Legal Considerations in Building and Investing in Social Enterprises

This past week, ONE WORLD hosted the third webinar of our new impact series, which is designed to highlight CEO Network members (more details here) or ecosystem partners through interactive discussions. This recent webinar focused on the top legal considerations from both the entrepreneur and investor perspective, for high growth early-stage social enterprises. 

To address these legal considerations, we brought in the expertise of our partners at Cooley, and featured Jen Barnette, Attorney at Cooley, as well as Erik Edwards, who is a Partner. 

We kicked off the conversation with Jen, whose practice focuses on the representation of companies and investors in the social impact and sustainability space. In her work, she counsels startups to late-stage private companies, venture capital investors, and family offices on a broad range of general corporate and transactional matters. Her particular expertise includes working with new corporate forms like Delaware’s public benefit corporation (PBC) and counseling B Corp certification and environmental, social and governance (ESG), as well as impact reporting. 

Focusing on the entrepreneur perspective, Jen described her work with organizations ranging from nonprofit to for profit, with Delaware Public Benefit Corporations, or PBCs, falling in the middle. With her focus being on companies looking to raise outside venture funding and grow with an ultimate exit goal, such as an acquisition, IPO, or SPAC, Jen explained that traditional corporations and PBCs are suited for these goals because investors are familiar with how they work and their benefits. For entrepreneurs, PBCs, also referred to as B corps, are attractive, because they allow a clear social or environmental purpose that helps company branding as well as attracts investors that are values aligned.

Addressing the concerns that entrepreneurs must consider throughout the process of gaining investors, hiring talent, etc., Jen focused on the value add of becoming a certified B corp by saying: 

“Companies that opt to get B corp certified enjoy the community that is of other certified B corps, and that they found a lot of their customers and suppliers through relationships in the B corp community. That’s one of the successes of B labs, they really do try to foster a sense of a different, better way of doing business and creating space for like-minded communities.”

To clarify on the various types of organizations addressed, corporate law is state based, meaning that other states, such as California, do not have the same for-profit characteristics as a Delaware PBC, but instead refer to a certain class of nonprofits as public benefit corporations. For more information on choosing the right lawyer for your startup, please refer to this Cooley Go article. 

For the second part of the webinar, Erik Edwards addressed the legal considerations from the investors perspective. Erik’s practices general securities and corporate law, with a focus on emerging growth companies, private financings, initial public offerings and mergers and acquisitions. He represents companies and investors in a wide variety of areas, including software, hardware, Internet of Things, edtech, cleantech, life sciences, social impact, fashion, retail, unmanned vehicles, artificial intelligence, media, fintech, and other areas of technology. 

Erik addressed a wide variety of topics concerning investing in the impact space and the opportunities as well as considerations that investors, specifically traditional investors, should be aware of when dealing with a social impact company. Of these topics, Erik went into detail on safes (simple agreement for future equity), SPACS (special purpose acquisition companies), qualified business stock, as well as the impact sectors he believes are showing the highest levels of growth. 

Offering advice to early stage investors, Erik added: 

“For those early stage investors, the form of note, form of safe, is widely available on the Cooley and Y combinator websites to go look at and we don’t vary from it often. There's some things built into those investment instruments that are fantastic for the investor, an antidilution protector that is built in, meaning you're at least getting the deal that the institutional investor is getting in, while most likely getting a 20 to 40% discount at what that future investor is putting in.”

Overall the webinar was extremely informative, providing valuable information for both entrepreneurs and investors. Find more information on investing trends here, and watch the webinar recording for a detailed explanation on the topics addressed.