence dictates backing off the social mission temporarily. In If the promoter dies with a controlling interest in the company, that will typically go to the person’s heirs, who may or may not want to follow the social mission. For this reason, we recommend making an explicit testamentary transfer to someone who is sure to respect the social mission.



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extreme cases, denying management the power to do this could actually undermine the social mission by putting the enterprise’s existence at risk. It’s also the case that pursuing the social mission can require some flexibility. In one case we know of, a wealthy person had a foundation that made regular contributions to non-profits of his choosing. The philanthropist died and the non-profits he was supporting faded away. The board did a better job of preserving his mission by choosing new non-profits to donate to rather than sticking to the outdated philanthropic regime. Finally, then there’s the matter of fairness. Often it’s not just the founders who have a stake in the organization — there are other owners too, and they deserve a say in key decisions. Is it right to hold them back with a voice from the past, hovering over them like Banquo’s ghost? Second, is it the founder or the mission that’s being protected? Since the founder is typically the mission-bearer, at first blush it makes sense to preserve the mission by making sure the founder maintains control over the organization. It’s not always the wisest course of action, though. Giving that much power to a single individual or group of individuals can depress the perceived value of the company to prospective investors. Nor is the founder always the best person for the Permanent Leader role — founders aren’t always great leaders. And as we noted, it could be the founder who changes their mind. Let’s say you decide to protect the social mission by granting special powers to the founder. It’s not a perfect strategy, but it’s often a good one — and it also happens to be frequently requested because it’s so often the founder who wants to preserve the mission, and what more congenial way to do this than by consolidating their own power? Technically, there are many ways to do this. The founder can own or control a special class of stock, “founder’s shares,” that own 50 percent or more of the company and can never be diluted. They can be granted special rights vis-à-vis the board such as veto power over the agenda or over mission-critical decisions such as the annual budget or the sale of shares.

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Founders can also protect themselves by keeping ownership of intellectual property they’ve developed. For instance, if an enterprise’s brand is a key business asset, the founder can retain ownership of that trademark, which is then licensed back to the company. There’s a lot of muscle in this: if the board veers away from the social mission, the disgruntled founder can pull the plug on the trademark, in which case — sayonara, brand. This strategy can be used to protect the social mission after the founder exits the company. When Judy Wicks, founder and long-time proprietor of Philadelphia’s legendary White Dog Café, decided it was time to move on, she sold the restaurant outright but licensed the name.4 The agreement authorized her to reclaim the name if the new owner violated core White Dog principles such as sourcing locally produced food whenever possible. Wicks astutely recognized that it was the brand, not the restaurant, that was her legacy. The licensing agreement enabled her to preserve her legacy — and the brand’s integrity. You can also bake the social mission into the organization in a manner that steers clear of favoring any specific individual or individuals. One popular way to do this is through the shareholder’s agreement (or operating agreement), which could, for instance, require all owners to accept and abide by a defined social mission. Another option is to vest power in a third-party individual or organization, typically a non-profit, that’s charged with the duty of preserving the social mission. This can be done via the shareholder’s agreement — for instance, by barring the transfer of shares without the express approval of this third party — or by issuing a special class of non-dilutable shares, only this time assigning them to the third party instead of the founder. As with licensing, this strategy can be deployed to protect a company’s mission once the founders depart. The Newman’s Own Foundation was formed in 2005 to ensure that Paul Newman’s policy of donating all after-tax royalties and profits to charity would be continued for the life of the Newman’s Own social enterprise.5 Another way to preserve the social mission after the founder exits



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is by integrating it into the purchase and sale agreement that governs the transfer of the enterprise. Finally, the social mission can be folded into the organizational form. As we’ve seen, Benefit Corporation status requires enterprises to actively declare, pursue and communicate about a social purpose. It also gives shareholders and directors the right to sue for failure to create or pursue a general or specific public benefit. But — again — an enterprise’s organizational form can be changed. The practical reality is that there’s an ongoing tension between, on the one hand, the founder’s understandable desire to have their social mission last forever and, on the other, the reality of how enterprises naturally evolve. Most of the approaches we’ve described don’t totally bar the door to downgrading or discarding the social mission going forward. Documents don’t run organizations; people run organizations, and people can always rewrite the rules, assuming they have the votes. Even when the founders are issued majority voting rights in the company in the form of a special class of non-dilutable shares, it’s not forever. The founders may elect to exit the company. Or a greater power may do the deciding for them and choose today as a really great moment for them to have a really, really bad time skydiving. Legally binding documents aren’t the only way to embed the social mission. You can also do it culturally and operationally. Management always has the option of embedding the enterprise’s public purpose in personnel, investment, procurement policies and more. There’s one big shortcoming to this approach, though. While it can effectively generate operational alignment, it doesn’t address the larger issue of how to deal with owner- and board-level disputes about strategic direction. An entire library of policy manuals can be swept overboard with a wave of the executive hand.

The Brand’s the Thing Probably the most powerful way to ensure the social mission is by embedding it in the brand. The social enterprise TOMS Shoes (now

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simply TOMS) made its mark by giving a pair of shoes to a child in need for every pair it sold. Now it’s doing the same with eyewear.6 If a company came along that wanted to buy TOMS without the one-for-one policy, it would be acquiring a different and less valuable company. At the end of the day, your ability to preserve the social mission may boil down to basic economics. If you’re looking to sell your company, your prospective purchasers will assign a value to the social mission. If it enhances the brand, it will have a positive value. If it does not enhance the brand, it will have a negative value because it will be viewed as increasing costs and reducing operational and strategic flexibility. The result: you will probably have to accept a lower price for your company than you would if your social mission were an asset or non-issue. Trade-offs like this arise out of the mission/money tension that is an ongoing challenge for many social enterprises. The best way to deal with this tension is not to manage it, but to eliminate it by seamlessly integrating the social mission into the business model and the brand. When the social mission and money are aligned, the main reason for opposing the mission disintegrates. As a conscientious manager (and doting parent), you may still want to formally bake the mission into the corporate structure and documents. This will be mostly an exercise in redundancy, though. Your brand will do the heavy lifting.

Chapter 5

Money Matters

The lack of money is the root of all evil. — Mark Twain

M

any social entrepreneurs are ambivalent about money. They haven’t quite achieved escape velocity from the cultural paradigm that says, Either heart-centered service to the world or the accumulation of personal wealth. From this perspective, wealth and service go together like oil and water, love and divorce. If you have this attitude, we have some advice for you: get over it. Money is to exchange as wheels are to transportation. It’s energy, a means to an end, and while venality and greed have all too often transformed this into an end unto itself, this is a commentary on human nature, not on what human ingenuity has devised. Nor is money to blame for our decadent financial system. In this era of programmed trading and invisible billion-dollar transactions, money has gotten weird and well-nigh incomprehensible, but once again, this isn’t money’s fault; it’s ours. Money is an opportunity creator. One can use that opportunity to do massive evil — think Big Oil, which has spilled billions of dollars into derailing the discourse about climate science — or massive good. 69

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Ted Turner launched the United Nations Foundation in 1998 with a $1B grant, which is pretty measly compared to the more than $26B Bill Gates has poured into the Bill and Melinda Gates Foundation. These magnates earned their money the old-fashioned way, yet they’re making an enormous positive contribution courtesy of their vast riches. Social enterprise is one way to do good in the world. Another way is to get very rich — and be a good person. Either way, you’ll want to cultivate a positive relationship with money.

A Catch-22 for Hungries Every social enterprise needs money to fund operations and growth. The standard approach is to raise funds in the capital market. This typically requires a significant commitment of time and, that’s right, money. It’s a conundrum: you need to have money to raise money. There are typically two sets of costs associated with seeking money from arm’s-length investors. The first involves packaging and preparation. Every social entrepreneur requires a business plan and often a presentation deck. They need to be clear about the size and structure of the investment they’re seeking and how much they’ll ultimately accept. They need to decide what rights they intend to keep for themselves and how the mission will be preserved. Will there be special founder’s rights? Will the mission be written into the shareholder’s agreement? What is the proposed valuation of the enterprise? How will the investors be repaid, and when? All this requires planning and, more often than not, professional advice. Once your preparations are complete, you need to find the money. You will probably need a professional fundraiser to make this happen. Much like the familiar real estate broker, these people help you locate prospective investors and then work with you to close the deal. They usually charge an upfront fee plus a percentage of the raise — typically 2-10 percent. How much they charge and how much they’ll accept on the back end depend on two variables — the fundraiser’s appraisal of



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their own value and their assessment of the opportunity. If they’re not confident there’ll be a positive outcome, they’re likely to seek more up front. If they believe they’ve got a winner, they’ll be more inclined to increase their risk — and potential return — by accepting more on the back end. Upfront costs, including the fundraiser’s fee, are typically in the $15K-$50K range. If you can’t afford this, don’t despair. You may get lucky and find people who will provide the necessary professional support on a strictly back-end basis. A strong social mission can make a powerful difference here. It’s also possible to succeed without going the traditional fundraising route, and indeed this is sometimes the only option available to underfunded Hungries. Here’s a short list of ways to build a social enterprise on a shoestring: Out of Pocket — This is an option that many Hungries pursue, if only because it’s their only option. It’s why God created credit cards. (Or was it the devil?) Out of Proceeds — If you have a good month, you can plough those extra dollars back into the business. Friends and Family — You can seek funding from people who care for you and want you to succeed. A couple of thousand dollars here and a couple of thousand dollars there can pay your bills for a month or two, or underwrite that upgrade that will boost your business from struggling to successful. Crowdfunding — Platforms like Kickstarter enable entrepreneurs to raise money for specific undertakings. These are donations with no equity participation. The usual ask is $20,000 or less, but there’s the occasional big number. Make that, really big number, as in 2012 when the developers of Pebble, a customizable digital wristwatch, raised over $10M with contributions from almost 70,000 backers.7 There’s also the recent JOBS Act, mentioned previously, which grants legal status to crowdfunding with equity participation. This avenue is best suited for social enterprises with a sizable fan base.

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Social Media — This can be a very cost-effective way to build your brand and get the word out about your offerings. It can also be a sink for time and money. Sweat Equity — If your business has significant upside potential, you may be able to get team members to sacrifice short-term income for the sake of riches to come. Your chances of getting skilled people to work on this basis improve during hard times — it’s one of the blessings of a down economy. This isn’t always a matter of getting employees to work inexpensively or for free. It can also be a way to build a strong collaborative enterprise. For instance, an aerospace consultant who had business partners in multiple countries gave each of them sweat equity in return for their pledge to work for him exclusively. This increased their loyalty while also delivering a competitive advantage. Interns and volunteers — This one’s tricky — and sometimes illegal. Although volunteers are by definition voluntary, this doesn’t eliminate the employer’s duty to comply with minimum wage laws. There is an exception for interns, but it’s a narrow one. To fall within the guidelines of the Fair Labor Standards Act, interns may not benefit the employer economically. Some state rules are even stricter. Essentially, this means you can’t lawfully use interns to reduce your labor costs. If you flout federal or state labor laws — and many entrepreneurs do — you are technically at risk of prosecution. As a practical matter, your exposure is low unless you’re a large employer. Still, states are doing more to enforce these rules, so you’re playing with fire. Our advice: do what the law requires. It’s not unheard of for social entrepreneurs to succeed magnificently while never taking equity investors. Eileen Fisher funded the eponymously named clothing company solely out of proceeds and debt. The company now has global sales in excess of $300M and is an iconic socially responsible business.

Capital Market, Here We Come Notwithstanding the previous discussion, unless you’re very brilliant or very lucky, you’ll probably have a difficult time walking the



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shoestring path to social enterprise success. Eventually you’ll have to go through the door that opens onto the capital market. In our consumer culture, it’s easy to think of a market as a place where prices are predetermined and non-negotiable. Amazon is a market, and if you’re going to buy a product there, you don’t try to talk the vendor down on their price. Similarly for a farmer’s market: if the person behind the table tells you that lovely purple broccoli costs a dollar a pound, then it costs a dollar a pound. There’s another definition of “market,” though, and it happens to predate our industrialized world with its off-the-shelf prices. A marketplace is not simply where goods and services are bought and sold; it’s also where the value of those goods and services are determined. Amazon, meet eBay! The capital market falls into this latter category. When you go into the capital market, you’re going into a bazaar, not the local supermarket. Value isn’t predetermined; it’s negotiated on a case-by-case basis. Any deal you strike will arise out of the interactions among the negotiators and be determined by considerations such as the perceived value of the enterprise, the perceived power of the parties relative to each other and their respective goals and values. It’s a game, a creative conversation. Which is not to say there are no rules. Different industries tend to have their own standard deals, and over the years, a suite of generic tools has emerged that makes it easier for buyers and sellers to reach agreement. Yes, money is what you’re after — in this case, it is your end — but you can only reach your destination by effectively navigating a complex series of interpersonal transactions. Our point is this: at the level of the deal, the capital market is intensely relationship-centric. You’ll get your money if you come into the transaction prepared to be fair and with something of real value to offer and if you then use clear transparent communication to develop a strong relationship with your prospective investors. Even money — cold, cold money — is about people.

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Entrepreneurs have two basic options when it comes to acquiring money: buy or rent. When they buy money, they get use of the funds in return for an ownership share in the company. When they rent money, they incur an obligation to repay the obligation over time, typically with interest. The former approach is equity; the latter is debt. Both approaches have pluses and minuses. With debt, the entrepreneur incurs short-term cash flow obligations that can be burdensome to the point of causing the business to fail. The upside is that no control is sacrificed. With equity, the entrepreneur doesn’t incur an ongoing top line obligation — they don’t have to pay interest every month. But they do have to share more of the pie later on, in the form of dividends (if that’s part of the deal) or upon a liquidity event (fancy financial jargon for selling the dang company). With an equity arrangement, more intensive management oversight is likelier because most investors will want to keep a close eye on the long-term well-being of the company. Lenders, by contrast, have a more short-term interest. They don’t have a financial stake in the company’s being profitable — all they want is their money back plus interest. While third-party oversight isn’t necessarily a bad thing vis-à-vis the overall well-being of the enterprise, it reduces operational autonomy and increases the likelihood of mission/money tension. From the investor point of view, debt involves less risk because lenders stand at or near the front of the line in terms of getting repaid. Equity is a higher-risk, higher-return proposition. The payoff is deferred but potentially much higher. There is a third, hybrid option — debt that converts into equity, or (very rarely) vice versa. With a convertible note, the lender has the right to convert their loan to equity if certain conditions are met. It’s often used as a pot-sweetener: if a business is thriving, the lender will be able to jump on the train and get a bigger payout. As a practical matter, the loan’s interest rate is sometimes reduced as a quid pro quo for this convertibility — the lender takes less money now in return for a possible bigger return later.



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Typically, loans get paid out of the top line, and dividends — payouts to owners — are paid out of profits. This doesn’t have to be the case, though. The parties could opt to give the investor an ownership interest with a capped return, with the proceeds paid out of revenue. Thus the investor would have priority in terms of payout, while also having the security of knowing they’d probably be paid in full if the enterprise were sold. (“Probably” because there’s always a possibility the enterprise would have no value.) At the end of the day, there’s no single right way to structure a deal. The details of an arrangement will reflect the participants’ particular requirements and their capacity to play the deal-making game creatively. Owners usually have a bigger say in management decisions than lenders. This makes sense: the more invested a person is, the likelier they are to want to influence key decisions. But we mustn’t confuse the norm with the rule. Voting and ownership rights are discrete interests, though they’re often combined as a matter of course. There’s no technical or legal reason a lender can’t be given voting rights. Nor, for that matter, is there any bar to denying an investor voting rights. The only limitation on a given deal is human creativity — the parties to a capital market transaction can agree on just about anything, so long as their agreement falls within the law and the mechanisms exist for implementing their understandings. And there are lots of mechanisms. Preferences, concessions, caps, options, favored nation status, rights of first refusal and rights of redemption are the main tools buyers and sellers use to reach agreement in the capital market — they are to the dealmaker what the scalpel is to the surgeon. With preferences, one investor or class of investors gets priority over other investors. For instance, if a deal calls for the investor to get paid out of revenue, they may have a preference that gives them the right to be paid ahead of all other investors. Or, an investor who’s been promised a relatively high return in consideration for having taken

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the plunge on a high-risk first-round investment may be promised the same deal on a lower-risk second round. Concessions are preferences in reverse: they favor the entrepreneur. They are generally used in two circumstances — to even out a delicately balanced deal and when private foundations invest in companies. These foundations are barred from making speculative or risky — the technical term is “jeopardy” — investments. Any investments must also be in furtherance of the social mission, and making money may not be a substantial purpose of the investment. Since it’s often difficult to ascertain in advance how the IRS will rule on a given case and because the penalties for violating this requirement are harsh, program-related investments, or PRIs, have emerged as a way to stay on the right side of the tax authorities. PRIs typically offer a belowmarket rate of return and thus serve as prima facie evidence that the foundation is pursuing mission, not money. We’ve seen more than one instance where a foundation insisted on granting strongly concessionary terms to a social enterprise they were supporting because it gave the foundation security vis-à-vis the IRS — and it also happened to be a better financial deal for them than an outright grant would have been. With caps, parties agree to limit the total return to investors. At an ultimately unsuccessful social enterprise called ManyOne Networks that Carl worked for, the term sheet called for investors to get a total 15x return on their investment. One million in, fifteen million out. For some investors, this sort of arrangement will be totally unacceptable. Venture capitalists, for example, rely on really big wins to make up for the fact that the vast majority of their investments fail. A return of 15x doesn’t fit their definition of a win. For other investors, however, especially those with a stake in the social mission, a 15x return on investment (ROI) might not be an obstacle at all. From the entrepreneur’s point of view, caps serve two purposes. They make it easy (and legal) to have investors gently fade away, along with any potential challenges they might pose to the social mission, management control et cetera. And, in the event that the enterprise



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turns out to be wildly successful, it means the entrepreneurs get more of the proceeds for themselves. We know: greedy, greedy. But sometimes greed is good, too. Most favored nation status essentially means that an investor will get as good a deal as any other investors get in current or future rounds. It’s a powerful offer: everyone likes to be special. Put and call options give the investor unilateral rights at some point in the future. It can be a right to buy (a call option) or sell (a put option) stock during a prescribed time frame at a defined price. If I have an option to buy stock at $5/share and the market value climbs to $20/share, that’s an instant profit when I cash out, as it is if I’ve negotiated the right to sell the stock back to the founders for $20/share when the stock price is $5. A right of first refusal gives the investor the right to purchase shares being sold by the company or other investors before they are offered to anyone else. This gives the investor the ability to avoid dilution and to have some influence on who the other shareholders will be. In most cases, if more than one investor wants to buy the offered shares, they are sold pro rata to all who want to participate. A right of redemption entitles the founder to buy back an investor’s equity share at a predetermined price such as X times the amount of their investment. Let’s say you’ve taken on some investors who you discover may not be as aligned with your values and social mission as you thought. With rights of redemption, you could buy them out at some point down the road if the business is going well and you meet other interested investors who are less ambivalent about the social mission. An important threshold question is, how much money should you ask for? The basic answer is simple: as much money as you need and not a penny more. When you seek less money, you’ll be surrendering less ownership — or, if you’re not offering equity, you’ll have a lower cost of capital. That said, it’s also important to bear in mind that entrepreneurs as a class tend to be overly optimistic about how their business will perform. You’ll probably want to build in a “reality

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margin,” ideally with the help of professional guidance. You can also raise money in stages — $500,000 to develop a new breakthrough product and then $1M to take that product to market, assuming that the product is successfully developed first. You’ll also want to design your ask in the context of your anticipated capital requirements over time. If you believe you’re going to need $5M altogether, that may dictate a different strategy than if all you’ll ever need is $500,000. When you raise money in separate asks — the capital-market term is “tranches” — tools like preferences and most favored nation status are often folded into the deal. Speaking of reality margins, if you’re looking at a debt deal, make sure you factor your top line cost of capital into your financials. A surprising number of entrepreneurs forget to do this, probably because they treat money-raising and business operations as totally discrete tracks. This is understandable. They’re like two different jobs: you focus on fundraising, then on operations and then on fundraising again. And so entrepreneurs make a sort of mental filing error by assuming the twain shall never meet and treating any capital that’s raised, including debt, as “something to be paid back later, at some indeterminate time in the future that — thank goodness! — is beyond the operational horizon I need to attend to.” This ain’t necessarily so, as becomes glaringly apparent when the monthly bill for your loan becomes due.

The Valuation Conundrum If you’re going to sell an interest in the company, you need to put a value on what you’re selling, and this in turn requires buyers and sellers to agree on what your company is worth. There are basically three ways to value a company (and we are simplifying dramatically here): Asset-Based — This approach starts with the book value of the company — essentially, what you get when you add up all the company’s



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assets and subtract all the company’s debt. Intangibles like brand can be included among the company’s assets. Earnings and Earnings/Share — This measure is arrived at by calculating all the money that is left over after a company pays all its bills. To allow for apples-to-apples comparisons, this is usually measured on a per-share basis. This latter figure is arrived at by dividing the dollar amount of a company’s earnings by its outstanding number of shares. Free Cash Flow — This valuation method looks at the cash that flows through a company for a fixed period of time after subtracting all fixed expenses. This is known as earnings before interest, taxes, depreciation and amortization (EBITDA). For Hungries, valuation can be a total stopper. Let’s say you’ve got annual revenue of $150,000 and profits of $10,000. You want to raise $500,000 while also retaining a majority interest in your company. To do this, you’ll need to persuade your prospective investor that your company is worth more than $1M. That’s a next to impossible task with the numbers what they are. An effective way to deal with this otherwise intractable problem is via the time-honored strategy of avoidance. Valuation only becomes a factor when an equity stake is being offered: it’s how the size of the ownership interest is determined. You can dodge the valuation bullet by renting, not buying. Look for investors who are happy to be paid sooner than later, even though it means reducing their upside potential. If you take this approach, you’ll need to be able to bear the increased cash flow burden, but this is often preferable to giving away most of your company. Ultimately, there’s no such thing as an “objective value” of a company. Objective criteria, yes, but these aren’t the product of hard science; they’re human-made benchmarks. A company is worth what the parties to a deal agree it’s worth, and this is a purely subjective measure. In one case we know of, a prospective buyer asked the seller how much he wanted for the company. The seller gave a number that reflected a gut

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sense of what felt right to him. He didn’t back it up with ratios or other rationales. The seller’s response was, “Let me see if I can make that work in the context of our business plan.” Sometime later, he returned with, “We can do this.” And thus the right-brained deal was done. As a rule, buyers tend to look to past performance and sellers look to future prospects. And then, if the will is there, they meet somewhere in the middle, in the conference room of now.

