Innovating business ownership models

Something I like doing for fun is sketching pie charts of ownership models for businesses. Yes, I am a business geek!

In the standard model today, the ownership of a business is something separate from its operations. The role of investor/owner doesn’t necessitate any involvement in actually running a company or delivering any value for its stakeholders. Owners have a right to appoint the directors and have the right to all of its profits. As I’ve written about before, this doesn’t do much to create fair and happy societies but as an entrepreneur, I am excited about how we can evolve new business ownership models. The goal is to engage more stakeholders to create better businesses that innovate more; provide better service and more value to customers; create better jobs; deliver more value to society as well as outperform traditional businesses in financial terms. I think we can do much better than today’s status quo.

Most of the pie charts I’ve been sketching are for new start-up businesses and combine three types of owners:

1. Private investors: This group is fairly traditional, but there’s no doubt that private investors can provide the capital necessary to get new ventures off the ground, especially in today’s market where lending to start-ups is difficult. However I see two key changes to the norm. Firstly, a commitment from investors to ALL of the outcomes of the enterprise (in terms of human, social and environmental capital, as well as financial returns.) And secondly, a commitment to eventually sell their stakes to the following two groups of owners, once they have accumulated a fair return for their investment and risk. On the surface this may look like sacrifices compared to investment purely for capital gain, but I believe that businesses with these more innovative ownership models will outperform traditional businesses, more than making up for the restrictions places on private investors.

2. Employee-owned trusts: Giving the employees a meaningful stake in the business from day one sends a powerful message that they are not working for someone else’s benefit, but they are true owners, partners and stakeholders in the venture. This changes the mindset of an employee who will see it as their business. This increases motivation and productivity. I reckon 30% is about right, to leave enough room for other investors.

3. Crowdfunding: There is a huge amount of innovation going on right now around sourcing finance in small chunks from large groups of people. Popular platforms like Kickstarter are helping new ventures to raise anything from hundreds to millions of dollars from future customers, friends, family and supporters. I think there’s something particularly powerful about having customers as part owners in a business. Imagine a customer in a restaurant who has bought a very small stake in the business. Perhaps they don’t have a great experience there one day, but instead of feeling like an annoyed customer, they feel like a disappointed owner. Very different mindset that wants to focus on making sure the problem is fixed for next time.

Putting it all together

Say a new company is founded with an initial £50,000 of capital from private investors. These shareholders own 50% of the company, valuing it at £100,000.

Next, an employee-owned trust is set up. This is a separate legal entity from the company and it owns 30% of the shares, including all voting and other shareholder rights. Employees can elect board members, giving them real power and influence right from the start. A very powerful way to attract and motivate employees.

A second trust is set up (I call this a Community Trust) which owns the remaining 20% of the shares. These shares are purchased by way of a loan from the company, so the Community Trust initially owes the company £20,000. The Community Trust then sells a limited number of memberships, say 500 at £40. This may take a few years, or it could use a platform like Kickstarter to sell the memberships before the company launches. This repays the loan and adds capital to the business as well as building a loyal base of fans. Once the memberships are sold out, the members can elect their own board member and receive ‘dividends’ – a share of the company’s profits in the form of vouchers that can be spent there.

From the outset, the private investors agree that they can only sell their shares to either the employees or the Community Trust. This aligns their interests with those of the other stakeholders.

The obvious objection to a model like this is that the traditional investors on the face of it appear to be giving up a lot of equity and control. Yes, they hold a smaller slice of the pie, but the pie could grow much larger with an engaged base of fans and motivated employees. Plus they have a new route to liquidity for their own investment, by selling their shares over time to the Community Trust (which creates new memberships at a higher valuation) or the employee-owned trust (which pays for the shares out of future profits.) I believe that it will also form a much stronger base of power in the company, with representation from employees and customers, sharing the ups and downs with everyone involved. Finally, for entrepreneurs and investors who want to do something more special for the world than just make some money it creates an opportunity to build a legacy that lasts beyond their personal involvement.

4 thoughts on “Innovating business ownership models

  1. Tom – I can see a few potential problems with this structure. The key thing to look at is – what happens when things go wonky. In the good times everyone will get along, but when things turn down (or succeed, sometimes success can be the catalyst for disagreement).
    The first thing to note is the 50% position of the outside investors v. the 50% position of Employees + Community Trust. If (as is likely) the Employees vote with the CT, then no decisions can ever be made as you have a classic 50/50 split. On the other hand, a combination of CT + Outside Investors or Employees + Outside Investors is a winning hand, which provides a strong incentive for the Outside Investors to play divide and rule. However, even combined the Employees and CT are weak – they cannot outvote the investors, only match them for paralysis.
    You say also that this would give the Employees a meaningful stake, but not in control terms – or not in a positive way, only in a blocking some things sort of way.
    I’ve seen a similar situation play out a while back at Poptel which was a workers co-op which brought in VC money to build up the .coop domain. When the money ran out and things weren’t going well the VC soon managed to take control of the company even though they weren’t supposed to be able to do this. The investors will have the money, the lawyers and the desire to get their money back when push comes to shove – the rest have very different agendas.
    I’m not saying it can’t work, and it’s a good starting point, but it needs to be a lot more sophisticated in control terms.

  2. Hey Ivan, good to hear from you, and thanks very much for the feedback. Would be great to meet up once I’m back in Brighton – sounds like there are some very useful lessons to be learnt from Poptel.

    Agree about potential for deadlock. In the latest model I’ve been working on, I have the private investors at 55% initially, CT at 15% and Employees still at 30%. Not sure why I had it at 50% in my example to tell you the truth.

    You’re right that 30% does not give control to the employees but it does mean that their stake cannot be diluted without their consent, and one or more elected seats at the board does hold considerable negotiating power, even if not the casting vote. And it would be a big deterrent for the private investors to sell out to an unfavourable new owner if they knew that at least 30% of the ownership – the employees were against it.

    But it’s the intention that’s the important thing with the initial investors being carefully selected to work towards selling out completely to the employees/CT as well as having rounded interests in all of the outcomes of the company – human, social and environmental capital as well as money. I doubt most traditional VCs would qualify for this (were the Poptel VCs interested in anything other than £££ ROI?), but I would personally put my own money into such a set-up and perhaps alternative investment vehicles (Big Issue Invest for example, although I’ve not spoken to them) might be interested specifically because the goal is to do more than just make money.

    I would ideally like to see many more companies that are owned and controlled mostly by the employees, without the need for other investors, but in reality it could be difficult to raise enough start-up capital in this way, so this slight twist on private investment could work.

    Hope to catch up soon. I’m off now for 10 days out in the Peruvian wilderness so won’t be able to comment further for a while 🙂

    • Wow! Enjoy (or I hope you enjoyed) the Peruvian wilderness. I was wondering where you’d got to – just caught your tweet. Poptel would be an interesting case study, I’m in touch with them still. Give me a shout if and when you get back, it’s an interesting space.

  3. Pingback: Cooperatives need bottom-up thinking | Tom Nixon

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