United States: Should Your Startup Take The B Corp Route?

Last Updated: October 4 2016
Article by Michael D. Bain

While most founders want to make a boatload of money, achieving a stunning exit is hardly the only driver for most entrepreneurs. More often, they're fueled by the challenge of solving a problem or producing something meaningful, whether it's an app or an ice cream.

Some want to make a corporate commitment to social responsibility by organizing their business as a B Corporation, with a mission to do good written into the governing documents. So far, 31 states have passed laws allowing companies to incorporate as B Corps.

Customers and job candidates might even prefer mission-driven products and employers over competitors. But do investors?

The B Corp route has been a boon for some. Ben & Jerry's, Method, Etsy and Warby Parker are among the best known of more than 1,800 businesses in 50 countries that are certified B Corps, meaning they've completed a rigorous and sometimes costly process that confirms their claims of being environmentally friendly, socially conscious and worker-friendly. Certification earns them the right to use the increasingly familiar B Corp logo on their cartons, hang tags and websites.

No, they're not nonprofits

In some cases, B Corp certification can help founders raise capital from like-minded investors and be a differentiator in a crowded marketplace. But B Corp status might sometimes scare off investors who don't understand it. People tend to be cautious about putting capital into models they don't comprehend—and rightly so. Some investors incorrectly assume B Corps operate like nonprofits, which is hardly a compelling model for attracting funds for growth-oriented businesses.

Even investors who respect the principles that guide a B Corp startup may hesitate to open their wallets. They may fear that a commitment to social causes might undermine the VCs' all-consuming quest for profits. It's not that investors are cold or heartless; rather, they have a fiduciary responsibility to their own investors to achieve the best returns possible on investments. And they themselves operate in a competitive marketplace that is largely driven by financial returns.

Perhaps the best thing you can do as founders of a B Corp—or a startup pondering B Corp status—is to communicate your priorities clearly to one another, to your team and to prospective investors. There's nothing inherently evil about wanting to be profitable, and there's no virtue in embracing a lofty vision while your business tanks.

Several VCs have invested in B Corps, so the two are not inconsistent. If you go the B Corp route, be prepared for questions from investors who want to understand how you'll balance your social mission with the imperative to maximize profits and returns to your shareholders.

Seeking a balance

If it's any consolation, even experienced, successful B Corps wrestle with this challenge. A recent Wall Street Journal article detailed the conflict that Patagonia has faced in producing quality clothing while staying true to its values of causing "no unnecessary harm." Company executives opted to stop buying wool from a chain of South American farms that were under fire by PETA for their treatment of sheep. The decision leveled a financial blow to the 43-year-old company, which had just introduced a popular line of wool clothing.

Every company faces ethical quandaries, of course. But unlike C Corps, whose responsibility is generally squarely to its shareholders, B Corps are specifically permitted to have more nuanced loyalties.

Let's say your company is fielding two acquisition offers. The $500 million offer moves all jobs overseas to factories that underpay their workers and produce emissions that pollute the environment. The $450 million offer keeps your loyal team in place in their LEED-certified offices. You can see the complexities in squaring your decision with your values as a B Corp business owner, your obligation to your investors and your ethical mission.

Remember that opting not to incorporate as a B Corp doesn't mean your business must by default espouse greed, selfishness and wanton destruction of natural resources. You can adopt as many earth-friendly and employee-friendly practices as you and your team wish if they are reasonably justified as being in the best interests of your shareholders.

Use only compostable products in your kitchen and restrooms. Give your staff paid time off to tutor in public schools or build houses with Habitat for Humanity. Hold a canned food drive, host blood drives and commit a percentage of your profits to humanitarian causes.

All of these actions can be justified on the grounds that they help you attract and retain the best talent, which in turn makes your company more valuable. The benefits that your startup provides to the community may not be written into your certificate of incorporation, but there's no reason they can't be a critical component of your mission.

NOTE: This article originally appeared on TechCrunch.com on October 2, 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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