The Specter of Litigation It’s every social entrepreneur’s nightmare: an unhappy investor sues them and the board for not seeking to maximize profits as per their fiduciary responsibility. How serious is this danger, and what can be done about it? Let’s start with the first question. Ours is a litigious culture: there’s always the possibility that an aggrieved owner will seek redress via the courts. In the case of a social enterprise, this will typically be because they believe the company has sacrificed profits in service to the social mission. We should note, however, that the mirror-image version, in which an impact investor sues the board of a Benefit Corp for failing to pursue the social mission, is an equally possible, though far less likely, scenario. This sword can cut both ways. It is now taken as gospel that corporations have a legal duty to maximize profits. This doctrine was established by the 1919 case of Dodge v. Ford, although there’s some debate at the margins about whether that’s the correct interpretation of the case.8 Be that as it may, in recent decades this law has been softened considerably at the edges. Over 30 states now have corporate constituency statutes, which permit corporate directors to consider non-shareholder interests when making business decisions. There is also the business judgment rule, which prescribes judicial restraint unless a board can be shown to have been blatantly irrational in its decisions or dealings. In addition, there are several basic steps you can take to further reduce the risk of successful litigation. You can choose your investors



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carefully. Sure, you can never know when the worm will turn. It is within your power to place better or worse bets, though. One way to do this is by carefully vetting your investor’s social values. If the person is only in it for the money, you’re at greater risk than if you’re aligned around the purpose — though there’s some risk in both cases. In our experience, promoters tend to focus on the money side of things when they’re looking to raise capital and often neglect to do full due diligence on the values side. It’s an omission that can cause problems down the road. You can embed your social mission in corporate documents such as a shareholder’s agreement. As we’ve noted, courts are less likely to favor an investor’s grievance if it can be shown they knowingly invested in a company with a high-priority social purpose. In short: communicate, communicate, communicate. You can also become a Benefit Corporation, although this doesn’t provide ironclad protection for two reasons. First, there have been virtually no court cases about Benefit Corporations (and therefore the precise rules of play are highly vague and uncertain). Second, as noted above, they expose directors to the risk of being sued for failing to adequately pursue the social mission. Litigation isn’t only a risk because you might lose — it’s a risk because it might happen. When you’re sued, the drain on energy, attention and dollars is enormous. You can dramatically reduce the pain factor by taking out directors’ and officers’ liability insurance. It’s relatively inexpensive and covers the costs of litigation as well as any personal liability. The prospect of investor litigation is the monster under every social entrepreneur’s bed. It’s a big reason why many of them would rather have no investors at all. In most cases, the risk of litigation is real but tiny. The associated anxiety usually outweighs the actual danger. Still, it’s a good idea to make this concern one of the organizing principles of your business strategy: you definitely don’t want this monster jumping out at you. The good news is that there are proactive steps you can take to minimize this risk.

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Is the Capital Market Less Capital for Social Entrepreneurs? Many social entrepreneurs have come to believe that having a social mission makes it more difficult to raise money because the vast majority of investors are interested in one thing only — maximizing profits. In our view, this is a simplistic and overly negative attitude. For one thing, while the capital market is preponderantly old school in terms of its preoccupation with financial return on investment (ROI), that isn’t always a negative for social entrepreneurs. When the social mission is integrated into the brand in a way that builds value, this will be viewed as a positive by even the most conservative investors. For another, there is a small but growing niche of investors who actively seek out social investments over conventional ones. As we’ve seen, organizations like Omidyar Network actively favor social enterprises. There is also a community of angel investors who give generous terms to social enterprises they believe in. Some of these high-net-worth individuals look to foster positive change and get their money back so they can reinvest it in other social enterprises. Any profit that comes their way is a welcome but non-essential extra. Conventional entrepreneurs will only get this deal from friends and family. The philanthropic investor is a rarity, but not an urban legend. It’s the rare — and, frankly, foolish — angel investor who will support your enterprise in the face of a dubious business model. The fundamental things apply even with the most starry-eyed do-gooder: they need to be persuaded that your business will deliver a decent financial return on investment. A strong social mission will rarely fill in the hole created by an inadequate business plan. How do you get hooked up with these angel investors? As noted earlier, you can hire a professional fundraiser who taps their personal networks. You can enter one of Investors Circle’s funding competitions. You can attend events hosted by organizations like the Social Venture Network where investors and entrepreneurs mingle informally.



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A separate issue concerns the investor perspective on hybrid organizational forms. Does Benefit Corporation status reduce access to capital? Our answer is probably — a little. Benefit Corp status creates uncertainty about matters of importance to many investors such as whether the financial mission will consistently have top priority. Because uncertainty is typically seen as a risk factor, this makes the investment potentially more dangerous. The result: investors will drive a harder bargain. In addition, a more extensive educational process is required where newfangled organizational forms like Benefit Corporations are involved. This, too, can be a disincentive to investment. Don’t know it, don’t get near it. Our assessment is preliminary simply because Benefit Corp legislation is quite recent and there isn’t much empirical evidence available yet. Our conclusion seems logical, though. The entire purpose of Benefit Corp statutes is to put other stakeholders on an equal footing with shareholders. One would expect this to concern more than a few investors. B Corp certification is a different kettle of organizational packaging. Whereas Benefit Corp status invites the perception that it increases risk because it confers a legal duty on board members to de-prioritize financial ROI relative to the social purpose, B Corp certification is a brand strategy largely devoid of legal obligations. While there are modest costs associated with B Corp certification, it’s a plausible business strategy that won’t typically be associated with increased risk. The bottom line is that investors won’t do you any favors if you’re a social enterprise. It doesn’t matter how noble your purpose is: without a compelling business plan, you’ll be left at the starting gate. But if you’re offering investors an attractive opportunity, and if it’s rendered all the more compelling because it has an integrated social mission that builds the brand, you’ll be at an advantage in the capital market. If, on the other hand, your social mission is viewed as a cost center and business liability, you’ll be carrying extra weight in the funding sweepstakes.

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So, in response to the question, Are social entrepreneurs advantaged or disadvantaged in the capital market? our profoundly middle-ofthe-road answer is, that depends.

Sharing the Wealth Congratulations! You’ve successfully raised money, invested it in the business, and now it’s raining profits or maybe just trickling them. What will you do with these jolly green symbols of success? Your answer to this question will depend on a number of variables. For starters, there may be legal constraints or requirements. If you’re a for-profit, you may have an agreement with investors that requires you to give them preference in the distribution of profits. If your social enterprise is a non-profit, you are barred from excessively compensating executives. It’s a broad but well-established rule. According to one IRS memorandum, its purpose is to “prevent anyone in a position to do so from siphoning off any of a charity’s income or assets for personal use.”9 There are also practical business considerations. It’s often an excellent idea to reward employees with a share of profits. When your team participates financially in the enterprise’s success, it creates alignment around enterprise objectives and incentivizes them to perform well. Back in olden days, the leader’s team, known as “warriors” or alternatively “marauders,” got the spoils of victory such as the loser’s land and chattels. It was their bonus, so to speak. Now we’ve gotten more civilized, or at least many of us have, and we dole out the thank-yous with money. Broadly speaking, there are two ways to distribute proceeds to team members. You can reward them collectively, as with a bonus pool in which your entire workforce participates, with individual shares contingent on performance. Or, you can make separate arrangements with specific team members: if you exceed your quota by 20 percent, you get a piece of the profits or stock options. Finally, how you distribute profits will depend on your values. If you believe that the bosses have the exclusive right to share in profits,



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that will point to one outcome. If your attitude is more in the vein of all for one and one for all, that will incline you to be more distributive. Does your status as a social entrepreneur alter the rules regarding the distribution of profits? Possibly. You may be inspired to reinvest proceeds in the social mission — needless to say, this option is not available to entrepreneurs who don’t run social enterprises and therefore don’t have a public purpose. The answer to this question also depends on what type of social entrepreneur you are. If you’re a Radical Innovator (see page 43), you may choose to jettison the traditional distinction between owners and “owners” and give broad classes of stakeholders such as suppliers or even customers an equity stake in your company. That’s pretty extreme, but hey, that’s what Radical Innovators do. If you’re an Egalitarian — in other words, a card-carrying member of the “socialist enterprise” wing of the social-enterprise union of change agents — you may feel obligated to create an employee stock ownership plan, or ESOP, which confers equity participation on all employees in a company. (And, yes, “socialist enterprise” is an oxymoron: you can’t be a social entrepreneur without having an abiding faith in capitalism.) Don’t forget to consider the tax consequences when distributing financial rewards. One of the benefits of incentive stock options — options granted by the board to selected individuals — is that there is typically no tax liability until the shares are actually sold. This benefits the taxpayer: where the IRS is concerned, it’s always better to put off till tomorrow what might be paid today. While we can all agree that money is nice to have, it’s not necessarily the best way to reward people. Nor is it the most cost effective. One manager we know of, who was the president of a division in Whereas stock options are regulated by the Securities and Exchange Commission and the Internal Revenue Service (IRS), ESOPs are regulated by the Department of Labor under authority of the Employee Retirement Income Security Act (ERISA) of 1974.

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an industry characterized by a very low compensation structure, was hugely successful — and loved — because of the creative ways he rewarded people non-financially, such as giving his team’s Employee of the Month use of his president’s parking space. In the words of social enterprise expert Mitchell Pines, “The little touches make all the difference.”10

This chapter has been about money, and for good reason. Money matters, big-time. At the same time, it’s important for us as authors, and for you as social entrepreneurs, not to get too obsessive in our focus on money. It’s a means to an end, remember — an excessively convergent focus on the Almighty Dollar can skew our focus and distort our priorities. With this in mind, it’s useful to bear in mind that the question we asked in this most recent section (How should social entrepreneurs distribute profits?) could have been framed as or more usefully as, How should we treat our stakeholders? At the end of the day, social enterprise isn’t about money; it’s about people. More specifically, it’s about treating them well. Indeed, this is one of the main points that differentiates social enterprise from conventional businesses. It is also the subject to which we now turn.

Chapter 6

The Social Enterprise as People Person

The magic formula that successful businesses have discovered is to treat customers like guests and employees like people. .

— Tom Peters

D

o social enterprises have a special duty vis-à-vis people? Our bold answer to this question is: yes and no. To elaborate: if we compare social enterprises to transnational corporations, the answer is an unequivocal yes. Even if they’re not directly underwriting sweatshops or engaging in similarly deplorable behavior, theirs is a culture that, rhetoric and sloganeering notwithstanding, has a structural bias toward putting profits first and people second. If there’s a special duty to people, it’s secondary. By definition, social enterprises are different. They’re about giving the same priority to people as they give to profit. That’s what makes them “social” enterprises. Their purpose is to reduce suffering in the world, and it’s people who do the suffering. In a parallel universe, giving people as much priority as profits isn’t a special duty for social enterprises: it’s a foundational ethical obligation shared by all organizations. This isn’t the world we actually live in, though. Much of the business world subscribes to a 87

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through-the-looking-glass value system that makes people the means and money the end, rather than the other way around, as ethics (and compassion) should dictate. We’re hard-pressed to imagine the organization that could treat people badly, whether out of carelessness or as a matter of strategy, and still be a social enterprise. If you don’t have an active and serious commitment to treating people well, you’re not a social entrepreneur, no matter what your mission statement says. So, yes to an affirmative duty to treat people well, yes also to a special duty compared to the baseline for transnational corporations, and no to having a “special duty” that’s greater than the standard that should be applied to enterprises generally. It’s a basic human right for people to be treated as an end in and of themselves, not as a means to an end. The reality of how people are treated by organizations is, of course, much more complex than what we’ve described here. Small business owners typically take great pride in their ability to provide gainful, honorable work and often treat their employees as extended family. As for transnational companies, they don’t have “mistreat people” written into their corporate charters. People manage these enterprises, and most people treat other people well much of the time. Consideration and kindness show up frequently in businesses large and small. All this is part of human nature, but not part of the standard business’s formal raison d’être. This is what makes social enterprises different. What does it mean to treat people well? To some extent that depends on your personal and cultural biases — and also on what species of social entrepreneur you happen to be. It may mean fair and equal pay for men or women or affirmatively seeking to hire minorities. If your values include a deeper bias toward egalitarianism, it may mean giving every employee an equity stake in the company. You may even be the sort of social entrepreneur who views it as part of your calling to minister to your team’s inner quality of life by supporting the personal growth of each team member and doing a whole lotta sharing.



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Whatever the specifics, the imperative for social entrepreneurs is to treat people respectfully, in other words, non-exploitatively. Or, in the language we’ve been using, as an end, not a means to an end. Conveniently, it also happens to make good business sense to treat people well. (No need to stop the press on this one: we know it falls short of a scoop.) For years, the advisability of treating employees well has been axiomatic among many of our most renowned business leaders: • Employees who believe that management is concerned about them as a whole person — not just an employee — are more productive, more satisfied, more fulfilled. Satisfied employees mean satisfied customers, which leads to profitability.” (Anne M. Mulcahy, former chairperson, Xerox Corporation)11 • “Everyone has an invisible sign hanging from their neck saying, ‘Make me feel important.’ Never forget this message when working with people.” (Mary Kay Ash, founder of the iconic Mary Kay Cosmetics of pink Cadillac fame)12 • “The simple act of paying positive attention to people has a great deal to do with productivity.”(Tom Peters, management guru)13 The reality, though, is that treating people well isn’t mandatory in conventional businesses. This is another way social enterprises are different. With them, it’s required to the point of being definitional. If you don’t treat people well, you’re not a social enterprise.

Make Like a Partner We live in a world of hierarchies. In business, for instance, we have the worker-management-boss hierarchy. Concerns about political correctness notwithstanding, hierarchies like these are inevitable. They belong to the order of things. And now, for the purposes of this chapter, forget about hierarchies. Instead, think partnership. More specifically, think about bringing a partnership mentality to how you relate with your stakeholders.

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The term “partnership” has been used so often that it’s lost some of its oomph. It’s a critically important concept, though, and worth taking a few moments to unpack. What’s so all-fired important about treating stakeholders as partners? Two things, really. It evokes an egalitarian mindset. An egalitarian energy, really. When people view each other as partners, there’s an unwritten assumption that they have equal standing and are collaborating willingly toward a common goal. This is a good thing, not only ethically but tactically as well. As we just saw, when people are treated respectfully, that is, as equals, they tend to perform better. A partnership mindset empowers everyone. It implies the need for structure. A partnership is also a legal construct, and although that’s not how we’re using it here, even when conceived less rigorously, it implies mutual obligations in a way that a squishier word like “relationship” does not. Professional partnerships have a clear beginning, middle and end. They are highly structured. They require active tending. A partnership orientation is especially important if you’re running a social enterprise. The military requires a clear chain of command: it depends on hierarchy. A professional football coach doesn’t have to be egalitarian: more than one top-down son of a bitch has won the Super Bowl. Social enterprises are different, though. Very different. This is because, whereas armies and professional football teams have a single mission (win!) and therefore treat people as a means to that end, one of the Prime Directives of social enterprises is to treat people as an end in themselves — and this is best achieved with a partnership mentality. Let us hasten to add that you don’t need to make nice all the time. In the offbeat management guide The Mafia Manager, the author, V, offers the following advice: “There will be times when you will have to be abrasive, even brutal to members of your staff. Don’t worry that your people will say bad things about you because of this. They already have. But in general, try to be pleasant and accommodating. Try to please the greatest number who work for you that you can; antagonize the fewest.”14



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Making nice — making partnership nice — is strategic. While it may occasionally be advisable for you to go silverback alpha large, it’s the exception that empowers the rule.

Partnership Principles How does the partnership principle show up in practice? Let’s start with the fact that it’s a practice. As primates, we’re hardwired to be attuned to hierarchy. This awareness of who’s above and who’s below sometimes pops up at inopportune times, such as when stress causes us to scapegoat someone below us who can’t fight back or, in the other direction, when someone has something we covet. Like money. It’s easy, for instance, to fall into the trap of approaching investors from a place of weakness. It’s also a surefire way to guarantee you’ll fail. Nothing makes an investor flee faster than being on the receiving end of an unseemly mix of neediness, envy and manipulation. Don’t approach prospective investors until you’ve totally cleared this energy from your system. Don’t look to raise money; look to build a relationship. Seek to connect. Approach them with a partnership mentality. You also want to achieve as much clarity as possible about your understandings and expectations. This goal is precautionary: the more knowledge the parties have about each other from the outset of a partnership, the less likely things are to go off the rails. In theory, all the essential information is embedded in the documents that govern the relationship between partners — the job description, the employment contract, the vendor agreement and so on. Unfortunately, this is one of those areas where theory collides with reality. What’s missing, as a rule, is the explicit articulation of the overarching intentions, attitudes and values that make the parties to the transaction who they are and ultimately determine the tenor of their relationship. In short, the trees are there, but the forest is missing. There are solid historical reasons for this neglect. The standard approach to deal making came into being during a time governed by the higher boundaries-greater aggressiveness worldview we discussed

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in chapter 3. Negotiations were presumed to be adversarial, so no effort was made to seek higher-level alignment between the parties. Why bother, since everyone had one hand on their sword? But things are changing. With a lower-boundary mental model emerging, we’re starting to see a shift towards a more inclusive and partnership-oriented approach to deal making. California attorney Linda Alvarez has developed a process called Discovering Agreement that seeks to elevate the understanding between parties to a higher level beyond the specific deal points. On her website, she elaborates: Discovering Agreement is a powerful alternative for those who are disenchanted with the old-style adversarial model. This new framework is ideal for socially responsible businesses already on the cutting edge of shifting business paradigms and those who avoid entering legal contracts because of the fear and mistrust inherent in the old model. Traditional practices pit contracting parties against one another, laying a foundation of mistrust. Discovering Agreement is a new paradigm that places shared vision and values first and foremost in the negotiation. By emphasizing and calibrating alignment, the process creates a safer, more trustworthy foundation for framing and conducting the business relationship. The result is a stronger, more sustainable and enjoyable venture that can endure and prosper even in the face of disagreement or unexpected change.15 Under her approach, the parties to an agreement identify and share their visions, missions and values (VMV). This information is then integrated into the governing document, not merely as a preamble but as a reference point for resolving any disagreements that may arise. It’s not always easy to get the parties to consent to taking the time required to share VMVs, but it’s worth the effort. “Once the VMV material has been hammered out, the parties have more of a real relationship,” says



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Alvarez. “They understand each other in ways that wouldn’t otherwise be possible. They also have a structure for resolving conflict if things break down.” The long-playing story of Ben & Jerry’s acquisition by Unilever provides a case study for Alvarez in how things can go wrong. “Under the terms of the purchase, Unilever promised to honor the founders’ original mission, vision and values,” she says, “but marketplace realities and structural bias have begun to cut into that. While Unilever is making some effort to adhere to Ben & Jerry’s original VMV, there are no guarantees that responsible practices will continue — and things have begun to slip noticeably.” This structural pressure is what the Discovering Agreement process is designed to address. It does so through a two-step process. Clarifying and calibrating the parties’ respective and shared VMVs is part one. The second, equally essential component is drafting a provision expressly stating that, if the parties find themselves in disagreement or if circumstances change so that they need to renegotiate all or some of the deal, they will use the contractual VMV as the framework for their negotiations. According to Alvarez, when conflict arises, emotions run high and it can be hard to remember what really matters. Conflict triggers our cultural conditioning and we go to battle, seeing ourselves as opposing forces in a struggle for dominance and control of decision-making power. We focus on winning and on protecting ourselves from “the enemy.” By agreeing ahead of time that, if the relationship goes into crisis, the first thing we’ll do is sit down together and review the VMV — reminding ourselves and re-orienting ourselves to what really matters — then there is a much greater chance that we’ll be able to remember what winning really means to us, and be able to work together creatively to resolve the crisis in a manner that

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regenerates our VMV, realigns our efforts and sustains our intentions and integrity. As a focus and frame for negotiation and decision making, dispute resolution and adaptive response to change, the VMV serves as a compass for the parties during the entire partnership. It enables both small and large course corrections to be approached more readily and efficiently. It evokes a side-by-side problem-solving orientation even in the midst of circumstances that might otherwise trigger combative one-upmanship and destructive adversarial acts. Seeking high-level alignment around the VMV also helps people get a read on the long-term compatibility of their prospective partner. Alvarez tells the story of a client of hers, a best-selling author who was being wooed by a literary agency. The author had a great conversation with one particular agent and decided this was the person she’d like to work with. However, when the form contract arrived, it turned out to be totally skewed in favor of the agency, and when Alvarez proposed collaborating to develop understandings around their missions, visions and values, she was met with dead silence. Eventually the entire deal came undone. “The agency’s underlying lack of integrity was revealed by its non-response to our request to orient the agreement around our respective VMVs,” says Alvarez. “When we asked the agency to walk its talk, it quickly became clear that the agency’s game was to get the author locked into a long-term contract in its favor.” The next stop in the search for a great agent brought Alvarez and the author to a firm that was happy to develop a VMV. The result: a The VMV is codified into the law in the sense that the language of a contract is what the legal system looks to and interprets as the parties’ “private law” governing their relationship. The conventional system will do all it can to enforce the deal or action plan that the parties have delineated in their contract, so long as the contract provision does not require an illegal act. Thus the VMV is not just an expression of good intentions: if properly drafted, it becomes an enforceable element of the contract.



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meeting of the minds — and spirits. At last report, the author and her new agent were living happily ever after. While Alvarez’s work focuses on non-employee relationships, there’s no reason not to apply her Discovering Agreement approach internally as well. Prospective employees will presumably be familiar with the social enterprise’s VMV. A dose of reciprocity will serve the employer well. So far, we’ve identified two partnership principles: one, be sensitive to power dynamics, and two, stay high — or, if you prefer, don’t lose the forest for the trees. Our third principle flows directly from the second: check in regularly. Repeatedly in these pages, we’ve stressed the importance of achieving clarity early about values, intentions and expectations. This is necessary but not sufficient. Like voting, you’ll want to get clarity early — and often. Once you’ve established your higher-level framework for cooperation, make a point of revisiting it regularly to ensure alignment or identify any shifts in orientation. If you’ve gotten these understandings down in writing, needless to say that makes the check-in process easier. Our fourth and final principle is this: support a culture where the partners view themselves as members of a learning organization. This is true for all partnerships, in increasing measure as the relationship is more consuming. People aren’t fixed points in space. Our path takes us from birth to death and, one hopes, from ignorance to wisdom. Partnerships, which, after all, are simply people acting in concert, travel the same highway. Their capacity reflects that of their members, and so it stands to reason that a partnership’s success will reflect the extent to which its participants are skilled and wise. A learning-culture organization offers multiple benefits. As a metacommunication, it signals humility. It says no one knows best, not even Da Boss. It says we’re all in process, all learning and growing. And, as a sort of bonus, it encourages alignment, dialogue and self-expression.

