How social impact entrepreneurs can rethink their organization structures: alternatives to the Founder-Takes-All approach

Building a business is more than just designing a smart solution. In order for impact entrepreneurs to succeed, you’ll have to build an organization: co-founders, employees, stakeholders. You have to understand governance.

What is governance? It’s the system through which you manage and control your organization. As you scale your business, you need to be able to apply the right governance practices in order to bring in the best people in for the job. As the founder, you’ll need to start thinking about how to communicate your business’s vision externally.

Why is this important? Well, the way a business is structured influences decision-making at every level. Your governance will affect how you choose leaders, set goals, and measure performance - all of which affect whether or not your business survives! 

(How’s that for sustainability?)

Here’s the problem: not a lot of impact entrepreneurs are aware of the alternatives they have outside of the traditional ownership model. You might know this as the Founder Takes All model. Like the name implies, the power is within the CEO and a handful of key employees, shareholders and investors.

But there are a lot of innovative models that impact entrepreneurs can consider! Different ways to balance day-to-day management. Different possibilities to leverage structure and create even more impact. 

In this blog post, you’ll learn the different alternatives to traditional ownership models and learn what it takes to build a ship with and for others. 

Why should impact entrepreneurs rethink ownership?

The answer is simple: to make your business future-proof.

By thinking about ownership before you start any business, you can avoid common pitfalls many entrepreneurs face in their journey.

This is more or less how it starts: 

1. A startup, usually in the hands of the owner, begins to grow.
2. As it grows, it starts to require change from the inside - from its management. 
3. Some founders (or all of them) leave, even though they still own some shares. Some investors may buy shares later on, giving them a bit of power over the business. Even the staff themselves. And et cetera, et cetera…

Like a body of water, startups shift and swell with change. This is normal. After all, all entrepreneurs want their businesses to grow. But along the way, businesses tend to be managed by “professional management” over entrepreneurs. 

Of course, this isn’t always a bad thing. Some entrepreneurs prefer to be innovators rather than managers. Sometimes complex business tasks should be left to the experts. Sometimes, the founders need only to focus on developing new or current businesses.

But in most cases, this kind of growth turns into a slippery slope. When people who have financial rights over the business aren’t on the same page as the people on the ground, profit and purpose become misaligned.

“Short term profit and long term strategy are a different thing,” writes Valerian Fauvel, co-founder at Jumanji Studio. “In an extreme case, if a social enterprise is heavily controlled by financial investors with their own financial expectations, the social mission of the business versus. the financial interest of its owners may differ.”

From an impact perspective, this is bad news. 

To avoid this, it’s crucial to start as early as possible and find the harmony between your business intentions and your personal North Star.

What ownership models impact entrepreneurs can consider 

There are many old and emerging ownership models you can take inspiration from. But in this article, we’ll keep it simple and give you a small taste of three different organization structures you can consider:

Ownership Model 1: Private Limited

In the Founder Takes All model – also called the Private Limited model – the power flows from the top down. The ones at the bottom do not benefit the same way as the ones at the top. Similarly, they don’t share the same accountability.

This is the most typical way to register and structure your company. Here, shareholders are the owners and profit the most from the success. And because they’re the owners, they also call the shots.

PROS:  

• Accountability is clearly defined
• Easy to maintain
• Tax efficient, separate legal entity

CONS:

• Business is designed to maximize profit for the shareholders
• Decision-making isn’t always democratic (It’s always about how many shares you have!)
• Prone to mission drift, since profit is put above all else

At The Spaceship, we encourage impact entrepreneurs to venture outside of this model. Why? We think Armin Steurnagel put it bestwhen he called private limited ownership an absentee-ownership. He says that while the Private Limited model creates responsibility, it also destroys it. The result: “a vacuum where nobody feels responsible.”

To paint a picture, he tells the story of a hospital in eastern Germany. It was a great, service-oriented hospital. But later on, as the hospital grew, a change in ownership pushed the company to overperform. They cut costs. They fired doctors. They lost that customer-first touch. All to meet the quotas they set in the name of growth.

So: who is responsible? Turns out–it’s us. 

Since the majority of investment capital comes from insurance companies and pension funds, that would label us - the public and their taxes - as the primary “stakeholder” in this model! And yet, not many people know about this! 

This is just one example of how this system failed the people it ought to serve.

Ownership Model 2: Steward Leadership

This ownership model challenges convention in the way we think about business and capitalism. Here, ownership of financial rights and decisions related to the business are explicitly always separated. Regardless of who makes decisions, the profit can be fairly split between founders, workers, and investors. 

Examples of organizations that use these are Ecosia, Zeiss, Sharetribe, and Ziel.

PROS:

• Decision-making is for people working on the ground - not the owners
• Plenty of room to raise external funding, create a for-profit entity, and for founders to create personal wealth
• Higher survival rate than traditionally-owned businesses

CONS:

• Typically harder to ‘sell’ in a traditional sense
• Founders lose their right to influence should they decide to leave the day-to-day management of the business

Ownership Model 3: Cooperatives

You may be familiar with this model for its use of member-ownership. In a cooperative, an enterprise is controlled by the very same members they serve. Members receive dividends from the enterprise’s profits proportional to how much they have spent. Each member typically has a say on the future of the business (one vote per member), while a board of directors safeguards the decision-making process.

PROS:

• Every voice is considered equal
• Typically lower transaction and contracting costs
• Greater customer trust and loyalty - higher resiliency

CONS:

• Raising capital can be challenging
• More voices means a slower decision-making process and slower innovation
• Prone to conflict between member

Examples of Cooperatives are Friendly City Coop, and Frontier Coop.

Rethinking your organizational structure should start at inception

If private ownership is no longer as healthy for our economy as we thought, how can impact entrepreneurs begin the journey of changing their organization structures?

Valerian argues that it would be easier to think about your ownership from the beginning. If you change your structure along the way, you have to make people (including the entrepreneur herself) rescind rights they have already acquired. And this is no way easy to do - especially after you've spent so much energy building your startup and your investors put in money with expectations waiting to be met.

But then again, it’s not impossible. For instance, Danone, a multinational food-product corporation, made a small step in this direction by becoming a B-Corp.

At The Spaceship, we understand all of this can feel complex. In our program, we guide entrepreneurs through different ownership options, so they can make the best choice possible for their business at the onset of their journey.

To learn more, check out the Launch Your Business masterclass, a self-paced program where we cover this module in detail for any entrepreneur or changemaker who wants an even deeper understanding of organizational structures.