Can I Raise Venture Capital as a Public Benefit Corporation?

By Ben Stone

As societies and markets increasingly insist that corporations generate positive social impact alongside profit, investors have taken notice. The global impact investing market alone, for instance, doubled from $114 billion in 2017 to $228 billion in 2018, and will almost certainly continue to accelerate. [1]

In the face of this encouraging trend, many entrepreneurs are starting for-profit companies with a social mission. But many find that the traditional corporate form, the C-Corporation, does not adequately protect a company’s commitment to generating both profits and positive impact. As a result, many companies are incorporating as Public Benefit Corporations (“PBCs”), a legal corporate form established in Delaware in 2013 that is now gaining mainstream acceptance. Most notably, as a PBC, a company may make business decisions based not just on the economic interests of its shareholders (as required by the C-Corporation), but based also on (a) the best interests of those materially affected by its conduct (like employees, customers, communities and the environment) and (b) a specific “public benefit” identified in the company’s certificate of incorporation (like combating hunger or increasing access to education).

Incorporating as a PBC can be advantageous for a mission-driven company. A PBC can help codify your strategy to focus on the long-term sustainability of the business and its social impact; help you tap into a skyrocketing market demand for products and services that are making a positive difference in the world; and supercharge your talent recruitment process and employee loyalty. Indeed, more than 4,000 companies have incorporated as PBCs, including major brands like Patagonia and Kickstarter.

You’re probably thinking, “Wow, that sounds terrific. Why wouldn’t I incorporate as a PBC?” 

The most typical hesitation is the assumption that operating as a PBC will hinder a company’s ability to secure critical startup and growth financing. This is not an unfounded concern. For emerging companies that are not yet able to generate significant revenues, angel and venture capital investors can hold the keys to survival, and these investors are often averse to changing how they do things. The good news, however, is that many mainstream investors are investing in PBCs. [2] And if you follow these general guidelines, your PBC should be well-positioned to successfully access this capital:

  • Educate investors. Despite their recent rise in prominence, PBCs are still nascent legal entities, and early-stage investors might hesitate when they have always invested in C-Corporations. As a result, you must proactively educate potential investors about the positive legal and commercial ramifications of the PBC form. [3]

  • Incorporate in Delaware. The strong preference of most early-stage investors is to invest in corporations organized in Delaware; the rules are predictable, business-friendly and backed by extensive case law. While thirty-three states have created their own form of the PBC, Delaware, not coincidentally, sought to develop the least restrictive version of the PBC. Make it easier for investors to say “yes” by incorporating your PBC in Delaware. 

  • Create an amazing Benefit Report. One of the chief differences between C-Corporations and PBCs is the requirement that PBCs provide stockholders with a report that (a) details how the Board intends to balance the best interests of the stockholders, its articulated public benefit and other stakeholders, and (b) assesses the company’s success meeting these objectives. It makes sense that a scrappy, cash-strapped young company might turn this into a quick check-the-box exercise. But that would be a mistake. Lean into the reporting process and create a document that inspires, informs and persuades. It will set you apart. [4]

  • Run a tight ship. This is a universal point for all early-stage companies, but particularly relevant for PBCs, which have a heightened incentive to demonstrate that they are as buttoned up as any other for-profit company. You should prioritize well-organized corporate records; robust financial controls and company policies; a diverse board and leadership team; and transparent, proactive corporate governance. Don’t give investors wiggle room to view your PBC as anything but a finely-tuned machine.

  • Show them the money! This is by far the most important point. Skeptical investors might argue that achieving profits and positive impact are incompatible goals, and that companies need to choose one or the other. Change their minds by making a detailed case that your PBC will not just make the world a better place, but how it will also generate returns that meet or exceed the returns from a more typical venture-backed company. 

If you can integrate these guidelines into your PBC’s fundraising strategy, you will be well on your way to raising transformative capital. Moreover, you will align with investors who have adopted your values and long-term strategy, a recipe that will help generate both profits and impact for decades.

If you have questions about PBCs, startups, social innovation, or the law, please reach out to me at bdstone (at) mintz.com.

[1] – Annual Impact Investor Survey 2018

[2] – I am currently compiling a comprehensive list, which I will make publically available.  Please contact me with investment companies to include!

[3] – Some helpful resources:

  • Alexander, Frederick H. Benefit Corporation Law and Governance: Pursuing Profit with Purpose. Berrett-Koehler Publishers, Inc., 2017.

[4]