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Whether the relationship is business or domestic, partners can help each other learn and grow. And you know it ain’t easy. We all have foibles — alright, weaknesses! — that get in our own and our partners’ way. It’s the rare individual who doesn’t shy away from these assaults on their self-esteem. It’s far more congenial to keep them at a safe remove from conscious awareness. This doesn’t keep our stuff from sabotaging us, though. Indeed, the more we try to bury our challenges, the likelier they are to rise up and haunt us. They’re not unlike vampires in this regard. And, like those creatures of current television fame, they’re best defused by being brought into the light. One of our favorite management questions is, what do I need to know that I don’t know? It’s a learning-culture invitation to partners and colleagues to bring forth information that, if left in the shadows, might undermine the collective undertaking. For this question to be effective, certain protocols need to be followed. For one thing, the question isn’t an invitation to abuse. Gratuitous aggression is off-limits. Also, the response should focus on feelings, which aren’t really subject to debate so long as they’re authentic. When Jill says, “Joe, I’m concerned that you’re demoralizing people by micromanaging,” it’s a communication about emotions, and it renders the protest “I’m not micromanaging!” irrelevant. Joe may or may not be micromanaging. Determining whether this is factually correct is not the point of the dialogue. What is indisputable — and relevant — is that Jill believes he is and that this has her worried about the team’s morale and productivity. Which makes it a reasonable issue to address. The former Secretary of Defense Donald Rumsfeld was much ridiculed for his infamous line about what we know, what we don’t know, and what we don’t know we don’t know. Much as it pains us to defend that Donald, in this particular matter he was, in our view, unfairly maligned. The line draws a useful distinction, calling our attention to the difference between the world of semi-control (what we know



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we don’t know) and the world of no control (what we don’t know we don’t know). It points to the vast gap between our conscious awareness and the vast terra incognita of the unconscious. If not in so many words, the question, What do I need to know that I don’t know, solicits information about the secret places that lie beyond our awareness — and beyond our ego defenses, too. If Joe, the head of your social enterprise, has an anger management problem, someone probably needs to tell him — and it’s all the more important if he’s in denial about it. The odds of that happening and of his actually being able to hear it increase greatly if Joe, in a spirit of genuine humility, actively encourages people to share information that will help him and the partnership succeed — such as the fact that his rage is shredding the team’s esprit de corps. Is it risky? Yes. But worth doing. Weak leaders will shy away from having material from these dark depths dragged into the light. Strong leaders won’t. To piggyback on Rumsfeld, there’s the stuff that’s easy to talk about, the stuff that’s difficult to talk about and the stuff that’s damn near impossible to talk about. One of the great strengths of What do I need to know that I don’t know? is that it hauls us out into the storm of the damn near impossible stuff. At the end of the day, that’s the only way to clear the air. Needless to say, you can have a learning culture without having this question be part of the process. But it helps.

Building a Strong Team Great: you’ve embraced a partnership mindset. Now on to building your team! This begins, as so much else does, with the business planning process. During this exercise, you’ll want to create fairly detailed job descriptions for all key members of your team. This is when you fit together the pieces of your puzzle. It’s an essential first step. Not that what you devise will be set in stone: some updating will be inevitable

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as circumstances change over time. You’ll need a foundation to build off, though, and this is what the business planning process provides. When the time comes to hire your team, what do you look for? Expertise is, of course, your first priority: you’re looking for performers. If you’re looking to build a team, though, it’s not enough to have a crew of eccentric, super-competent individuals doing their own thing. Your first priority should be to hire people first and foremost for their ability to deliver the goods. Ideally, they’ll also be able to play nicely with their colleagues while also bringing a modicum of self-awareness to their work and professional relationships. Look for high-honors performers who preferably get honors, or at worst okay grades, in the important secondary areas of collegiality and self-knowledge. This brings us to our next point, which is that we favor what’s been called the “full service contract.” This isn’t a legal document, but rather an informal (but ideally explicit) understanding that team members are expected to show up at the job in their emotional, intellectual and spiritual entirety. The full service contract tells employees that they’re being hired not just for what they can do, but for who they are. It’s a very empowering communication: it tells your hires that they’re not viewed as simply means to an end (do your job, hit your numbers and go home), but as, you guessed it, ends in themselves. The full service contract says, we want your passion; we want your creativity; we want your personality; we want you to bring to work every day those parts of you that are most fully alive. The full service contract can be folded into your employment agreement: it can’t hurt to put it into writing. However you communicate it, the vast majority of the sort of people you’d want to hire will view it as a gift. Interpersonal compatibility and emotional maturity will go a long way toward creating the je ne sais quoi that makes a team more than the sum of its parts. And, of course, competence helps, too. When you lack confidence that a colleague will be able to perform, it creates anxiety, and anxiety is the great underminer.



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You will also want to seek both alignment and diversity. This may seem paradoxical, like you’re being asked to piece together polar opposites, but it’s not. You’ll want to be aligned at the highest level around the VMV, and you’ll also want to have diversity below that at the level where you want the creative pots to be bubbling. Diversity isn’t simply a politically correct policy that you “should” pursue: it’s a powerful business asset. There’s nothing like a variety of perspectives to stir the creative juices and make the flame run high. How you define diversity will depend on your values and priorities. It may mean as little as looking for people with differing tactical or technological orientations. Or, it may mean going the more politically correct route of proactively seeking to hire women and minorities. While there are no right answers here, there is a right outcome — a team that’s aligned around the VMV and abounding in healthy creative differences otherwise. Here’s another key to building a strong team: express appreciation. In chapter 5, we reviewed ways to reward team members economically. You can also say thank you in non-financial ways such as promotions, extra vacation time and public praise. Get personal with your team about this. Ask each of them individually what non-financial expressions of appreciation they’d most appreciate. You might think of this tactic as a variation on Norman Vincent Peale: The Power of Positive Feedback. “To appreciate” means two things: to see the value of and to rise in value. The two are neatly linked. If you express appreciation, the regard in which you’re held will appreciate. And so will the collective morale of your team members. In the words of Mary Kay Ash of Mary Kay Cosmetics fame, “We treat our people like royalty. If you honor and serve the people who work for you, they will honor and serve you.”16 There’s one more key to building a strong team. Remember who its most important member is. You. Cultures are defined from the top down. As the organization’s leader, you need to demonstrate emotional maturity and self-awareness. You need to be humble and open to

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learning. You need to be highly competent while consistently displaying integrity. You need to empower others. You need to be a model and mentor for everyone on your team. That’s right: at the end of the day, it’s all about you.

Discovering Agreement and the full service contract shed light on what it means to treat a person as an end in themselves, not a means. By inviting the participants in a partnership to take the relationship to a higher, more integrated level, these processes acknowledge and honor the other person in their fullness, rather than focusing on the narrow slice of the person that can be of service to you. Unless you’re a saint, you see the world through egocentric eyes. Although your rational mind knows better, a large part of you “knows,” just like a baby “knows,” that the world revolves around you. This attitude is inevitable — a fundamental if unfortunate aspect of being human. The partnership principles challenge you to override this bias to the extent you’re able. It means acting as if your stakeholders have as full and rich a life as you, despite all the apparent evidence to the contrary, which comes from a lifetime of having a voice inside you bawling “Me! Me! Me!” Treating people with respect is thus more than a sound business policy: it also takes us into spiritual practice territory. It’s something to work at, something to get better at, both in the forms — saying and doing the right things — and in the heart, which is a much stickier wicket. The more progress we can make at the genuinely difficult work of letting down our egoistic, narcissistic defenses, the more we’ll be able to truly treat people as an end to themselves, not a means to an end. Treating people well isn’t only an ethical mandate. It’s also an opportunity — an ongoing learning opportunity — to step out of the shell of ourselves. But we’re getting ahead of ourselves. This is the stuff of social zenterprise, a topic we take up in the next section.

Chapter 7

Decisions, Decisions, Decisions

There are three constants in life — change, choice and principles. — Steven Covey

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ow that we’ve discussed the three key “IMP-gredients” for social entrepreneurs — intentions, money and people — let’s examine how they play out in the nitty-gritty of daily decision making. This chapter consists of edited transcripts of consultations Allen did with four social entrepreneurs — an early-stage Hungry, a late-stage Hungry, a Solid and an Adapter. Cumulatively, they provide insight into the sort of challenges social entrepreneurs face as well as the approach Allen takes in helping his clients make sound decisions. A lawyer has two roles — advisor and document drafter. In Allen’s experience, it’s the rare individual who comes through the door ready for document drafting. The vast majority, Solids included, need to do more thinking through of their business. This is why Allen always launches his client relationships with the sort of consultation you’ll find here. For Adapters, the challenge can be especially severe. Back in law school, we were taught to make what one of our professors called “a noise like a lawyer.” It’s a distinctive (though not always agreeable) 101

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sound — perspective, really — that most of us will recognize. Well, there’s also something called “a noise like a business person.” It involves things like bottom-line thinking and having an aptitude for non-linear problem solving and being able to spot market openings and opportunities for competitive advantage. For many non-profit executives, propensities like these don’t come naturally. It’s not part of their professional culture or experience. In these cases, Allen’s role goes beyond that of business advisor and document creator: he becomes a guide, helping Adapters become familiar with a new mental model. In these pages, you’ll find a good deal of strategizing around organizational form, with much of it relating back to the core social-entrepreneurial issues of raising capital and preserving the social mission. There’s also a reminder of the foundational importance of intentions, which turns out actually to be about the foundational importance of … the heart. Why? Because intentions are a mental byproduct of a feeling function. They’re what you get after you send the yearnings of the heart through the machinery of the will. Intentions are desires wrapped in resolve. Finally, you’ll find another reminder. This one is about the importance of community. Social enterprise is a tough business, and it’s even tougher when you feel alone. There’s a sizable and rapidly growing community of practitioners and other key members of the ecosystem such as impact investors and specialist advisors. There are immense practical and emotional benefits to be had from hooking into this network.

Early Stage Start-up — The Compass of the Heart Name of Organization: Center for 4D Arts Legal Form: Fiscally sponsored project of the non profit Solo Foundation Social Enterprise Type: Start-up Hungry Activity: Support holographic artists and the holographic arts Interviewee: Linda Law



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Role: Founder Key Issue(s): Sorting out non-profit mission and for-profit business opportunities, and the implications for organizational form Allen: Please provide a Reader’s Digest sumForm follows function. Your mary of your situation. first job is to define what Linda: We are a fiscally sponsored project success means for you. of the Solo Foundation and thus able to use their 501(c)(3) status. I am one of two founding directors. I have a long background in 3D holography as an artist and curator, among other things — I’m fairly well-known in the field. Our organizational mission is to provide holographic artists with access to the best available technology — it’s typically too expensive for them to buy on their own. We’ve gotten a bit of seed money, but are just getting going. There have been some real positives so far. A ton of holography equipment has been offered to us by donation, and we’ve gotten lots of volunteer help. We’ve also identified a space in my hometown where we’d like to have our advanced holography facility. The notion is to have artists come there and pay for use of the equipment. We’re currently looking at continuing to work from a non-profit model, although it’s more complicated than that, as you’ll see. A close friend and potential business partner is one of the pioneers in the world of holography. He developed the technology that eventually led to the mass production of holographs, for instance in credit cards. He recently developed a desktop holographic printer and is looking to make a business out of that. It could be very big. He’s considering working with me and with some other people as well. He’s seventy-eight years old, and while he’s very fit, this is a consideration. One more wrinkle: Bayer has produced a photopolymer that could be used in conjunction with this printer. One option would be to

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seek funding from Bayer, or from another major multinational like Hewlett-Packard. There are a lot of moving parts here, clearly. The questions that are in my mind are things like, Could we launch the business and have that fund the non-profit? Could the non-profit run the business? How if at all should the two be connected? Where and how do you draw the line between profit and non-profit companies? Our main mission is to train artists and provide them with access to technology, but there’s this major business opportunity as well, and I don’t want to let go of that. Allen: Some of the things you mention are more speculative than others. What is the plan right now for the 501(c)(3) in terms of funding? How will it exist as an economic entity? Linda: The main source of income would come from workshops for artists, and from providing them with access to 3D holographic technology. Allen: So you’d be providing services to them. Why did you decide to do it as a non-profit? Linda: It was the path of least resistance. We’re already getting contributions, and because of my reputation and connections, I’m being introduced to other potential donors. Allen: A 501(c)(3) might be a fine way to go. It permits you to seek donations, and you should also know that there’s no limit on how much earned income you can have as long as your mission is charitable and educational. Based on what you’ve told me, though, I’m not entirely sure that your mission actually is charitable and educational. I get the sense that you have your eye on a significant business opportunity and are attracted to the possibility of making lots of money. It sounds to me that, in addition to your charitable and educational mission, you’ve got an entire set of activities in mind whose purpose is primarily to generate revenue. I mean that in this sense: if you couldn’t make money from it, you wouldn’t do it.



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Not that you’re close to making this money yet. A lot of things have to fall into place before that happens. Linda: One reason I’ve made the business opportunity a high priority is because, if we’re going to move on it, we probably have to do it fast. There’s my friend’s age to consider. Allen: So it sounds as if you’re looking at having a business and nonprofit that operate side by side. They’re distinct but there’s some collaboration. You may want the non-profit to own part of the forprofit, or to benefit somehow. Linda: That’s right. Allen: There are a couple of basic strategies you can use to accomplish this. You could set up the business as an entirely separate legal entity and donate a share of profits to the non-profit, or alternatively, give a piece of the company to the non-profit. Under this scenario, the non-profit would not be actively involved in running the business, although there might be some cooperation. You’d have to make sure the non-profit in no way subsidized the for-profit. The business could support the non-profit, but not vice-versa. Linda: Could I be involved with both? Allen: Yes, but you’d have to observe some formalities and keep the two distinct in terms of record keeping and such. In situations like this, a for-profit and non-profit can share office and staff as long as there’s careful accounting between the two. The business is required to reimburse the charity for any expenses the charity incurs that really belong to the business. Linda: Let’s say we rent this facility we have our eye on. Could the space be divided so it was used partly by the for-profit and partly by the non-profit? Allen: Yes, so long as the financial arrangements are conducted at arm’s length. If the non-profit were to rent space to the for-profit, it would have to get at least fair market value. You might even want to have it pay a premium as a sort of insurance policy against a negative finding by the IRS vis-à-vis the non-profit’s tax-exempt status. Anything less

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than fair market value and the charity will be perceived as subsidizing the business, with the potential loss of its tax-exempt status. Linda: This makes things simpler for me. Allen: There’s one important caveat, though. Even if you have formal bookkeeping allocations that keep the two organizations separate, you can’t invite the perception that the two are operating as a single entity. In addition to having separate boards and separate books, you’ll probably want to have physically distinct spaces, perhaps with their own separate entrances. You’ll also want to do things like have separate payrolls. Linda: I was assuming you have to keep the two entities totally separate. Allen: That’s a common misperception. As long as the tax authorities can distinguish which is which, and as long as the charity is focusing on its charitable and educational mission, you’re okay. There’s another option: the charity could own the business. As long as the charity owns the business outright, this would be relatively straightforward. If you find you need to bring in investors, it would still be feasible, but it would get more complicated. In that case, the charity would be required to look after the interests of the investors, which might be at odds with the charitable mission. Linda: I’d be inclined to go with the first option — create separate entities. Allen: I agree. Your business venture may get complicated. It may have a lot of players. You don’t want the charity to be part of that. Let the business be a business, and the charity be a charity. If the business is successful and you have profits or net revenues, there are various ways to stream that to the charity. You could have a participation agreement that allows the charity to share in the profits without having voting rights in the business. Or, the business could make a charitable contribution. The flip side of this is that if you set up this business with investors, they may not want to be obligated to the charity. You’ll need to vet your investors closely and make sure they’re aligned with your vision



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of how the charity and for-profit will be related. There’s no guarantee you’ll be able to do this. You may find yourself needing to accept money that comes with strings attached. It’s all very situational. Linda: As I mentioned, Bayer has come up with a material that’s potentially revolutionary. We might be able to help them with this. How would you propose structuring that? Allen: I have a client that’s a non-profit in the health care area. They were contacted by a company that’s developing mobile technology for doctors and was looking to field-test the app. They needed to roll it out to a couple of thousand users who would use it on a daily basis and work out the bugs. My client has access to a pool of field testers, and so we worked out an arrangement whereby the non-profit agreed to ask its members to test the for-profit’s product. The board concluded it was within their mission to help these populations. But they would only do it for very generous compensation in order to ensure that it maintained its tax-exempt status. In your case, your for-profit company could agree to test the technology. It could then hire the non-profit as a subcontractor or do the work on its own and donate a portion of proceeds to the non-profit. There would also seem to be possible issues here around intellectual property ownership. I can imagine you might develop intellectual property that complements the Bayer product. Linda: It’s possible. My friend has written many patents. Allen: In that case, the for-profit could own the intellectual property and give the non-profit a piece of the proceeds. Linda: This all started because I wanted my friend to develop a stateof-the-art digital holography system for artists. This would be entirely complementary to the product Bayer has developed. They have the product but not the market. Allen: I’m getting the sense that you have two independent but overlapping interests here. You want to be in service to holographic artists, and you also want to develop this business. You can pursue both, and there can be efficiencies between them, for instance in the use of

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office space. There are two issues you need to pay close attention to in these circumstances. The first is potential conflicts of interest, and the second is private benefit — you can’t use the non-profit to generate wealth for you. They’re not insurmountable issues. Dealing with them is partly substantive and partly cosmetic. Linda: Right now I’m moving full speed ahead with the charity. We can get started with revenue from holographic artists and donations. The main reason I’m thinking about the for-profit business is because I’m looking to the long-term sustainability of the organization. I don’t want to have to rely forever on donations. Allen: There may be some issues here that are too complex to address in this short conversation. For now I’d say that you need to be very careful about who owns what. If you’re doing for-profit work and are on the charity’s payroll and if the for-profit is using the non-profit’s office space, the IRS could conclude that the charity owns the intellectual property, and this would create real problems for the business, which usually will want to own the intellectual property on which the business depends. I recommend that you set aside some time to take a really hard look at what your intentions are. What does your heart tell you? Is the non-profit work your first priority, or do you want to make money from the for-profit opportunity? There’s no right or wrong here, but it’s a very important inquiry. Your intentions will determine the kind of structural framework that’s best for you. One way to address this question is by looking out ten years. At that time, what do you see yourself doing? Linda: I’m one of those holographic artists who’s been struggling for many years to get access to this equipment. I’d like to be doing my own work in five years. I see someone else running the non-profit. Allen: Do you want to be involved in running a business? Linda: I’ll launch it, but I don’t want to run it. Allen: It’s good to be clear about that. With these intentions clearly in mind, now is the time to do careful business planning. Sit down and



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sketch out what the non-profit and business will look like over the next few years. Put meat on the bones of your ideas. Pay attention to priorities. Linda: We’re already doing this for the charity. Allen: Do the same for the business. Remember that form follows function. Your first job is to define what success means for you. Once you’ve done that, it’s my job to help you figure out what organizational structure will get you there as quickly as possible. Linda: This has been very helpful. Not only have you clarified my thinking, but I also learned that there’s a lot more latitude than I’d believed in terms of the possible interconnections between a for-profit and non-profit. I had thought the two needed to be very separate. It’s good to know that we can have both entities, if we choose to go that route, under a single roof. You’ve also helped make it clear that I need to keep close tabs on the link between my personal aspirations and the strategy we develop. Allen: That’s right. Your strategic priorities need to consistently reflect where you want to end up. That may sound obvious, but it’s not so easy to do in practice. It’s easy to get caught up in the enthusiasm born of an opportunity and veer off course as a result. It’s great to have these opportunities, but your internal compass has to stay on course. As a social entrepreneur, you need to sort out and prioritize your intentions and, when all is said and done, be guided by your most important one.

Interview with a Hungry — Getting the Horses Lined up in the Gate Name of Organization: The Battistoni Center for Stroke Recovery Legal Form: LLC Social Enterprise Type: Late-stage Hungry Activity: Stroke recovery education and support Interviewee: Louise McKenzie Role: Chief operating officer

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Key Issue(s): Getting ready to raise capital Allen: Tell me about your situation. Louise: I’m one of two principals in a social enterprise called The Battistoni Center for Stroke Recovery. We’re an LLC, registered in North Carolina. The other principal is Marcus Battistoni. Marcus is a medical professional who’s developed an innovative methodology for helping people recover from traumatic brain damage. We’re currently a small business — we’re at the six-figure level in annual revenue. We believe we have the potential to grow considerably: someone in the US has a stroke every 45 seconds. We have what we believe is a strong business plan and are looking to raise money. Allen: What do you need to take advantage of this opportunity? Louise: We have breakthrough intellectual property, but much of it is in Marcus’s head. We need to “product-ize” it with cloud-based software and online classes. Marcus has only so much time and energy. We want to free the genie, so to speak. Allen: What are the main business risks? Louise: Our main risks are that something happens to Marcus or his intellectual property isn’t adequately protected. Allen: How much money are you seeking? Louise: We’ve set a target of $300K-$500K. We believe we can make a serious start with $250,000 and have upped the number to be on the safe side. Allen: This might be too small a raise. Have you factored in the possibility that things will take longer to develop than you expect? Louise: We believe so. Allen: Still, that’s not a lot of money. Doing an offering is not a trivial undertaking. You don’t want to do it multiple times if you can help it. You could go for $500K-$800K with a minimum of $250K before you start using anyone’s money. That wouldn’t be any more work, and

Sit down and get clear with all team members and investors about three questions: What do I have to have? What am I willing to do to get it? What can I not give up?



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you can keep a round open for a year or so. In my experience, most first rounds for angel investment are in the $700K-$1M range. You might want to consider going for this level. Louise: We’ve been advised to go for less because we want to give up as little equity as possible, and if we go for a bigger ask, we may have to give up too much equity. We’ll never be able to make a worse deal than we can today, unless the business implodes completely. I’ve also been told that we can structure a smaller first round so we create a market for a follow-up round, for instance by offering a discount to first-round investors on a second round. Allen: You could also structure the deal so it’s based wholly or partly on debt rather than equity. That would let you route around the problem of having to give up too much equity in the company. A lot also depends on your overall vision for the company. If you want to be a $5M company, that’s one thing. You could do one round of funding, then grow the business organically. If you want to be a $50M or $500M company, that’s another story, and it may call for a different investment strategy with more generous terms for investors. It’s better to have 10 percent of a $50M company than 50 percent of a $5M company. Where do you want to get to? Louise: I can’t say we’ve gotten completely clear about this. An exit at $5M in annual sales would work fine for me. As for Marcus, he’s totally mission-driven. This is his passion. He doesn’t think in terms of revenue to the business or dollars in his bank account. His goal is to reach as many people as possible with his information. He’d like to grow the business aggressively, but not for the sake of growing the business — for the sake of the mission. Allen: Who has the final say about business decisions? Louise: We haven’t written down or agreed upon a formal authority structure, but it’s Marcus’s business before it’s mine. He’s first among equals. Allen: Well, you seem to be in agreement that you want to be at least a $5M business, so maybe the first round of funding should aim for there.

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Louise: We’d probably rather self-fund after the first round if possible. There are fewer hassles. Allen: Before you go out for money, I think you and Marcus need to get clear about a few things. First, you need to arrive at a shared vision for the company. Is it your intention to be a $5M company, a $50M company or a $500M company? This is about aligning around intention, and it’s critically important. You also need to get clear about decision-making authority. This can be awkward to talk about — consensus is so much easier in principle if not in fact — but in my experience, it’s always best to get clear about this sort of thing before the you-know-what hits the fan. Does Marcus have ultimate authority with regard to mission-critical business decisions? Louise: At this point, yes. Allen: How do you feel about this? Louise: I have mixed feelings. Marcus has excellent business instincts, but he’s a medical professional more than he is a businessperson. Ideally, the role would go to a true business expert with a total commitment to the social mission. I probably don’t have quite the right resumé for that. I see Marcus as having the final say about what deals are acceptable, or not, relative to our social mission. There may be companies he wouldn’t partner with. Allen: You’re an LLC. Have you created an operating agreement? Louise: Not in any detail. Allen: You’ll also need to do that before you go out for money. Investors will want to know who makes the decisions in the company. What do you do in the event of an impasse? You may want to have a third party who comes in as an informal arbitrator at that point. This should be in the operating agreement. You may also want to reexamine your choice of organizational form. In an LLC, ownership always equals 100 percent. New owners dilute the current owners’ share. C and S corporations are different. You can have shares that are authorized but not issued. That means



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you can issue them later to raise new money without diluting the position of the existing shareholders. If you decide to stay with an LLC, you’ll need to specify in the operating agreement how dilution occurs. You can achieve the same outcome with an LLC, but it’s a bit more complicated. Louise: What I hear you saying is that we need to get more shipshape before going out for money. Allen: Exactly. This is a great example of how companies that are ongoing enterprises still have work to do before going out for money. Louise: Let me play devil’s advocate for a moment. We have another advisor who has expressed keen interest in joining the management team. He believes that a loose agreement on consensus is good enough. He believes precious time is wasted creating structures that never get used. Allen: What I’m hearing is that you’re not completely aligned on important issues. Hopefully you can go forward and not have this be a big problem. You’re playing the odds here. You’re also playing with fire. My recommendation is that you plan in advance for what can go wrong. Think of it as a prenuptial agreement. Remember: you can always change the agreement — it’s easier to do that than to reach an agreement when you’re at odds with someone. At a minimum, if Marcus is going to have final decision-making authority, you need to protect yourself. I say this not as your personal counselor but as the company’s advisor. As a business organization, you want to make sure everyone is treated fairly. If he wants to go in a direction you disagree with fundamentally, you’ll want to have some sort of golden parachute that allows you to leave the company without feeling bitter or taken advantage of. More broadly, you need to sit down and get clear with all team members and investors about three questions: What do I have to have? What am I willing to do to get it? What can I not give up? You have to be very clear and deliberate in getting answers to these questions. This is where all genuinely good-faith negotiations begin. Louise: Can you be more specific?

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Allen: Sure. It’s not enough to know that an investor wants to make money. How much money does she want to make? What’s the time frame? Maybe they aspire to 30x return on their money but will accept less if they can get their money out early. This could produce a deal structure that has them getting paid partly out of revenue, which pushes their return forward and caps them at a 12x or 15x return on their investment. As a lawyer, I’m in the business of creating documents that capture people’s understandings. You have to start with exact information about what people want. The creative challenge is then to put the puzzle pieces together in a manner that comes as close as possible to giving everyone what they want. The starting point is inquiry. Louise: One more question, Allen. I’ve been wondering if we should perhaps have a hybrid organizational form. Under this scenario, Marcus would own the intellectual property and license it to a separate company in which he’d have a significant equity share. This separate company would be responsible for developing products, marketing them and so on. The rationale is that it would help resolve the authority issue. Marcus would totally control his intellectual property, but it would be primarily in the hands of the business people running the marketing company to make the business decisions, so long as they abided by the social mission. Allen: Which company would you be seeking investors for? Louise: The licensee. Allen: I’d counsel against this. Investors want to own intellectual property. You’d be denying them the value they prize most. Also, you only want to do hybrid forms when there’s a truly compelling reason to do so. When you have more than one organization, cost and complexity increase. You need two sets of books. You have twice as much compliance to deal with. Louise: What I’m taking from this, Allen, is that before going out for money, Marcus and I need to get more clear about some basic issues. What is our vision for the company? Do we in fact have a shared vision? We also need to reach a firm understanding about decision-making



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authority, including a mechanism for resolving impasses around mission-critical issues. That’s phase one. Once we’ve got that under control, we can turn our attention to structuring the offering. Allen: That’s correct. You’re like a great many social enterprises in your situation. It may seem like you’re ready to start the race, but the horses aren’t all in the starting gate yet.

Do Me a Solid — Preserving the Mission with Investors Name of Organization: Impact Makers Legal Form: For-profit (Non-stock C Corporation) Social Enterprise Type: Solid Activity: Management and IT consulting for health care and government Interviewee: Michael Pirron Role: Founder and chief executive officer Key Issue(s): How to maintain control of the social mission if they take on investors Allen: Michael, tell me about your business You always want to design situation. Michael: Impact Makers is a for-profit, non- for flexibility — you want stock C Corporation. We’re unusual in that your options to be as all our profits go to board-selected non-profit broad as possible. partners. Technically this is done on a licensing basis. We launched in late 2006 and have grown rapidly and organically. We have a line of credit, but we’ve never taken any investment dollars. Last year we hit $3.2M in revenue and are on a path for $5M in 2012. We’re now in need of working capital and are about to close an equity-like mezzanine debt round of about $500,000 to give us that. Our corporate mission is to maximize community value. We do this by allocating 100 percent of our profits to our non-profit partners. We also give them up to 10 percent of our time in the form of pro bono

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services. We’re now seeing the potential to grow to a $50M company or beyond, but it’s not clear to us that we can do this as a non-stock corporation with no investors. Do we need to take investors to scale up significantly? As a social enterprise, is this the right thing to do? How might this direction affect our ability to create community value? Allen: Why do you believe scaling up might threaten your social mission? Michael: We began with what seemed like an innovative notion — create a for-profit company that delivers all profits to the community via selected local non-profits. Now we’re in a different situation. A similar company with $56M in annual revenue recently sold for $100M. If we were to grow to a similar size, we could generate a lot more value for our non-profit partners. If we had a liquidity event, they would benefit enormously. If we grow by a factor of ten, we can increase the benefits we deliver our non-profit partners by that amount, too. But if we do this by taking investors, it would come at the cost of diluting our exclusive emphasis on community value. Allen: Is there business value in having an exclusive emphasis on community value? Michael: It sometimes gets us into the C-suites of prospective clients. It’s not mission-critical, though. Allen: That’s an important point — it means your business model, at least from a practical perspective, is optional. I think you’re talking about two separate things here, Michael. First, you’ve got this notion inside your head about what your business “really” is. Its core identity is defined by how all profits go to your non-profit partners. And then you’re having a separate conversation that’s really about strategy. Does it make sense to be bigger and less pure or smaller and more pure? Ultimately you need to be asking yourself how much relative importance you want to give these two quite separate inquiries. Are you prepared to jettison your established notion of corporate identity for strictly pragmatic reasons, or does your sense of Impact Makers’ core identity trump pure pragmatism?



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Michael: When you put it that way, the answer’s pretty clear. If I’m really looking to create community value, I should view identity as a strategic asset and treat it fairly flexibly. At the same time, what we absolutely won’t do is sacrifice our commitment to maximize community value. That’s non-negotiable. That said, it doesn’t make a lot of sense to insist that we pursue this goal using a strategy — no investors — that actually undercuts our ability to deliver on our mission. Allen: Then you seem not to have a philosophical objection to taking on investors, which makes it something to consider seriously as you consider how to finance growth. Do you have any thoughts about what technical approach you’d take to make this happen? Michael: I’m inclined to set up a Benefit Corporation and transfer ownership to a foundation. Allen: With your outside investors as minority shareholders? Michael: That’s correct. Allen: There’s nothing wrong with this approach, but it doesn’t come without challenges. To the extent you have outside investors with rights in terms of how the company is run, this could affect critical business decisions. Ultimately you could find yourself in a situation where you no longer have majority control. When this happens, your commitment to having all profits go to the community might yield to investors who say, “We want to do it differently now.” You might not be able to keep this from happening. Michael: Tactically, aren’t there ways to keep this from happening? Maybe go the preferred stock route and offer a modest dividend and no voting rights? Allen: There are tactical options, and we’ll explore some of them. As for going the preferred stock route, that has pros and cons. A modest dividend isn’t as onerous as a loan, but in terms of managing your cash flow, you’re better off not to have ongoing financial obligations to your investors. In that case, though, you’d need to offer them a compelling payday sometime down the road. Michael: Which means some sort of liquidity event, right?

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Allen: Not necessarily. You could also buy out your investors while keeping the enterprise going. There’s a middle ground to consider here: think of it as interim equity. For a time, Newman’s Own was in a situation not unlike yours. Sometime after it launched, it took equity investors. It had been pledging 100 percent of profits to causes. Now that was no longer possible. The solution lay in issuing self-dissolving shares. With this structure, the company commits to a capped return on investment to shareholders. Every payment the company makes to the investor counts toward paying off that obligation. The payment may look like a dividend, but it’s not because, technically speaking, dividends do not affect equity ownership. Here, what looks like dividends goes to buying back equity. Let’s say you promise investors a 10X return on investment. Joe invests $100,000. He stands to make $1M, which you pay back out of profits over time — you’d need to have time parameters in your subscription agreement. At the end of the day, you’ve gotten working capital at a reasonably low cost of capital and you’re back in the ideal position of being totally master of your destiny. You don’t have to worry about shareholders steering the company away from your core mission of maximizing community value. Michael: And if we can’t buy them out? Allen: Then you have a stock company with a majority interest held by the foundation and minority ownership by your investors. That’s not a terrible situation. Michael: We’d need to put together an attractive package for investors. Allen: The devil is always in the details. You need to make it attractive enough for investors to want to come on board, but not so attractive that it makes it too onerous to do business. A lot will depend on the type of investor you’re going out to. You’ll probably do best with values-aligned investors who appreciate your mission. This will make them more receptive to a capped return on investment. Your ideal investor will also not insist on short-term returns so you have the flexibility to defer buying them out for as long as possible, or to not buy



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them out at all. I would expect you to be able to find these investors, given your strong performance and prospects. Michael: My thought is to incorporate as a Benefit Corporation. We’ve just passed Benefit Corp legislation in Virginia, where we’re located. Allen: That could work. The foundation would hold all the shares. Large sums of money beyond dividends would only flow into the foundation if there were a liquidity event. Nothing would change in terms of tax obligations. One thing, though: Benefit Corp status might make it more difficult to attract investment. Most investors have no idea what a Benefit Corp is. This creates uncertainty, and uncertainty is experienced as a risk. Investors that are totally profit-oriented might also hesitate. Michael: How significant is this risk? Allen: At this point, one can only speculate. Benefit Corporations haven’t been around long enough for there to be a meaningful track record. Personally, I suspect Benefit Corp status may make it a bit more difficult to attract investors. Others disagree. Michael: I’d only consider doing it as a Benefit Corp. Allen: Then that’s the way to proceed. In terms of sequencing, you’d want to convert to a Benefit Corp and have it be fully owned initially by a foundation. This would be the framework from which to approach prospective investors. Michael: This direction opens up interesting possibilities beyond investment. With this structure, the Foundation would have value — the value of its investment in Impact Makers. We could then borrow against this collateral. I’m not totally committed to going for equity rather than debt. Allen: You could also grant equity shares to your non-profit partners. This way, you’d pay them dividends, either instead of or in addition to license payments. The non-profits wouldn’t pay tax on these dividends, so this would actually increase the community value you’d be creating. You always want to design for flexibility — you want your options to be as broad as possible. This approach scores high for this.

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Michael: The approach we’ve used so far is a purist’s model, but it’s also constraining our growth. For social purpose reasons, I’d much rather be a $100M business with a $15M annual payment and a $300M foundation, even if it means adding another class of stakeholders and more management complexity. My concern has been that we’d be opening a Pandora’s box of potential problems — changing one box for another. Allen: Here’s the reality, Michael: business is inherently risky. If you take on debt, your cash-flow burden increases. If you take on equity, you face possible issues around legacy and control. If you do neither, you cap your potential growth. You can never totally eliminate risk. The best you can hope for is wise choices — and smart structuring — that keep your risk low.

An Adapter Comes in from the Cold Name of Organization: Koinonia Foundation/GR8Lakes Essentials Legal Form: Koinonia is a non-profit. GR8Lakes Essentials is a for-profit company with a guaranteed profits donation to Koinonia Foundation. Social Enterprise Type: Hybrid non-profit/for-profit (Adapter) Activity: Koinonia Foundation works to improve education and empower women through entrepreneurship in the developing world. GR8Lakes Essentials develops and distributes products designed for people at the economic base of the pyramid. Interviewee: Andrew Williams Role: President, Koinonia Foundation and President, GR8Lakes Essentials Key Issue(s): Securing investment capital to grow GR8Lakes Essentials



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Allen: Please tell me something about yourself If you have a strong and your venture. Andrew: My father was a doctor who gave company with a good up a thriving family practice and opened the social mission, you’ll atKoinonia Medical Center to provide low-cost, tract people for whom the mostly free medical care to the poor in my knowledge that they’re home town of Muskegon, Michigan. While doing good is one of their running the Koinonia Medical Center, he returns on investment. also worked as a missionary and medical philanthropist serving people in impoverished nations. These efforts led to his founding the Koinonia Foundation in 2004. I now run the foundation. We developed some products, including a solar lantern and home-based water treatment, created companies to manufacture them and then brought them together under a new entity, GR8Lakes Essentials, to sell them to people in developing countries at the bottom of the pyramid. Allen: What inspired you to talk with me? Andrew: Because you’re a social enterprise attorney. We’ve been plugging along, figuring things out on our own, without much reference to or understanding of this area, which seems like its own emerging territory. So let me begin with this: what is the definition of social enterprise? Is it a recognized area? What kind of weight does it have? Allen: Social enterprise doesn’t have any generally agreed-upon definition. Carl and I offer one in the book that is premised on the social entrepreneur’s motivation, but that’s our definition, not the world’s. In my practice, I represent a lot of non-profits that are seeking to generate revenue using market-oriented strategies. I also represent a lot of for-profit companies with a social mission. In traditional jurisprudence, the board of a non-profit can be sued for failing to put their social mission first, while the board of a for-profit can be sued for not seeking to maximize profits. There’s a space in the middle where neither the purely for-profit or non-profit model is ideal. I help people create hybrid structures where you have a business and non-profit

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operating side by side. These hybrids can optionally share management and facilities. In terms of planning and governance, they can be run like a single unit, although it’s critically important that certain formalities be respected. Andrew: You just described us. We’re one of those hybrid organizations. Allen: A social enterprise tries to be profitable while pursuing a social mission. In terms of how that’s actually done, there are a lot of possibilities. Andrew: We try to keep the Koinonia Foundation as separate as possible from the for-profit GR8Lakes Essentials, which has a doublebottom-line orientation — its social mission is as important as its profit orientation. Right now this is a family operation. I know everyone. We want to raise money to expand capacity vis-à-vis the products we’ve developed, which target people at the bottom of the economic pyramid. Our main concern is how to protect the social mission if we take on investors or go for an IPO. If we do this, can it be structured to absolutely ensure protection of the social mission? Allen: There’s a lot you can do to protect your social mission, but the world is full of surprises, and there are no guarantees. A prominent social entrepreneur was recently booted out of what had been his company because he was advocating for more social mission activities than the board was comfortable with. This stuff happens. The law isn’t as cut-and-dried about this as you might think. Although for-profit corporations are legally required to try to maximize profits, boards actually have a good deal of wiggle room. For one thing, it’s a generally accepted judicial principle that courts shouldn’t second-guess reasonable business decisions that don’t end up maximizing profits. For another, about 30 states have adopted corporate constituency statutes that permit corporate boards to take into account impacts on stakeholders other than equity owners. You can protect yourself to some extent in your internal documents, for instance by affirmatively authorizing the board to pursue a social mission. If you put that into a shareholder agreement, it’s pretty



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powerful. It’s not ironclad, though. What if the board wants to do something that has fabulous social impact but may wipe out profits for a significant period of time? It’s not clear that, in a case like this, the board would be protected. You can also incorporate as a Benefit Corporation. Even if Michigan doesn’t have such a statute, you have the option of becoming a Benefit Corporation elsewhere and then doing business on that basis with your headquarters in Michigan. This is a new corporate form that creates an affirmative duty on the part of directors to give equal weight to the social mission. There’s no case law on Benefit Corporations yet, so we don’t really know how this will play out in terms of permissible and prohibited behavior. The downside of Benefit Corporations is that they may turn off investors who don’t understand them and see them, perhaps reasonably, as entailing higher risk. Andrew: This is very pertinent to our situation because we’re looking to raise capital. We’re considering government agencies, venture capitalists and angel investors. The concern for me is around the exit strategy. Because of our social mission, we can’t let control go to just anyone. We have to retain control. The mission needs to remain in place even if I’m not there anymore. But it’s not clear to me that I can get people to say yes to this proposition: “I’d love to take your money and advice, but I’ll retain the final say.” I know it’ll be a problem with venture capitalists because they automatically want 51 percent. Allen: I’d steer clear of venture capitalists. Control is non-negotiable for them. There are other options. There’s a relatively small but rapidly growing social capital market where people will be much more receptive to what you’re offering, where they don’t see a split between doing good and doing well. There are investment funds that are looking for companies with a social purpose — and they’re not seeking concessionary terms, not at any rate if the social mission doesn’t undercut the business model. You appear to meet this criterion.

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Andrew: We decided against pursuing venture capital when we developed our business plan. Allen: It sounds as if the issue isn’t so much around maintaining control personally as it is around ensuring that the social mission isn’t sacrificed to maximize profits. As I’ve said, one way to do this is by finding investors who applaud your social mission. There are other ways to proceed, too. You can create a special class of shares for people who you’re confident will defend the social mission and require the approval of these voters vis-à-vis decisions that would fundamentally change the company. One way to do this would be by making the Koinonia Foundation the sole holder of these shares. Another way to reduce your risk would be by structuring the investment terms so your investors are paid back sooner. They get a preference — and what investor wouldn’t like their money sooner? The benefit to you is that, as they’re paid off, their equity share is diminished, which means their ability to control decisions is reduced, too. Yet another strategy involves rights of redemption, which would authorize you to buy out your investors at a specific price at some point in time. We’ve articulated three strategies so far: one, find supportive investors; two, create a special class of shares to protect your social mission; three, use any of a variety of tactics for phasing out potentially “dangerous” investors. Andrew: What about government support? Is there anything out there for us at the federal level? Allen: No. There are small business loans and such, but they’re not geared for social enterprises. I expect this to change in the years ahead. There’s already stuff happening at the local level. For instance, the City of Philadelphia has given a tax credit to organizations with B Corp certification. There’ll be more of this because sensible government officials will want to incentivize organizations that are effectively tackling challenges it’s traditionally been the public sector’s role to address. There’s a natural alliance here.



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Andrew: The idea of giving the foundation ownership and seats on the board of the for-profit is interesting to me. How do you think potential investors would respond? Allen: That depends on the investor. As a rule, investors don’t like to give up control. For conventional investors, this will typically be because they want to protect their financial investment. With social investors, it may also be to make sure the social mission doesn’t go off track. In many ways what I’m talking about is not that different from what occurs with a conventional business whose founders want to protect their control. There are various ways to do this, such as poison pills, which make a company less attractive to an undesirable prospective purchaser. Andrew: What else can one do besides poison pills? Allen: There are conversion options where you convert the equity to debt. You can limit the governance powers of outside directors. You can require the consent of the founders for key decisions that materially affect the social mission. There are really two separate issues here. First, you can try to bake the social mission into the corporate DNA. You can do this in a way that makes it difficult to change the social mission, but you can’t make it impossible. If you can bake it in, you can bake it out. Second, you can try to maintain control in order to protect the social mission. Ultimately this — maintaining control — is your best protection, especially if you’re in a state with a corporate constituency statute. You also want to make sure you do adequate disclosure to investors from the outset. If you put your commitment to the social mission in your offering, it makes it very difficult for investors to turn around and say, “I didn’t agree to this.” Courts will tend to defer to private agreements between companies and shareholders where there hasn’t been fraud. Again — and I know I’m repeating myself — you want to find sympathetic investors. If you have a strong company with a good social

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mission, you’ll attract people for whom the knowledge that they’re doing good is one of their returns on investment. I strongly recommend getting hooked into networks like the Social Venture Network where you’ll meet this sort of person. There’s a whole community of people out there to meet. You can find them on the Internet, and there are also in-person gatherings. Andrew: Thanks, Allen. This has been very useful, both in terms of practical guidance and more generally. We’ve had trouble finding people with specialized expertise in the sort of issue we’ve been confronting. It’s nice to learn that you don’t have to reinvent the wheel and that there are like-minded people out there. It’s good to know that there are other people out there who are crazy like me.

Yup: crazy. And committed, too. This brings us to the end of our discussion of the mechanics of social enterprise. Hopefully, you now know how to work with the key ingredients of intention, money and people. Success isn’t only a function of what you do, though. It also depends on who you are. Next up: the inner game of social enterprise.

Section Three

The Social Zentrepreneur

Chapter 8

The Myth America Pageant

It is always the same: once you are liberated, you are forced to ask who you are. — philosopher and sociologist Jean Baudrillard

T

his chapter is about the stories we tell ourselves. Or, to go all “meta” on you, it is a story about the stories we tell ourselves. More precisely, it’s about the importance of knowing the difference between hand-me-down cultural narratives that we take in unthinkingly and stories we proactively choose — and that go a long way toward determining our values and self-sense. It is about the contrast between ersatz and authentic identity, between received beliefs and true wisdom, and the implications of this contrast for social enterprise and leadership. Before any of that, though, this is a story about two forces that according to Taoist philosophy are in constant interplay. We refer here not to the familiar duo of yin and yang, but to chi — energy — and li — structure. Chi is always bounded by the container of li, unless you happen to be an atom bomb, which presumably you’re not. Like our old friends love and marriage, you can’t have one without the other. 129

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The more early-stage a business, the likelier it is to be dominated by chi — energy. Then, as it grows, it becomes more structured. The chi gets channeled, contained and sometimes calcified. Thus the challenge for early-stage businesses is to judiciously fold structure, li, into all that wild-horse vitality, while for mature businesses the challenge is to support creative energy amidst all that structure. Entrepreneurs are specialists in chi and, often, less comfortable with li. This is why they tend to thrive in early-stage environments and often need to bring in operations experts when the time comes to consolidate their gains. In Western business culture — roughly synonymous these days with global business culture — the relative values ascribed to li and chi have undergone a dramatic transformation in recent decades. Once upon a time — this would be back before the advent of the Internet — high levels of li were considered the foundation of business success. The bigger and more plodding the organization, the greater the chances for success. It was true at the level of the individual executive, too. This was the Era of the Organization Man (and it usually was a man!) whose main skill lay in playing by the rules. Then things changed. Over time, individual creativity — the atoms in the atom bomb, as it were — claimed precedence over structure as the Prime Mover of business success. This contest between mindsets found sublime expression in the extended competition that pitted IBM (Big Blue, the Suit Company) against Apple with its groundbreaking and memorable “think different” slogan. We all know how that one came out. While both companies have thrived financially, Apple won the philosophical competition hands down. During the years leading up to and since his premature demise, Apple’s Steve Jobs has been widely canonized. If you dig down below the noise, you’ll find that Jobs has been acclaimed for two separate reasons, first as the standard-bearer for the rise of chi in the face of li and subsequently for being a master at integrating li and chi. Jobs the breakthrough thinker and unyielding perfectionist, Jobs the artist



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with product and Jobs the tough-minded executive who brings back companies from the dead. Steve Jobs, rebel. Steve Jobs, integrator. You want it all? You got it with the Book of Jobs. Like so many leaders, Jobs had, in addition to his talent and charisma, the blessing of good timing. During his prime years, a series of profound cultural and technological transformations brought important hierarchical (and often calcified) structures crashing to the ground while simultaneously breathing new life into the notion that the individual has enormous pent-up power, whether operating solo or with others. There was the fall of The Wall. There was the rise of the Internet and its many offspring, including the open source movement, crowdsourcing, social media and direct publishing. There was the Arab Spring. All spoke to the same principle — the ascendance of chi over li, with chi in this instance taking the form of creative self-expression. It turns out that people, individually and even more so collectively, are Da (real) Bomb. You just needed structures — new, flatter forms of li — to empower them. In a very real sense, then, this is the age of the entrepreneur. The age of unencumbered chi. Yet there is a paradox built into this bracing news. Although individual self-expression is now a clear winner over group conformity, entrepreneurs have rarely faced stiffer political and economic headwinds. We all know the extent to which money is tight and the middle class is being eviscerated. Now more than ever, entrepreneurs need some sort of special sauce to make a go of it. Which brings us to more good news: social entrepreneurs have that differentiator in the form of their social mission, assuming they’ve skillfully folded it into their business strategy. To sum up, then, entrepreneurship is about “showing up,” about taking what’s unique, powerful and passionate about yourself — your very own chi fingerprint, as it were — and using it to bring something new and bold into the world. You gotta be you — your own best and wisest self. How do you discover and deploy that person? How do you support that person’s appropriate self-expression? How

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do you respond skillfully to the inevitable real-world feedback (and pushback)? This is the subject of this section. As for the term “social zentrepreneur,” here’s why we use it. Zen is both a spiritual practice and a life art. It teaches two things — how to strip away illusion and how to live in harmonious balance with things as they really are. Social enterprise requires similar skills, only without Zen’s metaphysical overlay. Social entrepreneurs need, first, to clear away the false narratives that keep them from gaining access to their best and wisest self and, second, to then bring that self into the world well and wisely. This is the sense in which the skillful social entrepreneur is also a social zentrepreneur. This chapter focuses on the first part of the challenge — stripping away illusion. Cultural truths flow into us like mother’s milk. Valid or not, these memes become our baseline, truths we take for granted until we decide otherwise. To some extent, of course, this is obvious. We all know that we take in our parents’ truths and those of the broader culture. But several things are perhaps less evident, such as, first, how immensely difficult it can be to separate our authentic selves out from the stories we’ve ingested. Cultural fictions, like Bruce Willis, die hard. Second, whenever a mainstream narrative emerges, a counternarrative will eventually claim the stage, too. If, like many social entrepreneurs, you’re the sort of person who is suspicious of dominant narratives, the odds are good that you’ll be drawn to the alternatives. But just because these narratives are different doesn’t make them wise or right. At the end of the day, we need to choose our stories and not let them choose us. To truly excel at social enterprise (or anything, for that matter!), we need to have the psychological freedom to make the best choices we possibly can. We get there by taking a bit from this story and a bit from that story and piecing them together till we have something that works more truly and deeply for us. The most effective and authentic stories are integral — living truths cobbled together from off-the-shelf narratives.



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In this chapter, we explore how this plays out with regard to four narratives — two mainstream and two alternative.

Mainstream Myths About Business A truly “successful” business is defined by its size and its soullessness. How do we know? Because our culture tells us so.

Bigger is better Before anything else, we are mammals and pack animals. One consequence: we have a keen nose for who is alpha and who is beta, for dominance and submission. And another: we tend to assume that bigger means more powerful. Bigger means more muscles, and more muscles means no one will prevent you from taking your pick of food and other privileges. As a culture, we have taken these animal intuitions about size and projected them onto a multitude of landscapes, including the commercial, where our first impulse is to define companies by revenue size: the “$150M Seventh Generation,” the “$124B AT&T.” This journalistic convention exists for good reason. Writers need to do more with less, and this formulation provides a shorthand snapshot of a company’s place in the commercial pecking order. Yet it’s also illogical. Even the most mainstream businesspeople would say that profits are the more accurate measure of success, yet here we are using revenue as our baseline. It just doesn’t make sense — not unless you factor in the notion that we mammals use raw size as our first-cut measure of status and power. Because of this bigger-is-better bias, our culture accords elite status to transnational corporations, which are the enterprise behemoths of our time. They are not corporations so much as “court-porations,” latter-day global-culture descendants of the titled class that frolicked at Versailles during the time of Louis XIV, the legendary Sun King. Transnational corporations are our alpha institutions, our greatest of great apes. For every action, there is an equal and opposite reaction, and we’ve certainly witnessed that here. We all know what happened to the Versailles nobility — does the phrase “severed head” ring a bell? The

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transnational corporate elite is increasingly on the receiving end of similar popular resentment. The narrative of the evil, heartless corporation is now a muscular rival to the “corporate elite” meme that ruled the roost in less disenchanted times. A similar dynamic is playing out around the concept of “local.” Small, locally owned businesses without larger aspirations used to be seen as the working class of commerce. It was honorable but lowstatus work compared to that of the aristocrats hobnobbing in the corporate playgrounds. “Local” was the minor leagues; “national” and “global” were the majors. These perceptions, too, are changing rapidly. Staying close to home is increasingly seen as a critically important antidote to the environmental and social depredations of global enterprise, with local businesspeople cast in the heroic role of foot soldiers in the war against the evil elites. It’s a “smaller is better” reaction to the “bigger is better” meme that has long held sway culturally. Where do we, the authors, stand on this? It won’t shock you to learn that we stand for local business and against transnational corporate transgressions. However, while we don’t believe bigger is inherently better, it’s not worse, either. Bigger is a choice. Social entrepreneurs have good reason to aspire to scale. The best way to have a big social impact is by being a big company, and the best way to have an even bigger impact is by being an even bigger company. When a company like the mega-alpha Walmart ($15.4B in 2011 profits) doubles the amount of locally sourced product on its shelves — a policy announced in late 20101 — you can count on local market dynamics to shift virtually overnight. At the same time, modesty is a virtue, both in deportment and ambition. Not everyone needs to be king, no matter how good Mel Brooks says it is. We are all each other’s model and mentor. There’s much to be said for modeling contentment with community. We’ll channel John Lennon here: imagine a world where people didn’t equate happiness with wealth, power and status. Wouldn’t there



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be a lot more peace of mind? Wouldn’t there be a lot less blood spilt on the way to the top? Wouldn’t there be a lot less ruthlessness (and, we suppose, a lot more ruth)? Social entrepreneurs also perform a real service when they don’t pursue scale — when they implicitly declare, “Small is good too. What we have — a roof over our heads, friends, family and community, a clean conscience — is enough.” So, in response to the eternal question Does size Bigger isn’t better. matter? our answer is yes, absolutely. You don’t have to Bigger isn’t worse. be big to be good, though. At the end of the day, it’s Bigger is a choice. who you are — and how you show up — that counts.

Heartless is better This meme has been building up a head of steam for a good (and not-so-good) century. In the early 20th century, a school of scientific management called Taylorism — named for its founder Frederick Taylor — set out to make business processes dramatically more efficient. It was an exciting notion: by applying the scientific method, defined as dispassionate analytical reasoning, to the inherently sloppy business of managing human beings, you could gain a clear competitive advantage over people who let old-fashioned notions like tradition and compassion get in the way. Taylorism had its heyday from 1910 to 1920, but the efficiency meme had been loosed upon the business world and has been with us ever since, expressing itself in everything from the assembly line to the leveraged buyout. If the Tin Man were the CEO of a transnational corporation with offices around the world, he wouldn’t be bemoaning not having a heart — he’d be treating it as a business necessity. The basic notion — that you’ll do better at business by tuning out your heart — shows up in business conventions and cultural narratives too numerous to count. Nice guys finish last.This phrase, which was coined by baseball manager Leo Durocher in the early 1950s, continues to have traction

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today. It buys into the social Darwinist view that it’s a jungle out there and you have to be red in tooth and claw to survive. There is some truth in this, especially among those who take the notion to, er, heart. But it is not in fact a law of either nature or business. As we’ve seen, virtues such as loyalty and altruism are powerful evolutionary assets. This is increasingly the view of the current crop of evolutionary biologists — and if this isn’t doesn’t persuade you, just ask the Marines, who are all about teamwork and sacrificing for their comrades. Machines “r” us. Back when I (Carl) was a teenager, I played tennis competitively. A moment at a national tournament has stayed with me till this day. I was watching a match featuring a nationally ranked junior. Encountering stiffer than expected resistance, he exhorted himself to step it up with these words: “C’mon, machine!” Although I couldn’t have said so at the time, I now know there was a century of acculturation in that statement. If you could only put aside human frailty and automate your processes, you would be unvanquishable and prevail. This pretty much summarizes the mainstream view about what it takes for a business to succeed at any serious level of scale. C’mon, machine! Money is the only measure of success. If you took a time machine back to the American Revolution, happened on Paul Revere and asked him what the fastest mode of transportation was, chances are he’d stare at you blankly and answer, “The horse.” As in, like there’s anything else? Most people take a similarly Duh! approach to business metrics. Of course success is defined by quantitative financial measures such as revenue and profits! Is there anything else? But here’s the thing about numbers: they’re abstractions, and abstractions inhabit a mental universe that knows nothing of the heart. Even the grimmest statistics — 60 million people killed during the Second World War — evoke only a pale shadow of what we’d experience if, say, we happened on a car crash with two or three bodies lying broken on the road. And since money these days is nothing but a digital notation in a computer



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network, financial metrics are actually twice removed from the heart — they’re abstractions of an abstraction. Businesses play out their destiny on the human stage. They build hope and break hearts. They delight and they devastate. When we reduce business performance to dollar tallies, all those real-world effects are siphoned away. We are left with something less — more precisely, with something heart-less. We are left with the cold comfort of an abstraction — which, as the record shows, can make it easier for people to do cold things. Social missions are bad for business. A conventional wisdom (sic) corollary of money is the only measure of success is that social missions are a counterproductive distraction. If heartless is better, how could they be anything else, since social missions are typically about the heart? Having a social mission thus becomes a form of apostasy as well as a sign of management ineptitude — you need to be hyperefficient to win, and your social mission is a resource drain. Social enterprise is premised on a totally contrary proposition: business needs heart. No: business thrives on heart. In fact, the entire social enterprise, er, enterprise, can be seen as a vast grassroots campaign to prove that you can do just fine at business, thank you very much, by making helping others your Prime Directive. Social entrepreneurs thus have a moonlighting gig of sorts. It’s a construction job: they’re building a counternarrative. Think of it as the Tin Man project — we’re helping business find a heart. This exercise isn’t substitutive, it’s additive, which is a fancy way of saying that social entrepreneurs aren’t swapping out head for heart, they’re integrating the two. In The Wizard of Oz, Dorothy only succeeds in her mission — to return home — when her allies, the Tin Man, Scarecrow and Cowardly Lion, find a heart, a brain and courage, respectively. And so it is with social enterprise. Not every social enterprise is heart centered. The Applied Science Foundation for Homeland Security, for instance. But the vast majority are.

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Heartless isn’t better. Heartless is a distancing strategy. “Left brain, right purpose” — social entrepreneurs marry a passion to serve with the tools of analytical reason.

Counternarratives About Power and Leadership Just as there are right ways to do business, there are also right ways to resist the siren call of conventional biases. How do we know? Again, because our culture tells us so.

The will to power is a problem Power — now that’s one mighty powerful topic. It stirs up strong feelings in most of us, or more exactly, in our inner primate. Power speaks to us of above and below, of access to resources, of kowtowing and lording over, of “power to” (a good thing) and “power over” (yum and eek). Because it’s such a charged topic, people spend a lot of time projecting negative qualities on those above and below — that’s how we manage threatening emotions. “The 1 percent is evil.” “People on welfare don’t want to work.” They’re all either heartless bastards or lazy bastards. We project positive qualities too, up to the point of idealization. The pages of the National Enquirer are filled with tales of latter-day demigods — Brad and Angelina are secular surrogates for Zeus and Hera, descended to Earth in human form. As for those inclined to project perfection on those below, we’ve got the myth of the workingclass hero. Politicians regularly traffic in one-size-fits-all generalizations about power and class. Those on the left tend to sling spears at those above, those on the right at those below. Put projection in the hands of politicians and, alakazam, it becomes demagoguery. The mainstream narrative about power is that it’s appropriate and indeed desirable to enter into the fray and go for the gold ring. Yes, there are rules: you must be “civilized” — things like sexual abuse and



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torture are off limits. Still, it’s vital and robust and 100 percent natural to pursue power, and may the best person win! Enter the counternarrative: the will to power is the root of much (if not all) evil and something to be shunned. This story is premised on a not unrealistic view of history as an endless saga of violence and suffering largely perpetrated by people trying to climb over each other to be king (rarely queen!) of the hill. Do-gooders and other idealists are understandably drawn to this counternarrative. In a world beset by inequality, it’s natural to yearn for a flattened — or at least flatter — social hierarchy where the urge to love and care for each other overcomes the urge to dominate and there are no oppressed or oppressors. This was Christ’s vision (the meek shall inherit the Earth) — and, hmm, the dream of godless communists, too. This notion — that if people would only suppress their will to power, the world would be a kinder, gentler place — has come to be reflected in the so-called Sensitive New Age Guy (SNAG) personality type. Squash that vital, forward-moving energy, and you’ll be modeling a new post-chauvinist version of manliness that will turn those big bad lions into lambs and, hey, might also lure attractive women! Wrong on both counts. You can’t wave away the will to power any more than you can erase the sex drive or the fact of our mortality. They’re part of the hand we were dealt coming in. Power is sexy — blame evolution for that. Here’s why the SNAG worldview is misguided: the will to power isn’t actually the problem. Difficulties arise only when power is exercised pathologically — when my being up translates into needing to keep you down. The SNAG approach to power doesn’t solve this problem; it only creates a new one. Like the sex drive, the will to power can never be suppressed; it can only be rechanneled, and when that happens, it tends to emerge in twisted, unclean ways. Power can be repressed pathologically, too. There is a path that lies midway between the traditional pursuit of power and the way of the SNAG. It starts with understanding that

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power is a complex topic with many different facets. It has a yang (masculine) aspect that’s forward-moving and assertive, and it also has a yin (feminine) aspect that’s nurturing and receptive. And these two are just the beginning. The psychologist James Hillman identified two dozen types of power. It also means recognizing that power isn’t ultimately about power over others; it’s about power over ourselves. This is a lifelong struggle — perhaps the most important challenge of all — and it’s a doozy. How many of us succeed fully at overcoming our fears, our anxieties, our impulse to flee the present moment? First and foremost, power isn’t something we do unto others: it’s something we cultivate in ourselves. Power over oneself has multiple aspects: Self-knowledge — Power is what gives us the strength to cut through false narratives about ourselves and get to the truth of who we are — and to get there with a modicum of love. Power manifested as self-knowledge helps us know when to be tough and when to be gentle. It’s what gives us the strength, when necessary, to turn the other cheek. Courage — Courage is not only about the capacity to be brave in the face of mortal danger. There is also the courage to have compassion, the courage to love, the courage when necessary to take unpopular actions because we are convinced they serve the greater good. Wisdom — Nothing is more powerful than equanimity in the face of life’s challenges, up to and including death. Or, for that matter, more inspiring. Attunement — The martial arts train people in how to be fully present; they teach the art of attunement, which is why martial arts masters have a reputation for being truly powerful. For Hillman, power supports us to do things like shedding worn-out identities and pondering the implications of one’s actions for the wider world and for future generations.



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Needless to say, power isn’t solely intrapsychic. It also has a social dimension, and an enormously impactful one at that. Unfortunately, our headlines are littered with accounts of important people behaving cluelessly. If the people who run things had as much sagacity as influence, the world would be a far happier place. But hey, isn’t wisdom better? As social entrepreneurs, we are Power isn’t a problem best served by cultivating a healthy, comfortable, unless it’s expressed conscious relationship with our will to power — pathologically. Power is and then putting that power to work in service what enables people to to our missions. do good in the world.

You lead by getting out of the way Aided by heaping helpings of Hollywood machismo, our culture encourages us to associate power with a Rambo-like version of masculinity. Power means having abs of steel and shooting the bad guys without blinking. Because leadership is about the exercise of power, the mainstream story about leadership has featured a similar muscularity. You inspire people by being the über-alpha. Think General Patton and Vince Lombardi. You’re tough; you’re rambunctious; you don’t take no for an answer. You Da Man and that’s all there is to it. Here, too, the predictable counternarrative has emerged. It celebrates a softer, gentler model of leadership that is more consistent with the emerging notion of employees as creative dynamos, not cogs in a wheel. Known as servant leadership, this approach has been embraced by a long list of leadership gurus, including James Autry, Ken Blanchard, Stephen Covey, Peter Senge, Max DePree and Margaret Wheatley. According to this school of thought, the leader’s role isn’t primarily to make sure employees toe the line. It’s to empower them — truly skilled leaders inspire and then get out of the way. They don’t get in your face; they hold space. Compared to the old way, servant leadership is a much more yin model of leadership. More Gandhi, less General Patton. More gentle mother, less tough-love dad.

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As a general principle, “leading by getting out of the way” makes great sense, but it does its best work when taken as a loose guide, not gospel. Every person is different. Some need you to get in their face; others thrive on being left alone. A truly deft leader does whatever it takes to get the most out of their team members. Usually this means empowering; sometimes it The best leaders pracmeans “my way or the highway.” The best leadtice servant leadership ers aren’t trapped inside either the tough-guy or and can also come down hard if necessary. gentle-mother narrative. They are able to draw on the yin or yang leadership model as circumstances require.

The Coachman and the Narratives Spiritual teachers seem to have this thing about horses. In Phaedrus, Plato tells the allegory of a chariot powered by two steeds, a noble white one and an ignoble black one. The charioteer aspires to rise to divine heights, but that danged black horse keeps dragging him down. Over two millennia later, the less famous but also influential George Gurdjieff offered another equine allegory. This one featured a carriage, a horse and a coachman representing the body, the emotions and the mind, respectively. According to a Gurdjieff paraphraser, “In the ordinary person, the carriage [the body] is broken down and in dire need of repairs, the horse [the mind] has been brought up on beatings and continual abuse and has never been properly educated, and the coachman [the emotions] is always drunk and half asleep. And instead of the carriage having an owner who is the master of the equipage, there is a continual succession of passengers that are the different ‘I’s that make up our daily life.”2 Plato and Gurdjieff had similar messages. To lead a truly realized life, we need to master our steeds and become managers of our chariots. Our point is similar, although it comes with a postmodern twist. As a matter of course, we ingest narratives and counternarratives.



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It’s part of the package we get as participants in a post-tribal world where memes en masse are constantly competing with each other. Our challenge is to not be in their thrall, but instead to find a place of nonattachment inside ourselves where we can consciously choose which stories — and story segments — to embrace. Until we do that, we’re in a runaway carriage and the horses are driving us. Here, again, the Steve Jobs story — or, more precisely, our story about the Steve Jobs story — is instructive. As we’ve seen, Jobs became a cultural icon because of what came to be seen as his double identity — the rebel with a cause and advocate of free energy (chi) and the master integrator who appreciated the value of structure (li), was an ace at getting result and was as pragmatic as he was visionary. Not artist, not manager, but consummate artist-as-manager, Steve Jobs integrated two archetypes and emerged with something fresh and heroic. Here’s the thing: what he did, we all can do. We all have what it takes to embody not this narrative or that narrative, but our own unique narrative. As social entrepreneurs, we have the power — and the opportunity! — to manifest this autonomy every day, every moment, with every fresh decision. This is the stuff of true leadership and how we best serve our mission.

Chapter 9

Carl and Allen’s Ten Commandments

Say what you will about the Ten Commandments, you must always come back to the pleasant fact that there are only ten of them. — H.L. Mencken

I

n the previous chapter, we discussed the desirability of cobbling together one’s own authentic story out of the many narratives and counternarratives that come to us on the cultural tide. We spoke out on behalf of authenticity and self-expression. Now we head down a different highway and examine what for us are immutable principles about how to excel at social enterprise. These aren’t precepts to adopt or not depending on whether you believe they work for you. They are commandments you ignore at your peril. You will probably not be shocked to learn we weren’t handed these truths on a tablet — we developed them on our own. In what turned out to be both an analytical and intuitive process, we chose from among dozens of candidates based on a few simple rules: the winners had to be truly foundational; the “outer” and “inner” games of social enterprise — strategy and psyche, respectively — had to receive roughly equal attention; and ten was our final number because, well, it had a certain ring to it. 145

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Before launching into our discussion of the individual commandments, some additional clarifications and caveats are in order: • These commandments apply to all entrepreneurs. We discuss them, though, with an eye on the perspective and special challenges social entrepreneurs tend to bring to their work. General principles, specialized focus. • We omitted some principles that might logically have been included. For instance, “Treat people well” didn’t make the final cut because it seemed so obvious — and we gave it serious consideration because so many people aren’t considerate. • As we analyzed these principles, an “on the other hand” occasionally demanded our attention — and was written up as a sidebar. Not even commandments, it seems, are absolute. Not ours, anyway. • A few of the commandments are of the Business 101 variety. We included them because many social entrepreneurs disregard them in their zeal for the social mission. • Many of the commandments are interconnected. For instance, “Be intensely strategic” overlaps with “Practice quality control,” which is related to “Compromise on everything but your integrity.” And so on to the commandments! Carl and Allen’s Ten Commandments

1. Respect money. 2. Be intensely strategic. 3. Insist on quality. 4. KISS (Keep it simple, stupid!). 5. Be willing to compromise on everything but your integrity. 6. Know thyself. 7. Get support. 8. Cultivate a healthy relationship with your (ad)venture. 9. Take care of yourself. 10. Keep dancing on the high wire.



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Commandment One: Respect Money Many social entrepreneurs are drawn to business by the social mission. Turning a profit is secondary, more a means to an end than an end in itself. The result: cash flow — the entire world of money — occupies a distant horizon and is largely taken for granted. This frequent and sometimes fatal flaw takes the form of three distinct fallacies:

The money will come fallacy If you’re intoxicated by your vision, it’s easy to be overly optimistic about when and how much funding will be forthcoming. Jason Street,3 the founder of Amazing Space Enterprises, wanted to create a global sustainability platform. He raised about $500,000 in seed capital and put the bulk of it into developing an impressive website. He was sure that once he had a prototype, the money would come. It didn’t. The prototype looked good, but proofs of concept, not beauty contests, are what attract investors. The capital market needed to be shown that the website could attract advertisers and generate a profit. Street didn’t deliver that. The tiny fraction fallacy It’s easy to be wasteful when you’re feeling flush. In 2004, a friend gave me (Carl) a low-six-figures gift, which I used to launch Our Community Networks, a social enterprise. During the venture’s earliest days, I was feeling very expansive around money: the prospect of running low on or out of capital felt so far away as to be, for all intents and purposes, irrelevant. I promptly invested too much money in logo development and marketing collateral. As much as anything, it was a symbolic gesture: we were putting our stake in the ground, and why not do it right? Meanwhile I was discounting the future — turning a blind eye to the important reality that today’s tiny fraction can be tomorrow’s lifeline. The inevitability fallacy For years, current Hong Kong resident Christina Dean worked as an oral surgeon. Then she transitioned to journalism and, from there,

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to founding and running Redress, an entrepreneurial and fast-growing non-profit organization dedicated to creating, as per its website,

Counterpoint: You Can Achieve a Lot with Less When it became clear to me (Carl) that Our Community Networks was destined for a time to lead a cash-strapped existence, I decided to make a game of it. The biologist Rupert Sheldrake had proposed that everyday citizens could contribute to science by doing small-scale, low-budget, carefully thought-out experiments. You didn’t need to build a Hadron Collider, or even half a Hadron Collider, to make a difference. There was an alternative, which he called “small science.” I resolved to try something similar, which, cognizant of the wordplay, I dubbed “small business.” If I could succeed on a shoestring, I would be putting the lie to the notion that you need serious funding to make a serious go of it — and wouldn’t that be a ray of sunshine for entrepreneurs everywhere! Although Our Community Networks never took off, I continue to believe the hypothesis has merit. Yes, you have to respect money. And you can also accomplish a lot on a shoestring. For one thing, we inhabit a two-economy world — markup and no markup. In the markup economy, consultants are billed at a multiple of 3X or more of what they’re paid. You can reduce your costs by three times or more by avoiding the middleman (or middle agency) and hiring talent directly. The upside of doing business in a down economy is that many talented people are hungry to work and available at a fraction of their value. It’s a buyer’s market. With luck and perseverance, you can find great people at a modest cost to you. There is also — and we run the risk of heresy here — offshore hiring. While we favor sourcing locally wherever possible, ultimately there’s nothing wrong with hiring someone who’s not “from around here.” Indeed, it can reasonably be argued that it’s discriminatory to favor one’s home community. We’re a single human family, right? In that case, what makes providing an income for a nearby family inherently more worthy than doing the same for a family in Bangalore or Bucharest? Wherever you land on this issue, the fact remains that competent, affordable talent is available if you search globally.



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“a fashion industry where sustainable fashion is not a niche, but a norm.”4 Says Dean, “I wasted a lot of money early on. I assumed this was customary and inevitable. If I hadn’t made that assumption, I would have been more careful with my money.” When you’re running a social enterprise, never be casual about money. The bottom line is … the bottom line.

Commandment Two: Be Intensely Strategic To succeed as a social entrepreneur, you need to be strategic. Of course you do. But intensely strategic? Why this emphasis? For this reason: having a social mission can create a perceptual soft focus that blots out the critically important role of hard strategic analysis. Heart is an important aspect of social enterprise — and heart can also get in the way. “Be intensely strategic” reminds us not to fall into this trap. It’s an antidote to the notion that, when it comes to social enterprise, love will find a way. We have three specific notions in mind here. First, know your weight class. Don’t overreach. Compete at a level where you can win. Most social enterprises start off as featherweights. If this describes you, take on other featherweights. Don’t get in the ring with Muhammad Ali. Jason Street of Amazing Space envisioned the company’s competing with the big guys. It was a worthy and potentially achievable dream, but that sort of thing doesn’t happen overnight. Street built his strategy around launching large. He’d have been better-off building incrementally. There’s a corollary to this principle. Don’t go for the gold ring too soon. Businesses, like plants, need time to grow. You can hit the big time prematurely. The sex-education social enterprise I (Carl) help run provides a case in point. Sheri Winston, our front-of-the-curtain talent, wrote a book (Women’s Anatomy of Arousal: Secret Maps to Buried Pleasure) that won a significant national prize, an achievement all the more noteworthy because the book was self-published.5 It’s every

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writer’s dream to be on Oprah (or the post-Oprah equivalent) — it’s the authorial equivalent of the Promised Land. For years, friends and fans have been encouraging us to make this our highest priority. From one perspective, their counsel makes sense. Sheri has what it takes to be a hit, and appearing on a major television show would be a big win. Or would it? Our consistent response has been, “Not yet.” A successful national media event would create enormous demand for the book. We’d need lots of inventory along with extensive distribution to meet that demand, and we don’t have either yet. That time may come. When Sheri appears on The Ellen DeGeneres Show, it’ll be because we’re ready for it. Second, keep your eye on the prize. Not to go all hellfire-andbrimstone on you, but there’s a lot of temptation out there. Or, if you prefer, opportunity. When it knocks, you need to ask yourself an all-important question: “Is this a distraction or does it further my mission?” The answer isn’t always clear, and not always because the pros and cons are about equal. Dig down and you may find that you yourself don’t have complete clarity about what your mission is. Remember that wildly premature speech President G.W. Bush gave on the USS Abraham Lincoln in front of a banner reading Mission Accomplished? That was a classic case of mission blur. What he did you can do too, although less conspicuously. Jenelle Malbrough is the founder and head of First World Trash, a start-up New York City-based social enterprise that converts waste vinyl billboards from the city’s waste stream into products like messenger bags and laptop cases. In 2011, local officials considered making much of the city’s waste vinyl billboards available to the company. Although they did not ultimately go in that direction, if they had, that would have been a whole lot of vinyl waste, much more than she had capacity for. What would have been the right choice in what ultimately turned out to be a hypothetical situation? In the view of business coach Rob



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Lederer,6 who works with Malbrough, that would have depended on how she defined her mission. A mission to divert vinyl waste would have argued for jettisoning her business model and getting into the very different business of disposing of those mountains of material. Following this path, for instance, might have required her to set up a pipeline to Africa, where the vinyl could be used as roofing material. But if her mission was the quite different one of building a successful social enterprise that converts waste vinyl into products, the more consistent choice would have been to say no. Is the social purpose the mission, or is creating an enterprise that supports the social purpose the mission? It’s an important distinction, and one that most social entrepreneurs need to get clear on at some point. If it’s the latter — and it generally has to be unless you want to be in the business of constantly reinventing your business model — then it brings us back to our starting point. You need to be intensely strategic. Third, leverage the mission. Having a social mission can boost a business. It can also bury it. As we’ve stressed over the course of these pages, your odds of success increase exponentially if you integrate the social mission into the business model. Dolores Delvecchio7 made a small fortune building a conventional business and decided to dedicate the next chapter of her life to doing good in the world. She tried working in the non-profit sector, found the experience frustrating and turned to social enterprise. Higher Calling was a telemarketing call center with a difference. Delvecchio was concerned about the lot of college students, many of whom were mortgaging their future by taking on enormous levels of debt. Delvecchio put it this way: “Instead of following their true calling, these young people were taking jobs with Exxon. They had no choice. They needed to pay off their debt.” Higher Calling hired only college students who had taken on loans. The company paid twice the industry norm and provided stock options that accumulated the longer an employee stayed with the company.

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Although the company’s investors were initially skeptical, it turned out to be a win-win strategy. The student-employees benefited because the higher pay and stock options made it easier for them to pay off their loans. The social enterprise benefited because happy, motivated

Counterpoint: When the Mission Stands Alone Adam & Eve is in the sex business, no positions barred. The company, which has estimated annual revenues in the $90-plus million range, sells and distributes adult movies and sex toys (oops, adult novelties). It is also, improbably, a social enterprise, or at least a close cousin. The company was founded in the late 1960s by University of North Carolina graduate students Phil Harvey and Tim Black, who were studying non-medical ways of promoting family planning. Their professors approved an experiment selling condoms by mail, even though doing so violated the federal Comstock Act. They weren’t arrested, the business took off, and soon Harvey and Black were running a hot ‘n’ heavy adult business. What puts Adam & Eve in social enterprise territory? It was initially fueled by, and continues to serve, a clear social mission — the delivery of affordable birth-control and AIDS prevention products. Phil Harvey,8 who still owns about 40 percent of the company, donates the bulk of his profits to DKT International, a non-profit he founded that distributes affordable contraception in Africa and elsewhere. Do the math and it turns out that close to 25 percent of Adam & Eve’s profits go via Harvey to this cause. That’s a percentage any socially responsible business would be proud of. Adam & Eve does precious little to promote this aspect of its story. Not because they’re leery about roiling the political waters, but because integrating mission and marketing doesn’t boost their sales. “Our customers come to us because they’re thinking about pleasure,” explains Harvey. “The philanthropic impulse lives elsewhere in their brain.” The company has tested cause-marketing campaigns that pledge a significant percentage of every purchase to international AIDS prevention. “They’ve gotten a big yawn,” says Harvey. The moral: integrate the social mission into the business model if you can. But sometimes the exception proves the rule. It’s not always fatal if you don’t.



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employees meant reduced absenteeism and higher productivity. The result was a highly profitable business, in large measure because the social mission was integrated into the business model.

Commandment Three: Insist on Quality Before anything else, a “good business” must be a good business. It must be aligned with established success principles, one of which is a commitment to quality. A sterling social mission can never make up for a subpar product. If you’re delivering quality that’s equal to or better than your competition’s, your social mission can deliver a decisive edge. Fall short on quality, and fuggedaboudit. Quality doesn’t only apply to products. It also applies to people. Here, quality means competence, social intelligence and integrity. And of course you’ll want your team to have aligned values, too. George Polisner9 is the founder and long-time nurturer-in-chief of the social enterprise Alonovo. Polisner’s vision is of a buying guide that supplies shoppers with current, accurate point-of-purchase information about corporate environmental and social performance. Alonovo created a considerable buzz when launched in 2005. More than a few investors expressed interest, giving Polisner high hopes that generous funding would be forthcoming. It never quite happened. One group of investors pledged $500,000, then backed out at the last minute when they collectively concluded that Polisner would need $1 million to make a go of it. Other investors, Polisner reports, “shied away at the point of signing on the dotted line. They professed to be green, but the only green they turned out to be interested in was the color of money.” After a spate of disappointments, Polisner couldn’t bring himself to say no when a serious investor showed up with $250K in capital, even though the money came with a catch — a CEO who, in Polisner’s words, “was better suited for Walmart than Alonovo.” It didn’t take long for Polisner’s decision to backfire. “It took a lot of legal maneuvering for me to regain control,” he recounts. When the

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CEO eventually departed, the funding vanished too — and precious time had been lost. “It was one of my biggest mistakes,” says Polisner. Our reading: his eagerness to find funding caused him to lower his standards and accept a business partner who wasn’t right for him.

Commandment Four: KISS (Keep It Simple, Stupid) A social enterprise is inherently more complex than a conventional business. Social entrepreneurs have two agendas, not one. At the very least, this requires a sort of double vision. Complexity can be a strategic asset if you’re defending an entrenched position. For entrepreneurs, though, it’s usually problematic. More moving parts means more things that can go wrong. The mean time to failure decreases exponentially. The everyday repercussions of complexity make many entrepreneurs — we’ll just say it — crazy. Complexity increases the administrative burden, often in ways that weren’t accounted for in the planning. This can increase your costs — and stress, too. Business isn’t fun when you’re being nibbled to death by guppies. The solutions? First, streamline your business model and processes. Second, farm out complexity if you can. At The Center for the Intimate Arts, we outsourced book fulfillment to Amazon. This step has saved us both money and headaches. A second problem with complexity is that it turns off investors and other stakeholders. “You need to be able to articulate your concept concisely,” says Alonovo’s George Polisner. As the founder of the conceptually complex Our Community Networks, I (Carl) can testify to the importance of this. The enterprise required buy-in from a broad range of shareholders, including local One investor actually said, while writing me (Carl) a check, “I still don’t understand the concept.” I was left unsure whether to feel grateful for his show of faith or unsettled about his mental stability.



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citizens, business and non-profits. They tended to glaze over when I reached sentence three. I never quite got around to making my elevator speech more concise. I was infatuated by the conceptual elegance of the model and thought others would appreciate it too. They didn’t. The importance of focusing is a recurrent theme in this and the next chapter. Find your target, aim, fire and repeat — and do it over and over again. Says George Polisner, “Without significant funding, you need to focus on excelling at a very narrow set of activities. The martial artist Bruce Lee put it this way: ‘I fear not the man that has practiced 10,000 different kicks once; I fear the man that has practiced one kick 10,000 times.’”

Commandment Five: Be Willing to Compromise on Everything but Your Integrity This commandment combines pragmatism with principle: do what you need to do to make your social enterprise a success, and know when to say no. It’s a precept with a large gray area, though. How do you actually know when to pull up the drawbridge? Green real estate development provides a case in point. It takes big investment dollars to make an ambitious project happen, and this creates not only competing pressures, but also competing responsibilities. The developer has a duty to deliver a respectable return to his investors as well as a project that sustainability advocates will applaud. In such situations, “integrity” isn’t a line in the sand; it’s a zone along a continuum. In virtually every green real estate project, the developers end up making decisions that tug at their conscience. There’s usually a compelling rationale for these compromises. If you don’t, the project won’t see the light of day, and isn’t a light green project better than no project at all? This was the logic developers David Case and Kevin Kelly10 embraced in the late 1990s when they became involved with Civano, an ecovillage in Tucson that emerged out of a grassroots vision of a 100 percent solar community. It soon became clear to the developers

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that this vision, though laudable, wasn’t economically viable. The project could tolerate up to a 15 percent price premium over conventional housing. Going totally solar would have consumed the entire premium and then some, making it impossible to implement other eco-initiatives such as water efficiency. Rather than commit to a lopsided eco-project with unsustainable price points, Case and Kelly dropped 100 percent solar from the plan, incurring the wrath of local activists. “We were getting it from all sides,” recalls Case. “Because the project received $3M in funding from the City of Tucson, Hispanic leaders accused us of siphoning off money that could have gone to inner-city projects. But our worst critics were the environmentalists.” Today, Civano is a thriving community of about 600 homes. That’s a lot smaller than the plan Case and Kelly launched with — and also much better than nothing. “I give the project an A-,” says Case. “We were hoping to raise the bar for real estate development generally in the Tucson area, and overall we succeeded. If we’d been less willing to compromise, we would have had a product we couldn’t sell, Civano would never have gotten off the ground, and we’d still be at square one locally.” Was this the path of integrity? Depends who you ask. Some years ago, I (Carl) asked the late environmental scientist Donella Meadows what the appropriate parameters were for a green real estate development in Tucson. “In that desert? No development at all,” she said. That’s a very different answer from Case’s. For one person, integrity



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may mean insisting on the purity of the vision. It may also mean, as with Case and Kelly, accepting some adulteration. But only some — for every person of conscience, there comes a time when you simply must say no. For David Case, this moment arrived when Fannie Mae, one of Civano’s funders, lent the developers money on condition that they not use the term “sustainability” in their marketing. “Fannie Mae was concerned about getting sued if the project fell short of someone’s definition of sustainability,” says Case. “This was absurd and paranoid. They were requiring us to not say who we were. We accepted their money but ignored the requirement.” Here again, we see how tricky a subject integrity is. This was contractual disobedience, which some might see as a failure of integrity, carried out in the name of personal integrity. How did Case and Kelly know this was the right course of action for them? It wasn’t an intellectual process. “The answer was in our gut,” says David Case. “We just knew.” There are no easy answers here. Integrity is an absolute and inviolable value, yet unimpeachably ethical people can and do disagree about what integrity requires in a given situation. We’re not going to tell you what integrity should mean to you. We’re not ethicists, and more importantly still, we’re not you. What we can and will do, however, is affirm the importance of this commandment and recommend that you give focused thought to what integrity means to you in the context of your social enterprise. Ideally you’ll do this early on, in relative tranquility. To sum up, integrity requires you to combine practicality, deliberation and intuition: • Be intensely pragmatic. • Give serious advance thought to what your social mission boundaries are. • Understand and respect that these are complex issues that don’t always lend themselves to easy answers. • Listen to your gut. You’ll know when it’s a “no.”

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Commandment Six: Know Thyself This one’s so important it comes with its own handle: Founder’s Syndrome. Your social enterprise is your baby. It is everything to you, so naturally you want to do everything for it. This dedication, while useful in the very early stages of an undertaking, becomes increasingly problematic as your business matures. No one person can do everything well. That’s not how aptitudes are distributed, and even if they were, there’s not enough time in the day to perform across the board at a high level. Founder’s Syndrome is a problem for three reasons: • It leads to micromanagement — Founder knows best! — and is disempowering. You don’t want to do this to your team. Not only is it inconsiderate, but it creates a vicious cycle too. Demoralized employees tend to duck responsibility. When this becomes an institutional problem, the only person who can step into the breach is — that’s right — the person with Founder’s Syndrome. • It gums up the works. When every decision has to go through the Imperial (or Servant) Leader, delays are inevitable. It’s like stripping a car of its fourth and fifth gears. • It undermines quality. There’s a word for the boss who presumes to know how to do everything better than anyone on the team — delusional. When talent is subordinated to delusion, performance pays the price. Every person has strengths and weaknesses. Recognize your strengths — be proud of them! — and leverage them. As for your weaknesses, recognize them too. Find people you can trust to do that work well — and then get out of the way.

Commandment Seven: Get Support There’s a corollary to “know thyself ” — “you can’t do it alone.” No man or woman is an island — and no social enterprise, either. The marketing firm Merrigan & Co. specializes in writing copy for non-profits. Owner Bob Merrigan developed the business because



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he loved to write and was good at it. Sales and business development were neither his forte nor particular interest. He developed an excellent reputation, and without having to do much independent selling, his business grew to three additional people to handle the work flow. Merrigan had the foresight to hire a business development specialist, although they already had as much work as they could handle. When the inevitable winter arrived, the company had more than enough opportunities in its pipeline.11 Social entrepreneurs don’t only need inside help: they benefit from external networks of connection, too. At the Center for the Intimate Arts, we learned this virtually overnight when I (Carl) attended the Fall 2011 Social Venture Network gathering for social entrepreneurs. I had decided to attend the conference to conduct research for this book. It hadn’t occurred to me that there might also be significant business bene­fits for the sex-education business I help run. My eyes were opened quickly. By the time the two-day gathering had ended, I’d made important connections with two possible branding partners, a prospective funder, and a business development and fundraising specialist. In hindsight, I’ve come to understand why I didn’t at first view the conference as a business development opportunity for The Center for the Intimate Arts. Sex education is a world unto itself. Scan that landscape and you’ll see Planned Parenthood — it’s the elephant in the bedroom — along with an assortment of solo teachers who are there because they’re passionate about education, sex or both. You’ll find also a measure of cultural diversity, with a mix of respectable middle-class citizens and edgy alternative-lifestyle sorts. What you’ll find relatively little mention of is social enterprise and sustainability, though both can be found at the margins. Sir Richard’s Condoms donates one condom to a developing country for every one it sells. Aloe Cadabra and Good Clean Love sell organic personal lubricants. And Adam & Eve, as we have seen, generates millions of dollars a year for international family planning and AIDS prevention initiatives.

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My error, such as it was, lay in accepting without question the boundaries I’d been handed instead of undertaking my own independent assessment of what communities The Center for the Intimate Arts belonged to. One of which is social enterprise. What are your networks? Are you leveraging them as much as possible? As a social entrepreneur, it’s important for you to identify and participate in your communities — all of them. Support can show up in unexpected ways. Your job is to put yourself out there so it can come to you. The networking payoff may not be something you can quantify in a spreadsheet, but it’ll be there — in spades.

Commandment Eight: Cultivate a Healthy Relationship with Your (Ad)Venture Previously we wrote that being a social entrepreneur is like being a parent. True enough — and it’s also like being in a serious romantic relationship. There’s passion, there’s commitment, it’s a roller-coaster ride, and you’ll inevitably face challenges. Fittingly, some of the same success principles apply.

Keep rediscovering the passion Babies, bill-paying, taking out the garbage — these things can put the kibosh on romance. Similarly for the day-to-day requirements of running a business — you can forget why you made the commitment in the first place. Who’s going to provide the inspiration, and who’s going to do the remembering, if not you? Be the faith-keeper When the going gets tough, it can be easy to lose heart. This attitude can be catching, especially if it comes down from the top. If you’ve got to fake it a bit, then fake away — and do it well. The time to hold the torch highest is when things are at their darkest. Empower your team If you’re in a relationship with a controlaholic, you’re in for a bumpy ride. It’s no different if you work for one. Treat your employees as



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equal partners. Give them the respect they deserve — and a heaping helping of autonomy, too, even if it makes you anxious that they’ll make mistakes.

Be on the lookout for weak signals Whether you’re in an intimate relationship or running a business, it’s always better to address a problem before it’s a big deal. Is it better to treat a cancer when it’s an itty-bitty tumor or after it’s metastasized? This approach, which is obvious once you think about it, requires you to attend to anxieties on the periphery of your awareness. Samson Research provides data analysis for health care companies. Pat Purcell, the head of this fast-growing organization, had a hunch that there was a problem with how software updates were rolled out. The reason: “There’s no clear owner for this.”12 From this starting point, he proceeded to launch an end-to-end inventory of the company’s processes with a view toward identifying which aspects of it fell between the management cracks. Purcell was attending to weak signals that a less forward-thinking manager might have ignored. The end result was great for his mental health — and also nipped potential problems in the bud. Know when to quit We know how it is when you’re in love. No matter how difficult things get, you want to hang in there; you don’t want to let go. Sometimes, though, there comes a point where it doesn’t make sense to keep trying. It’s similar for social enterprise, though in this case you usually have a signal — no money. Occasionally, though, you can keep limping along, for instance by going deeper into debt even when it serves no purpose. Social enterprise is a gamble. You’ll do better if you know when to fold ’em.

Commandment Nine: Take Care of Yourself Social entrepreneurs tend to run themselves ragged. It’s your baby, it’s your partner, it’s your everything. So why shouldn’t you put every last iota of your passion and energy into it?

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Here’s why: because overdoing it can backfire. If you push yourself so hard that you become seriously ill, the ship will lose its captain. If you “only” get stressed out, your decision-making and leadership skills may suffer. Says Christina Dean of Redress, “When I’m feeling stressed, it can be difficult for me to distinguish between legitimate concerns and what’s just me being fretful.” Not taking care of yourself can also have a subtle impact on your team and the brand. While struggling to make Alonovo a success, George Polisner gained 85 pounds. “This didn’t help the business,” he says. “People look for a person with good self-discipline, and I wasn’t demonstrating that. It may also have affected my ability to raise capital.”

Commandment Ten: Keep Dancing on the High Wire As much as anything, skillful management is about balancing polarities — lots of them: Humility and pride — You have to be open to learning while having faith in what you know. Heart and head — As the social enterprise’s leader, you’re the person who needs to keep the passion alive, along with the sense of commitment. You also need to be intensely strategic. Perfectionism and flexibility — Sometimes it has to be just so. Other times, the perfect is the enemy of the good. You need to be able to toggle between the two. Keeping the faith and being realistic — Ya gotta believe. And be hardheaded, too. Staying on top of things and meddling — An absentee manager is a problem. So is an intrusive one. Finding the right balance — holding on loosely without letting go — is one of the arts of management. Being forward-thinking and ahead of your time — One step ahead is a competitive advantage. Three steps ahead can be disastrous — a cartoon tumble over the cliff.



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Authenticity and diplomacy — Being real is a virtue — usually. Did you just decide to lay off key team members? If so, it’s probably best to plan this difficult conversation carefully and, until it happens, interact with them on terms that are less than completely transparent. Vision and implementation — Social entrepreneurs tend to have big dreams. That part’s easy. The bigger challenge is to spend long, often thankless hours at the daily grind of building a business. The tension between vision and implementation is such a common and important problem that it’s the subject of the next chapter.

Chapter 10

Overcoming Entrepreneur’s Disease

Vision without execution is hallucination. — Thomas Edison

H

ello. My name is Carl and I am a visionaholic. A recovering visionaholic. What’s a visionaholic you ask. It’s a person who loves to spend their time imagining what could be, often at the expense of mundane daily activities. It happens to afflict a great many entrepreneurs (and social entrepreneurs). As we’ve said, every entrepreneur wants to get from today’s “here” to a grander “there.” Their vision of the future is what drives and inspires them. Vision is the gleam in the eye that births every creative endeavor, including social enterprises. Vision is wonderful. It’s magical. It’s indispensable. And you can overdo a good thing. This, in a nutshell, is Entrepreneur’s Disease. In our experience, Entrepreneur’s Disease is endemic. Since vision­ aholism is, so far as we know, our own coinage, we have no Official Statistics to prove this. There aren’t boatloads of psychologists out there designing questionnaires or local Visionaholics Anonymous Allen shares my views but not my affliction. 165

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meetings to attend. But none of that disproves the disease’s existence. If you’re a social entrepreneur, you probably have the gene and you may well have a full-blown case of the illness, too. As a recovering visionaholic, I have lots of sympathy for those afflicted. I get it, at a deep level. Visionaholism is born in a conflict between two worlds. We spend much of our time dealing with mundane reality, and this can get dull and depressing. Pay the bills. Take out the garbage. Move stacks of paper from pile A to pile B. Witness the world going to hell in a handbasket, with those in charge seemingly unwilling or unable to do a damn thing about it. Then contrast this Reality Realm with what could be — with the world of the imagination. When I am caught up in a vision of my creation, I enjoy complete dominion. Vision Space contains all the good stuff — excitement, creative flow, infinite potential — and none of the bad and boring. Better yet, it is fun — and this, playing, is something we mammals love to do. Playing is hardwired into our nature, is one of the main ways we learn and is something that, as adults, we get to do far too little — unless we have Entrepreneur’s Disease and spend lots of time in Vision Space. Which is nothing if not playful. In the Reality Realm, there are innumerable physical and social constraints. We can only run so fast. People say no when we want them to say yes. Out there in Vision Space, I can travel at the speed of the imagination — a whole lot faster than my feet can do. As for social constraints, there are none. The only person who can say no to me is me. In Vision Space, we are perfectly powerful and can play, in theory, forever. When an obstacle presents itself, it’s not a problem so much as a brand new chance to play. Hey, more fun! In Vision Space, the game doesn’t stop — or stop being fun — until we decide to walk away. Vision Space has yet another blessing. It’s an anxiety-free zone. The worst thing that can befall you there is getting snagged on an insurmountable creative challenge. You don’t lose loved ones in Vision Space; you don’t face death yourself. It’s an immortal realm: you’re forever a child there, always delighting in playing. There’s no negativity



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and certainly no claustrophobia. Not only is Vision Space not the Reality Realm, it’s the anti-Reality Realm. These attractions are why artists are drawn to making art. When they’re caught up in the creative process, they, too, have power and control; they, too, have no limits on imagination; they, too, manage their anxiety this way; they, too — and only they — decide when the game will end. The rules of the Vision Space game are different for entrepreneurs and artists, though. Entrepreneurs win or lose depending on how their work of the imagination fares in the Reality Realm. Revenues must exceed expenses. With artists, while it’s nice to do well commercially, success is ultimately determined subjectively. Art is judged by art’s standard, not the bottom line. There is an inherent tension between vision — the stuff of Vision Space — and implementation — the work of the Reality Realm. We can understand Thomas Edison’s famous maxim, “Genius is 1 percent inspiration and 99 percent perspiration,” as the tension between play and work. Small wonder, then, that entrepreneurs and social entrepreneurs tend to be drawn to a playful place that’s fun and free and to be impatient with the less inspiring nitty-gritty of day-to-day manifestation. Do you suffer from Entrepreneur’s Disease? If your answer to any of these questions is yes, there’s a good chance you do: • Have you ever framed an ambitious intention as a “just” task? We’ll just raise a million dollars. We’ll just get a dozen talented people to volunteer their time for us. Beware that demon word “just”! It’s an indicator that you’re glossing over all the hard work that lies ahead. That “just” just may be delusional. • Have you ever been on track to successfully getting a business off the ground and abruptly lost interest once the business made the transition from a gleam in your eye to a child needing tending? • Do you tend to wildly underestimate how much time it will take to get tasks done?

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• Have you put an inordinate number of hours into fine-tuning your logo and refining your sales material — and then had trouble actually making all those sales calls? • Do you love to chase after new business opportunities and keep piling them onto your to-do list? • Have you ever run a business where your deal-making got far ahead of your systems and processes? Have you ever fallen way behind on your bookkeeping? Did you ever almost miss your final deadline to get your taxes filed on time — or maybe actually miss it? Entrepreneur’s Disease isn’t all bad. You actually need a touch of it to succeed as a social entrepreneur. After all, if you want to change the world, you have to have a vision of how it could be a better place. Without vision you’re just another worker ant: you’ll be disadvantaged as a leader and have difficulty inspiring the troops. But — and here’s our main point — you need to control the disease. You need to manage it, and you can only do this by going against the grain of your natural predilections. You must, in a sense, not be you — or, to frame this more generously, you must be a more integrated you. A more disciplined you. The most inspiring and successful social entrepreneurs don’t throw their passion for Vision Space under the bus. They modulate it. They only go into that realm when it makes business sense to do so. They stay sober.

Please Let Me Bring You Down To resist the temptation to hunker down in Vision Space, you’ve got to train yourself to go against the grain. This translates into a handful of precepts.

Get real (and stay there) “Get real” has two distinct meanings. It’s an admonition to be authentic — an important management skill when balanced with the aptitude to keep one’s mouth shut (and emotions hidden) when necessary. That’s not how we mean it here, though. As an antidote to



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Entrepreneur’s Disease, “getting real” means training oneself to differentiate between how things are and how we’d like them to be. It means stomping on those rose-colored glasses, picking up the shards and throwing them away, as often as we need to. We’re not talking about getting enlightened here; we’re talking about getting grounded — about getting in the habit of asking yourself questions like the following: • Am I being hardheaded about this, or am I indulging in wishful thinking? • Has our brainstorming process reached the point of dramatically limited returns? • What action steps are required, and how will I make them happen? • Is the proposed direction feasible? How long will it take? How much will it cost? To what extent is it on mission? To what extent will it be a distraction? Some of the Reality Realm’s rules are ones people with Entrepreneur’s Disease would rather wish away. In Vision Space, for instance, time doesn’t really exist: things happen instantaneously. In the Reality Realm, not only does it exist, but it typically takes a whole lot longer to get things done than you imagined. Updating those Web pages, which you thought would take 15 minutes, ends up consuming half a day. Getting real (and staying there) means factoring annoying realities, like how long it really takes to get things done, into your decision process. It means establishing residence in the Reality Realm — and, if necessary, chaining yourself there.

Make friends with Murphy Another aggravating feature of the Reality Realm is the relentless presence of Murphy’s Law, which states that if anything can go wrong, it will. Visionaholics, don’t be surprised when Murphy comes along — and don’t waste your time being indignant. Why get worked up about

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what can’t be changed? Why challenge the natural order? Murphy has no place in Vision Space, but the Reality Realm is where the real work gets done. Plan for Murphy. Deal with Murphy. Cultivate a sense of humor about him.

Just say no Opportunities are abundant, some might argue infinite. There are a million rainbows out there, each with its own pot of gold. Time is limited, though, and so are money and energy. In Vision Space, there’s space and time to let a thousand rainbows bloom. In the Reality Realm, there’s only room for a handful. As a social entrepreneur, you need to be intensely discriminating, pursuing an opportunity only because it makes compelling business sense to do so. As is so often the case, there is also a countertruth here. Don’t shut off the new business opportunity valve completely. The indispensable partnership that’s exactly what your enterprise needs may be just around the corner. Do less better There’s a corollary to Just say no. Social enterprise is very challenging. There’s limited room for error. To succeed at social enterprise you’ve got to play the game at a very high level. You must do what you do very well, and this requires you to maintain a narrow focus. When you spread yourself too thin, your energy is dissipated and quality across the board suffers. Do you have an overflow of loose commitments or a handful of serious relationships? Weed out the excess and focus, focus, focus. Follow the advice of the Portuguese proverb — Think of many things; do one. Be painfully practical Sometimes running a business is fun. Sometimes it’s not. When work becomes a slog, it can be tempting to detour into Vision Space where it’s never boring. Whenever this temptation arises, notice it, breathe it away, and bring your shoulder back to the wheel.



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Get support We said it in the previous chapter, and we’ll say it again: get help. Old habits die hard: it’s mighty difficult to stay sober on your own. Support can take different forms: • You can ask team members to speak up when they see you backsliding. This can be a thankless job, though, and you can’t count on totally straight talk from people who depend on you for their paycheck. • You can proactively solicit input from team members. As we noted in chapter 6, one of our favorite management questions is, What do I need to know that I don’t know? If the feedback is “You’re being visionaholic again,” there’s only one right response: “Thank you.” • You can hire a coach who helps you monitor and evolve your behavior. Coaches help you stay accountable to yourself, a critically important step in keeping yourself — and, by extension, your enterprise — on mission(s). If you can dredge up the money in your budget, do it. It’s a great investment. • Get support from your communities. Cultivate relationships with others so you have someone to check in with who’s on your team, but not on your payroll. At the end of the day, visionaholics just want to have fun. Put the daily grind in front of them and their impulse is to say, “Naw, let’s go play!” As an antidote, we are counseling what amounts to a sort of Puritanism. Spend more time perspiring and less time seeking inspiration. Defer gratification; then defer gratification some more. There’s a big win out there. It’s the prize you get for working hard even when the work isn’t fun. Unlike Puritanism, though, the reward isn’t life eternal. It’s a social enterprise — your social enterprise! — that wins at the game of making the world a better place.

An Anxiety Management Protocol As we saw in chapter 9, anxiety, or what we called a “weak signal,” is a good thing. It cautions us to be on the lookout. It has evolutionary

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value. Business value, too. Weak signals are an early warning system. They tell us to turn our attention to something before it’s too late. Our relationship with anxiety can go wrong in two ways. We can suffer from premature anxiety, worrying about things that don’t merit our concern yet (or at all). Yes, there may be a lion in that tree, but since we’re in New York City’s Central Park, overall the risk seems pretty low. Premature anxiety is like paying interest on a loan you haven’t taken out yet. Or, we can manage our anxiety badly. Here, again, there are two possible paths. We can run toward it (in other words, obsess about it) or away from it (denial). Vision Space is especially handy if we’re inclined toward the latter strategy. In evolutionary terms, anxiety results from a fear of annihilation. That lion in the tree we mentioned? The image of its teeth and claws may make my adrenaline flow, but they’re not ultimately what frighten me. It’s the lion’s ability to make me dinner, and not in a sociable way. Vision Space is an annihilation-free zone. There’s no time or space (or lions) there; you can’t become dinner (or even toast, for that matter). Now, a business worry may seem very different from a lion in a tree, but it’s really not. Failure is always a fraught subject. Root around among the signifiers and you’ll find that it has echoes of beta status; of shame and potential exile from the tribe; of decreased access to resources; of the wolf that much closer to the door. Wolves, lions, what’s the difference? Small wonder, then, that it’s tempting to retreat to Vision Space. How do visionaholics resist the urge to dive through that magic portal? By cultivating a healthy relationship with anxiety — and with the prospect of annihilation, in whatever form. Three precepts may help here.

Cultivate comfort with uncertainty You’ll never know if yesterday’s decisions were wise, or if today’s or tomorrow’s will be. You can’t know if today’s bad news might turn out



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to be a blessing in disguise, or vice versa. You can’t know what fate has waiting for you just around the corner. It’s pretty endless, what we don’t know. Hey, we don’t even really know who we are. Yes, we have a name and personality. But does this — what the philosopher Alan Watts called the “skin-encapsulated ego” — constitute our entire identity? Perhaps not. Spiritual teachers tell us our true identity lies beyond the ego’s narrow confines and that happiness — a proposition, by the way, that includes the elimination of anxiety — lies in abandoning our allegiance to the ego with its narrow (and false) certainties and opening to the universe of not-knowing that lies beyond. Not even the physical world is what we know it as. Our minds translate energy and information into form and tell us these forms are the world. But there’s something more essential — something extraordinary and literally unimaginable — out there beyond the reality the brain constructs. There’s so much that we don’t know, and so little that we do! This is the unsettling — and, for many, unnerving — reality. Feeling in the know is our first and most powerful strategy of control. Etymologically, the word “control” comes from the Latin contra, to move against. Our reflexive embrace of knowing is how we “move against” the profound vulnerability that comes with confronting how small and ignorant we are. Size rules in Primate World, remember? And we are staggeringly small. In Vision Space we have total control. This is one of its great gratifications. It follows that, to overcome the urge to seek sanctuary there, we need to reduce the need to feel in control. We need to cultivate comfort with uncertainty — with accepting what is ultimately an existential reality, that what we know rides atop a vast ocean of not knowing. If you can become genuinely okay with how little you know, uncertainty won’t make you anxious. It won’t be a warning sign — a deviation from the norm. It’ll be the status quo — a non-threatening status quo. There’s a paradox here: surrender control and you gain control.

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Maintain an even keel If there’s one sure thing during your tenure as a social entrepreneur, it’s that there’ll be ups and downs. Lots of them. It’s easy to get bogged down in anxiety when things go wrong — and then take flight into Vision Space. There’s an alternative. You can take the longer view and remind yourself that it’s a long season. Don’t get too excited by the highs or too dejected by the lows. Tomorrow, things will probably look different. Keep it all in perspective Let’s wrap up this discussion with a return to Vision Space, which as we’ve seen is a great antidote to anxiety. What we’re about to describe is not just a vision; it’s a mega-vision. And a meta-vision too, one that requires you to take the really long-term view — the god’s-eye view, as it were — as distinguished from the normal, human-scale long-term view. Yes, the success of your social enterprise matters — and from another perspective, it’s of no consequence at all. As epics like the Bhagavad Gita remind us, this is a grand cosmic dance we’re in. For thousands upon thousands of years, the great dualities — birth and death, ecstasy and suffering, love and hate, peace and war, victory and defeat — have been having their way with us. From our place inside this drama, we tell ourselves individual outcomes matter. But this is an illusion, the desperate conceit of marionettes aspiring to be gods. It is also, as it happens, a necessary illusion, for it is precisely this, our investment in outcomes, that propels us into action and fuels the drama on the stage. Where would the passion be if we thought we didn’t matter? Without passion there would be no drama or beauty, and ultimately no dance. From this perspective, it doesn’t really matter if we win or lose. Winning and losing are human-scale illusions. The Choreographer doesn’t root for this or that outcome like we root for the Yankees or Red Sox. The pageant simply is; the drama unfolds, endlessly and timelessly, on a cosmically level playing field where we win simply by participating.



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There is beauty and majesty in this timeless vision — and also, potentially, equanimity in the face of the many anxieties that can send us fleeing into Vision Space. Are you concerned that you may be playing your hand wrong in the game of life? No worries. If you’re being human, you’re doing it exactly right. Are you fretting about the future of the planet or your social enterprise? Of course you are! It’s written into your role. Fretting is one of the emotions that makes the dance go round. There’s no need to stress about it, though, no need to turn that anxiety into a fearsome lion. So you’re fretful. So what? You’re dancing.

} And so we come to the end of our journey. Over the course of these pages we’ve covered a lot of ground. We’ve painted a portrait of the rapidly expanding universe that is social enterprise. We’ve dipped our toes into the definitional debate and made the case for a generous, heart-centered understanding of this crucially important emerging model. We’ve examined the mechanics of social enterprise through the foundational lens of intention, money and people. We’ve presented real-world examples of social entrepreneurs who are grappling with mission-critical issues. We’ve crossed over into the parallel territory of leadership and examined it through a lens that basically sees it as an expression of self-actualization. We’ve gone all biblical on ya and shared our ten commandments for social enterprise success. We’ve cautioned you about the dangers of visionaholism. What it all adds up to, we hope, is a better understanding of the world and work of social enterprise. What are the main takeaways? Of course, that’s up to you, but we’ll highlight the following possibilities for your consideration. First, the definitional debate around social enterprise, while interesting and in some ways important, is ultimately a sidebar. What matters isn’t what people call themselves. It’s what they do. Second, communicate early, clearly and often.

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Third, while the success principles for entrepreneurs and social entrepreneurs are similar, there is divergence in important areas: • Social entrepreneurs have more extensive and challenging work to do around intentions, in terms both of achieving internal clarity and communicating about those intentions to teammates, investors and stakeholders. • Social entrepreneurs need to be able to play the organizational-form game wisely and, if need be, creatively. • In the great majority of cases, social entrepreneurs are well served by integrating their social mission into their brand and business model. (This is, of course, a non-issue for entrepreneurs without a social mission.) Fourth, there are special traps that social entrepreneurs are prey to. Conventional business is predominately left-brained. Social entrepreneurs typically seek to balance left and right brain, head and heart. This exposes them to the risk of overcompensating and being so heart-centered that they make less than optimal business decisions. Whatever the organizational form, social enterprises need to be run like businesses. Even when the heart’s the driver, the fundamental business things apply. Fifth, the more conscious you can be as a social entrepreneur, the better off you (and the world) will be. This word “conscious” has been much abused over time, and we confess to feeding the beast here. If we take the word literally, you’re conscious if you’re not comatose, sleeping or dead. An alternative meaning has emerged over time, though. In the words of author and consultant Fred Kofman, it “means to be awake, mindful. To live consciously means to be open to perceiving the world around and within us, to understand our circumstances, and to decide how to respond to them in ways that honor our needs, values, and goals.”13 This alternative definition of “conscious” wouldn’t have the currency it does were it not for the increasing influence in Western culture of the meditative traditions. When we meditate, we become skilled



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at non-judgmentally observing ourselves feeling, thinking, fantasizing, taking action, whatever. As this aptitude develops, we can still be spontaneous but we’re less likely to be impulsive. We operate more from a place of true volition. We are more “conscious.” Even those of us who don’t meditate are exposed to the meditation meme that has been loosed into the air. And so today we have notions like conscious aging, conscious relationships, conscious eating and, lest we forget, Conscious Capitalism, which Kofman defines as “the reorientation of business focused solely on the pursuit of profits to one focused on integrity, higher standards, and serving all stakeholders — employees, suppliers, customers, investors, the community, and the world at large.”14 Sounds a lot like social enterprise, right? This is the terrain where social enterprise starts segueing into social zenterprise, which is essentially about following a wisdom path. It’s about practicing self-observation and self-awareness. About embracing balance and humility. About learning to separate hand-me-down truths from ones that work well and truly for you. About developing an accurate sense of our place in the order of things. About practicing what philosopher Ken Wilber has called “passionate equanimity.” About finding that place inside us where the philosophical consolations of the Bhagavad Gita power our commitment to action. Social enterprise affords a wonderful opportunity to become more skilled at these things. Not that the purpose of social enterprise is personal growth or spiritual development: it’s to make the world a better place. Still, there’s a positive correlation between the two. The more skilled you are as a social zentrepreneur, the greater your chances of success. And make no mistake about it: no matter how the gods view it, at the human level — at the heart level — your success matters. Social enterprise is a bold attempt to reinvent capitalism. On our small imperiled planet, there may not be a more important project. The term “Conscious Capitalism” is a trademark of Conscious Capitalism Inc. http://consciouscapitalism.org/.

Appendix A

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Note: B Corps are not included in this chart because they’re a marketing designation, not a type of business entity. Unrelated Business Income Tax b Federal Insurance Contributions Act a

179

Appendix B Everything You Wanted to Know About Social Enterprise but Were Afraid to Ask What’s the right organizational form for me? his depends on why you’re launching your social enterprise. When you contemplate the future, are you comfortable with the prospect of depending on financial support from others? Are you hoping to profit personally from your venture? If your answer is the former, a non-profit form is probably the way to go. If the latter, you’re probably best in the for-profit box. And if you want both, as people increasingly do, then you’ll want to consider a hybrid organizational form. To some extent, the answer to this question depends on where your money will be coming from. Can you access the necessary funding through grants and donations? That makes non-profit status a real possibility. If you believe you’ll need investors, then a for-profit form is likelier. If you decide to be a non-profit, you’ll need to decide what type of (501)(c) form is right for you. The likeliest home for your organization is as a tax-exempt (501)(c)(3) educational or charitable organization. If you go for for-profit status, you need to choose between being a corporation on the one hand and a limited liability company (LLC) or partnership on the other. C corporations pay taxes. LLCs, partnerships and S corporations do not. They’re pass-through organizations: the principals pay taxes directly.

T

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Should I go for one of those newfangled Benefit Corporations? There are two good reasons to seek Benefit Corporation status. The first is if there’s significant business value in signifying to the marketplace that you’re a social enterprise. The second is if you believe your enterprise’s social values need to be baked into the organization’s DNA in this public way. As recent innovations, Benefit Corporations are, as of this writing, a somewhat unknown commodity. Not all the implications have been sorted out. Since uncertainty means risk, this is one of the negatives in adopting the Benefit Corporation form at this time. But there are countervailing considerations such as branding benefits that can override this concern. What about seeking B Corp status? As with a Benefit Corporation, B Corp certification offers branding benefits. B Corp status proclaims, “I’m proud to be a social enterprise.” The downside is that B Corp status entails non-trivial administrative and financial costs. Whether this trade-off is worthwhile is something every social entrepreneur must decide. As a for-profit, how can I benefit from partnering with non-profits? Broadly speaking, you can benefit in two ways. First, your brand bene‑ fits through association with a cause. Second, there is a broad range of other situation-specific business benefits. An alliance with a non-profit may provide access to philanthropic capital, government contracts or specialized services only the non-profit can provide. Non-profits can also deliver streamlined access to new markets, with the added benefit of your partner’s stamp of approval. As a non-profit, in what ways can I benefit from partnering with for-profits? Benefits of partnering with for-profits include the following: • Access to funds. A cause marketing campaign can generate significant revenue for the non-profit. • Access to resources, technologies et cetera. 181

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• The business can develop relationships or pursue activities that would be too risky for the non-profit to do independently. • The for-profit can be an investment vehicle for supporters of the nonprofit. For instance, a supporter could invest directly in Company A, with the provision that some or all of the dividends from Company A go directly to the non-profit. Alternatively, the supporter could gift the non-profit with funds to be invested in Company A. • It may make it possible to engage in certain business activities without having to pay tax on that revenue. If a (501(c)(3) earns revenue from a business operation that’s unrelated to its charitable or educational purpose, it’s required to pay tax under the IRS’s Unrelated Business Income Tax (UBIT) provision. Corporate dividends, however, aren’t taxable, and neither are donations generated by cause-marketing partnerships. As a non-profit, what earned-income strategies am I legally allowed to pursue? There are no restrictions on the kind of business you can operate. However, in some cases you will have to pay UBIT. In more extreme cases, you risk losing your tax-exempt status. You will be required to pay UBIT if your business is not substantially related to your charitable or educational purpose. You risk losing your tax-exempt status if the primary purpose of your (501(c)(3) is to run a business that does not directly further your charitable or educational mission. As a non-profit, what investment strategies am I allowed to pursue? A non-profit can invest in any business so long as the investment is approved by the board of directors and is a prudent use of the organization’s assets. Income generated through this investment may or may not be taxable, depending on the particulars of the situation. As we’ve seen, dividends are not taxable. However, if you invest in an LLC, income will be taxable because the LLC is a pass-through legal structure.



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From a business perspective, what are the best ways to leverage the social mission? There are two basic ways to leverage the social mission — marketing and strategic partnerships. When you integrate the social mission into the business strategy, you don’t need to force it into your marketing material — it settles there naturally. For instance, if you have a “two for one” policy — for every product you purchase, another is donated to people in need — you’ll need to let people know about it because it’s so central to your value proposition. It’s why many people will choose to purchase your product. As for strategic partnerships, when well designed, they can confer significant brand benefits. Sears, for instance, has a long-standing commitment to veterans. The company gets “patriot points” for this, along with the implied imprimatur of a community of soldiers and their presumably high standard of performance.

Notes

Section One 1. Allen Bromberger, Getting Organized (Moyer Bell Ltd. 1989). 2. Allen Bromberger & Catherine L Woodman, Advising Nonprofits (Council of New York Law Associates, 1990). 3. Carl Frankel, In Earth’s Company: Business, Environment and the Challenge of Sustainability (New Society Publishers, 1998). 4. Carl Frankel, Out of the Labyrinth: Who We Are, How We Go Wrong, and What We Can Do About It (Monkfish Book Publishing, 2004). 5. Muhammad Yunus, Building Social Business (New York: Public Affairs, 2010). 6. Jed Emerson, “Social Entrepreneurship Defies Definition” (speech at the Commonwealth Club of California, 2011), accessed September 19, 2012, fora.tv/2011/02/23/Jed_Emerson_The_Blended_Value_ Proposition#Jed_Emerson_Social_Entrepreneurship_Defies_ Definition. 7. “Christian Social Entrepreneurs Measure Success by a Different Yardstick,” Baptist Standard, July 29, 2009, accessed September 19, 2012, www.baptiststandard.com/index.php?option=com_content& task=view&id=9087&Itemid=53. 8. All quotes from the Applied Science Foundation for Homeland Security (ASFHS) are from the Applied Science Foundation for Homeland Security website, accessed September 19, 2012, www.asfhs.org/ASFHS/index.html. 9. LuminAID, accessed October 5, 2011, www.luminaidlab.com/. 184

10. Warby Parker, “How We Do It,” accessed October 31, 2012, www.warbyparker.com. 11. South African Social Investment Exchange (SASIX), “About Us,” www.sasix.co.za/. 12. Tom Lee, interview with Carl Frankel. 13. The Cara Program, accessed October 31, 20102, www.thecaraprogram.org/. 14. Allianz, “Microinsurance,” accessed October 31, 2012, www.allianz. com/en/index.html. 15. Vodaphone, “Money transfer,” accessed October 31, 2012, www.vodafone.com/content/index/about/about_us/money_transfer. html. 16. For an interesting discussion of the challenges of social intrapreneurship, see David Grayson, Melody McLaren and Heiko Spitzeck, Social Intrapreneurs — An Extra Force for Sustainability (Doughty Centre for Corporate Responsibility, Cranfield University School of Management, 2011), www.som.cranfield.ac.uk/som/dinamic-content/ media/social%20intrapreneurs%20occasional%20paper.pdf. 17. Elisabet Sahtouris, “The Biology of Business: New Laws of Nature Reveal a Better Way for Business,” Perspectives (World Business Academy) 19, no. 4 (January 2005), www.sahtouris.com/pdfs/ BIOBUSPart2.pdf. 18. Milton Friedman, “The Social Responsibility of Business Is to Increase its Profits,” New York Times Magazine (1970), quoted in M.J. Perry, “Corporate Social Responsibility: ‘A Fundamentally Subversive Doctrine in a Free Society.’ Friedman,” Carpe Diem (blog) March 8, 2011, mjperry.blogspot.com/2011/03/social-responsibilityfundamentally.htm. 19. Anand Giridharadas, “Real Change Requires Politics,” New York Times, July 15, 2011, www.nytimes.com/2011/07/16/us/16ihtcurrents16.html?_r=1. 20. Alexander Wolff, “Sports Saves the World,” Sports Illustrated, September 26, 2011, sportsillustrated.cnn.com/vault/article/ magazine/MAG1190627/1/index.htm. 21. Charles Leadbeater, “Mainstreaming of the Mavericks,” Observer, March 25, 2011, www.guardian.co.uk/society/2007/mar/25/ voluntarysector.business. 185

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22. Anand Giridharadas, “Real Change Requires Politics,” New York Times, July 15, 2011, www.nytimes.com/2011/07/16/us/16ihtcurrents16.html.

Section Two 1. Bobbie Johnson, “After Going For-Profit, CouchSurfing Faces User Revolt,” GigaOM, September 11, 2011, gigaom.com/2011/09/01/ after-going-for-profit-couchsurfing-faces-user-revolt/. 2. Omidyar Network, “Approach,” accessed September 19, 2012, www.omidyar.com/. 3. Social Capital Markets, “About,” accessed September 19, 2012, socialcapitalmarkets.net/. 4. Judy Wicks, as a panelist at “Updating the Meaning and Measure of Value for the 21st Century,” (The New Metrics of Sustainable Business Conference, Wharton School, Philadelphia, September 27, 28, 2012). 5. Newman’s Own Foundation, “History,” accessed October 31, 2011, www.newmansownfoundation.org/. 6. TOMS, www.toms.com. 7. Kickstarter, “Pebble: E-Paper Watch for iPhone and Android,” accessed October 31, 2012, www.kickstarter.com/projects/597507018/ pebble-e-paper-watch-for-iphone-and-android. 8. See, for instance, Lynn A. Stout, “Why We Should Stop Teaching Dodge v. Ford,” Virginia Law & Business Review 3, no. 1 (2008), vlbr. net/wp-content/uploads/2011/02/5-Stout.pdf. 9. IRS General Counsel Memorandum 39862, December 2, 1991. 10. Mitchell Pines, personal communication with Carl Frankel. 11. BrainyQuote, “Anne M. Mulcahy Quotes,” accessed November 4, 2012, www.brainyquote.com/quotes/authors/a/anne_m_mulcahy.html. 12. Ibid, “Mary Kay Ash Quotes” accessed October 25, 2012, www.brainyquote.com/quotes/quotes/m/marykayash393052.html. 13. ThinkExist.com Quotations, “Tom Peters Quotes,” accessed October 26, 2012, thinkexist.com/quotation/the_simple_act_of_paying_ positive_attention_to/168176.html. 14. V., The Mafia Manager: A Guide to the Corporate Machiavelli (St. Martin’s Griffin, 1997), 63. 15. Linda Alvarez, Discovering Agreement, “What Is Discovering Agreement,” www.discoveringagreement.com/history-and-philosophy/.

Notes



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Additional information provided in an interview with Carl Frankel.

16. Search Quotes, “Mary Kay Ash Quotes,” accessed October 25, 2012, www.searchquotes.com/quotation/We_treat_our_people_like_royalty._If_you_honor_and_serve_the_people_who_work_for_you,_they_ will_hono/49876/.

Section Three 1. Rachel Cernansky, “Walmart’s Newest Sustainability Initiative Focuses on Local Produce, Small Farmers,” Treehugger, Oct 14, 2010, www.treehugger.com/corporate-responsibility/walmarts-newestsustainability-initiative-focuses-on-local-produce-small-farmers.html. 2. Jeff Meyers, “Journey to Essence” (September 2011) Gurdjieffwork.com, www.gurdjieffwork.com/site/index.asp?page=131762&DL=243. 3. Jason Street, personal communication with authors. 4. Redress, “Vision,” accessed October 15, 2012, redress.com.hk/. 5. Sheri Winston, Women’s Anatomy of Arousal: Secret Maps to Buried Pleasure (Mango Garden Press, 2009). Recipient of the 2010 Book of the Year Award, American Association of Sex Educators, Counselors and Therapists. 6. Rob Lederer, personal communication with Carl Frankel. 7. Dolores Delvecchio, interview with Carl Frankel. 8. Phil Harvey, interview with Carl Frankel. 9. George Polisner, interview with Carl Frankel. 10. David Case and Kevin Kelly, interview with Carl Frankel. Frankel was also a consultant on the Civano project. 11. Rob Lederer, personal communication with Carl Frankel. 12. Ibid. 13. Sean Murphy, “Conscious Capitalism,” Murfdipity (blog), murfdipity. com/conscious-capitalism/. 14. Ibid.

Index

access to capital, 27 accredited investors, 58-59 Adam & Eve, 152 Adapters, 32, 33, 42, 101, 120-126 Allianz Group, 33 Alonovo, 153-154 Alvarez, Linda, 92-95 Amazing Space Enterprises, 147, 149 angel investors, 58, 82 anxiety, management of, 171-175 Apple, 52, 130. See also Jobs, Steve. Applied Science Foundation for Homeland Security (ASFHS), 22-23 appreciation, expressions of, 89, 99 Ash, Mary Kay, 89, 99 asset-based valuation, 78-79 Baptist Standard, 21-22

Battistoni Center for Stroke Recovery, 109-115 B Corp certification, 31-32, 83, 124, 181 B Corporations, 31-32, 61-62 Ben & Jerry’s, 21, 93 Benefit Corporations, 30-31, 61, 67, 81, 83, 119, 123, 181 Bhagavad Gita, 174, 177 bigger is better myth, 133-135 B Labs, 31-32 Black, Tim, 152 boundaries, 36-37, 40, 91-92 brand, 52-53, 62, 66, 68, 79, 162, 181 broken systems, 25 business judgment rule, 80 business planning process, 55-56, 70, 82, 83, 97-98, 151 California, 30-31 capitalism, 38, 44, 52, 54, 85.

188

Index

See also Conscious Capitalism. capital market, 73-78, 82-83 caps, 76-77 Cara Program, 32-33 Case, David, 155-157 C Corporation, 28, 29, 112-113. See also Impact Makers. Center for 4D Arts, 102-109 Center for the Intimate Arts, 154, 159-160 certification programs, 31-32 chi (energy), 129-131 Civano, 155-157 Cleanslate, 33 collaboration, 38-39, 40 communications, 61-63, 81, 98, 176 community value, 115-119 complexity, 154 concessions, 76 conflict, 62, 92-94 conflicts of interest, 108 Conscious Capitalism, 177 consciousness, 9, 176-177 contract hybrids, 31 control, 65, 74, 96-97, 123, 173. See also power. conversion options, 74, 125 convertible note, 74 corporate constituency statutes, 80, 122 corporate social responsibility, 43-44

189

corporate tax, 28-29, 180, 182 CouchSurfing, 53 Crowdfunding, 71crowdsource, 60-61 cultural alignment, 62 danger, 36, 37-38 Darwin, Charles, 38 deal making, 73, 91-92, 113-114 Dean, Christina, 147-149, 162 debt, 74-75, 78-79, 125, 161 decision making, 93-94, 101-126 Delvecchio, Dolores, 151 The Descent of Man, 38 directors, 30-31, 81 Discovering Agreement, 92, 93, 95 diversity, 99 dividends, 28, 74, 75, 118 DKT International, 152 earned-income strategies, 8, 18, 32, 42, 104, 182 earnings and earnings/share, 79 efficiency, 135, 137 Egalitarians, 85 Emerson, Jed, 19 employees, hiring of, 72, 97-99, 148 employee stock ownership plan (ESOP), 43, 85 Entrepreneur’s Disease, 165-177

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equity, 43, 74, 118, 120, 124, 125 equity shares, 77, 119 ethics, 21, 39, 41, 62, 87-88, 90

getting real, 168-169 Giridharadas, Anand, 46 green real estate, 155-157 Gurdjieff, George, 142

501(c)(3) non-profits, 61, 104, 180, 182 fallacies, about money, 147-149 Fannie Mae, 157 financial measures, 136-137 First World Trash, 150-151 Fisher, Eileen, 72 flexible purpose corporation, 30-31 for-profit organizational form, 8, 28-29, 84, 180, 181. See also CouchSurfing; Impact Makers. forwardlooking mental model, 45, 62, 63 foundations, 65, 70, 76, 117, 119, 125. See also Koinonia Foundation; Newman’s Own Foundation. founders, 55, 56, 57, 63-67 founder’s shares, 65 Founder’s Syndrome, 158 free cash flow, 79 Friedman, Milton, 39, 43-44 Fuller, R. Buckminster, 4, 10 full service contract, 98 funding levels, 27 fundraisers, 70-71, 82

Harvey, Phil, 152 health care system, US, 25 hierarchy, 89, 90, 91, 139 Higher Calling, 151-153 human suffering, 4-6, 87 Hungries, 27, 33, 42, 70-72, 79, 102-115 hybrid option, 74. See also Koinonia Foundation/ GR8Lakes Essentials. identity, 52-53, 54 Impact Makers, 115-120 Imperial (or Servant) Leader, 158 inclusivity, 41 inevitability fallacy, 147-149 integrity, 94, 100, 155-157, 177. See also quality; trust. intellectual property ownership, 66, 107, 108, 110, 114 intention, 51-68 intermediation, 24-25 Internet, 25, 40, 60, 126, 131. See also social media. interns, 72 interventions, by social entrepreneurs, 23-26 investor/advisor tension, 59

Index

investors, 57-61, 70-86, 91, 118-119 jeopardy investments, 76 job descriptions, 97-98 Jobs, Steve, 130-131, 143 Jumpstart Our Business Startups (JOBS) Act, 60-61, 71 Kelly, Kevin, 155-157 KISS (Keep It Simple, Stupid), 154-155 Kofman, Fred, 176, 177 Koinonia Foundation/GR8Lakes Essentials, 120-126 L3C. See low-profit limited liability company. leadership, 99-100, 138-142. See also Founder’s Syndrome; management decisions. learning-culture organization, 95-97 legally binding documents, 57, 61. See also by name. Lee, Tom, 25-26 li (structure), 129-131 lifecycle status, 32-34 litigation, 80-81 LLCs, 29, 180, 182 local ownership, 134 low-profit limited liability company (L3C), 29-30.

191

See also Battistoni Center for Stroke Recovery. LuminAID, 24 The Mafia Manager, 90 majority interest, 67, 79, 117, 118 management decisions, 75, 80, 162-163 market inefficiencies, 24-25 Malbrough, Jenelle, 150-151 measures of success, 136-137 Meadows, Donella, 156 meditation, 176-177 mental models. See worldviews. Merrigan, Bob, 158-159 Merrigan & Co., 158-159 micromanagement, 158 Mission Markets, 60 mission/money tension, 59, 68, 74 missions, 63-68, 151. See also social missions. M-PESA, 33 money, 69-86, 147-149 most favored nation status, 77, 78 Murphy’s Law, 169-170 myths about business, 133-138 narratives, and counternarratives, 132, 138-142

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negotiations, 73, 92, 93. See also deal making. networking, 24-25, 126, 159-160 Newman’s Own Foundation, 66-67, 118 New York Times, 46 non-accredited investors, 58-59 non-dilutable shares, 66, 67 non-profit organizational form, 8, 28, 182. See also 501(c)(3) non-profits. offshore hiring, 148 Omidyar Network, 59-60, 82 Omidyar, Pierre, 60 One Medical Group, 25-26 operating agreement, 57, 66, 112-113 organizational forms, 27-32, 53, 67, 102-115, 180-182. See also by name. Our Community Networks, 147, 148, 154-155 owners, 28-29, 43, 75 ownership share, 74 Parker, Warby, 24 partnerships, 89-97, 160-161, 183 Pebble, 71 people, as a priority, 87-100 Permanent Leaders, 65

perspective, 174-175 polarities, in management, 162-163 Polisner, George, 153-154, 155, 162 politics, 44-46 positive feedback, 99. See also appreciation, expressions of; rewards, for employees. positive social change, 20-23 power, 138-141. See also control; partnerships. PPM. See private placement memorandum. preferences, 75-76, 78 preferred stock, 117 Prime Directive, 90, 137 private benefit, 108 private placement memorandum (PPM), 58-59, 61 profits, 20, 28, 57, 80, 84-86 program-related investments (PRIs), 29, 76 public purpose, 30, 67, 85 Purcell, Pat, 161 put and call options, 77 quality, 153-154, 158 Radical Innovators, 85 reality margins, 77-78 Reality Realm, 166-170

Index

Redress, 147-149 respect money, 147-149 return on investment (ROI), 76, 82, 114, 118 revenue-sharing partnerships, 27 rewards, for employees, 84-86, 88 right of first refusal, 77 right of redemption, 77, 124 Sahtouris, Elisabet, 38, 39 Samson Research, 161 Say, Sam, 22 scale, of business, 133-135. See also transnationals. Schumpeter, Joseph, 45 S Corporation, 28-29, 112-113 Securities and Exchange Commission (SEC), 57, 58 self-awareness, 13, 40-41, 99, 140, 158, 160-162 self-discipline, 161-162 self-dissolving shares, 118 self-expression, 95, 131-132 Sensitive New Age Guy (SNAG), 139-140 separate asks, 78 service, 39-40 shareholders, 39, 124 shareholder’s agreement, 57, 61, 66, 81, 122-123 shares, 28-29, 77, 85. See also equity shares;

193

founder’s shares; non-dilutable shares; self-dissolving shares Sheldrake, Rupert, 148 shoestring funding, 27, 71-73, 148 small businesses, 8 social capital market, 59-60, 123 Social Capital Markets (SOCAP), 60 social Darwinism, 38, 136 social entrepreneurs and relationship with venture, 160-161 types of, 42-43 social enterprise, defined, 18-20 legal status of, 9-10 social enterprise sector, 47. See also social capital market. social intrapreneurship, 33-34 social investments, 24-25, 82 socialism, 44 socially responsible business, 21 social media, 72 social missions, 30, 137-138, 183. See also missions; social purpose. social networks, 53, 126 social purpose, 40, 59, 63, 64, 67, 81, 123, 151 social purpose corporations, 31 social zentrepreneur, 132

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Solids, 27, 33, 42 South African Social Investment Exchange (SASIX), 24-25 spirituality, 13, 100, 132, 142, 173 stakeholders, 41, 55, 62, 85. See also partnerships. stock options, 85, 151-152 strategies, intensity of, 149-153 Street, Jason, 147, 149 subversiveness, of social enterprise, 43-46 support, internal and external, 158-160, 171 Sustainable and Impact Investment Exchange (SIIX), 60 sweat equity, 72 tax-deductible donations, 28 tax-exempt status, 8, 28, 53, 105-106, 182 Taylorism, 135 team building, 97-100 technological developments, 9 ten commandments, 145-163 tiny fraction fallacy, 147 TOMS Shoes, 68 tranches, 78 transfer of the enterprise, 67, 68, 74, 79-80. See also valuation. transnationals, 8, 87, 88, 133-134

transparency, 62-63 trust, 62-63, 92 uncertainty, 172-173 underserved markets, 24 Unilever, 93 Unrelated Business Income Tax (UBIT), 182 valuation, 70, 73, 75, 78-80, 82 values, 54-55, 136, 163, 181. See also integrity. venture capital, 59-60 venture capitalists, 53, 76, 123 vision, 165-177 Vision Space, 166-170, 172, 173 visions, missions and values (VMV), 92-95 Vodaphone, 33 volunteers, 72 voting rights, 29, 67, 75, 106, 117 Washington State, 31 White Dog Café, 66 Wicks, Judy, 66 Winston, Sheri, 149-150 worldviews, 35-47 Yunus, Muhammad, 17

About the Authors

C

arl Frankel is a writer, journalist, consultant and serial social entrepreneur with over two decades’ experience in socially responsible business. He is the author of two acclaimed books — In Earth’s Company: Business, the Environment and Sustainability (1998) and Out of the Labyrinth: Who We Are, How We Go Wrong and What We Can Do About It (2004). Better World Supplements, his latest social enterprise, Credit: Studio Stu generates “supplemental” annuity income for non-profits via causemarketing partnerships. He is a a graduate of Columbia Law School and a member of the New York State bar. http://carlfrankel.com Allen R. Bromberger is a partner at the New York City law firm of Perlman & Perlman. He holds a BA from the University of California/Berkeley and a JD from the University of California/Hastings College of the Law. Mr. Bromberger has more than 30 years of experience structuring a wide variety of for-profit and non-profit social ventures, non-profit/for-profit joint ventures, commercial co-ventures, and substantial non-profit earned revenue ventures. His clients include for-profit companies, non-profit organizations, social investors and philanthropists. He is the author of several papers in the field, including “When is a B not a B?, “The Contract Hybrid.” “Social Enterprise: A Lawyer’s Perspective,” and is a contributor to “Mission, Inc., The Practitioner’s Guide to Social Enterprise.” He is also the author of two widely used handbooks in the field, “Getting Organized” and “Advising Nonprofits.” http://perlmanandperlman.com 195

A Guide to Responsible Digital Reading Most readers understand that buying a book printed on 100% recycled, ancient-forest friendly paper is a more environmentally responsible choice than buying one printed on paper made from virgin timber or old-growth forests. In the same way, the choices we make about our electronic reading devices can help minimize the environmental impact of our e-reading.

Issues and Resources Before your next electronic purchase, find out which companies have the best ratings in terms of environmental and social responsibility. Have the human rights of workers been respected in the manufacture of your device or in the sourcing of raw materials? What are the environmental standards of the countries where your electronics or their components are produced? Are the minerals used in your smartphone, tablet or e-reader conflict-free? Here are some resources to help you learn more:   

The Greenpeace Guide to Greener Electronics Conflict Minerals: Raise Hope for the Congo Slavery Footprint

Recycle Old Electronics Responsibly According to the United Nations Environment Programme some 20 to 50 million metric tonnes of e-waste are generated worldwide every year, comprising more than 5% of all municipal solid waste. Toxic chemicals in electronics, such as lead, cadium and mercury, can leach into the land over time or can be released into the atmosphere, impacting nearby communities and the environment. The links below will help you to recycle your electronic devices responsibly.   

Electronics Take Back Canada - Recycle My Electronics United States - E-cycling central

Of course, the greenest option is to keep your device going as long as possible. If you decide to upgrade, please give some thought to passing your old one along for someone else to use.

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… a must read for anyone interested in delving into the realm of social enterprise, or starting their own venture to create good. — Jeffrey Hollender, co-founder and former CEO, Seventh Generation

… the authors take readers from A to Z, reviewing key concepts and principles of successfully launching sustainable ventures. A great addition to any library!

Social enterprise is an exciting and rewarding business model driven by the desire to create positive change through entrepreneurial activities. The Art of Social Enterprise includes an overview of this rapidly growing field, as well as proven strategies for success. This complete guide offers legal expertise without the jargon, and provides deep insight into the many unique challenges and benefits of this singular approach to making “good” money. Learn everything you need to know about the mechanics of social entrepreneurship including:

• Startup – envisioning and manifesting intention • Strategic planning – balancing social and financial objectives • Operations – running a socially responsible business • Legacy and exits – when and how to move on

Aimed at emerging as well as established social entrepreneurs, for-profit leaders who want to introduce more social responsibility into their companies, MBA students, social investors and non-profit organizations who want to increase their stability by generating reliable income, The Art of Social Enterprise is the definitive guide to doing well while doing good. …a very well researched and artfully written book covering all aspects of how to start, run and live a social enterprise.

SOCIAL ENTERPRISE

— Jed Emerson, Founding Director, Roberts Enterprise Development Fund (REDF)

THE ART OF

Mission Driven — Business as a Vehicle for Change

— Gifford Pinchot, President and co-founder, the Bainbridge Graduate Institute

Allen Bromberger is one of the the leading social enterprise lawyers in the U.S. Over the years, he has advised hundreds of social entrepreneurs in a wide variety of situations at every stage of their development.

www.newsociety.com

FRANKEL / BROMBERGER

Carl Frankel is a serial social entrepreneur, writer and thought leader who has been tracking green business, corporate environmentalism and social enterprise for over two decades.

CARL FRANKEL AND ALLEN BROMBERGER

THE

ART

OF

SOCIAL

ENTERPRISE