As a former founder, I know many of us start our businesses because of a deep sense of mission. But getting in the food & beverage CPG space requires a lot of money. Between buying up inventory, long cash cycles, and deductions dinging you left and right, it’s a long path to profitability.
Even if your business is doing well, it will likely need some serious growth capital—and quickly.
Over time, a clear fundraising pattern starts to emerge for most CPG businesses:
Sometimes this works for CPG businesses. They have a hot product in a trending category and what it takes to ride the wave. But there are costs associated with "growth at all costs" like declining product integrity or paying to access retailers, that aren’t the best fit, to help you show growth in “doors." The most certain thing, though, is that growth comes at the expense of control. You may still have retained most of your voting rights, but there are often onerous provisions to keep your hands tied on certain decisions. Now, your job is to grow the company, as fast as possible, so that you can exit to a bigger player and make your investors a large multiple.
It can feel like the only tried and true way to succeed is via this big money, “boom or bust” route. But, that’s just one route. There are others in which founders or the business operators can maintain control, ensure mission stays front-and-center, and offer up compelling returns. One way to preserve mission and continue to be economically successful is to adjust the underlying legal structure of your business.
Alternative Governance Structures
What kinds of legal structures can best facilitate this type of fundraising so that mission can be maintained and control can be preserved? In the United States, this is a movement that has largely been forgotten but is again picking up steam. Purpose, a global foundation which started in Europe but has branches in the US and Latin America, promotes alternative business structures that can suit more long-term focused companies. In fact, our European counterparts have these kinds of structures more deeply integrated into their societies—in Denmark, for instance, roughly 70% of the stock market value is derived from limited- or non-voting right stock. Not so here in the U.S. where most stocks also include voting rights. Similarly, there are tax benefits in Europe for business structures you’ve probably never heard of like foundation-owned businesses and trust-owned businesses. But there are two key structures being used here in the US currently that can apply to CPG companies:
Ideal for new startups or early-stage businesses
The central idea of a golden share model is that companies add to their cap table a “golden share,” with special veto powers specifically designed to protect the company’s mission. The golden share model is one that is easy to implement at any point in a business’s trajectory. For example, it may be that nothing about the business, on the face of it, changes except adding a golden share, which typically has 1% voting rights and is held by an organization outside of the company. The golden shares are usually held by a non-profit organization that either relates to the mission of the company or by an organization like Purpose, that is set up to hold golden shares.
The types of veto powers a golden share holds is typically focused on large events like changes to the organizational structure or ownership that may create mission drift. For example, during a fundraising round it could veto allowing for investor minority rights that skew the control of the company away from its operators. It could also veto the acquisition of a company to a misaligned partner.
While not required, something companies generally do when implementing a golden share model is to separate the remaining equity into at least two different classes, shares with economic rights and shares with voting rights. This may not be feasible if you already have outside investment. But for those in the early stages of their businesses, you still have the flexibility to consider this route. Typically, founders, management, or employees—people involved in the day-to-day operations—receive shares with voting rights so that operational decisions can remain within the company. The economic shares, which convey monetary upside potential or buyback provisions only (with certain emergency protections), can then be sold to outside investors so that the business can raise capital while reducing the risk that those investors will dilute the purpose of the company. The golden share’s veto power can then preserve this system so that any proposed changes to this structure are vetoed, preserving the founding team’s ability to maintain the business’s intended course.
While this is the standard structure, the beauty of the golden share model is that it’s flexible and allows for creativity in writing up the organizing documents. That creative leeway allows the founders to determine the areas they don’t want to compromise on as the business grows, whether that’s steward ownership, control of the day-to-day operations of the company, or only exiting to acquirers that will maintain the company’s intended mission. It goes without saying that these documents should be drawn up by a good startup attorney.
Perpetual Purpose Trust
Ideal for more established businesses with positive cash flow
A perpetual purpose trust (PPT) is an indefinite trust with flexibility to craft a specific purpose into the legal framework of how your company operates. Think of this structure as your company getting “acquired” by a benevolent owner—one that you set up. In doing this, typically, a trust is formed and the trust “acquires'' the business. A “Trust Protector Committee'' is formed, which oversees this trust and acts as keepers of the purpose, however you decide to define it in the trust agreement. Therefore, this committee, unlike the golden shareholders, can have more operational or veto power around certain business decisions, like maintaining certain sourcing standards or vetoing packaging decisions.
You might wonder how this differs from, say, becoming a Certified B Corporation or changing your business entity to a benefit corporation. Becoming a Certified B Corporation is similar to getting any other private certification. It does require you to add some provisions to your organizational documents that acknowledge some degree of “stakeholder consideration.” However, these considerations can be easily removed from legal documents if it’s no longer convenient for leadership and the certification is allowed to lapse. Setting up your business as a benefit corporation means including purpose and stakeholder considerations into your organizing documents according to local laws. This can mean additional reporting requirements; generally, every year you must publish a public report, verified by a third-party, measuring your social and environmental performance, in addition to the standard corporate reporting requirements.
Setting up a PPT can allow the structural foundation of your business to be purpose-driven, along with the flexibility to define the purpose however you and your team see fit. Unlike becoming a Certified B Corporation, the mission can’t be diluted when it’s no longer convenient. Unlike becoming a benefit corporation, the legal entity of the business doesn’t have to be a corporation and have the burdensome reporting requirements. PPTs are also built for long-term mission protection; you would have to dissolve the entire entity in order for significant ownership changes to be made.
Like the golden share model, PPTs still raise money, and they also typically split voting and economic rights to make sure your investors are long-term aligned and focused on mission. This is still an emergent area in the US but there are some trailblazers leading the way. For those interested in learning more about how, functionally, fundraising as a PPT can work, Alternative Ownership Advisors (AOA) has a great blog post on how Organically Grown Company, an organic produce distributor, raised an $11M Series A as a PPT. AOA also has a number of other resources on how to transition to a PPT.
A New Way of Doing Business
These two legal structures offer a way for founders to preserve mission while still having the opportunity to raise funds and stay competitive. Separating voting and economic rights in equity raises can certainly make fundraising more difficult, but if the business is healthy, growing, and has a solid brand, there is a growing number of investors interested in impact as well as return. Businesses can only legally do what their fiduciary duty dictates. If their fiduciary duty, like most investor-owned businesses, is maximizing return, that is what the leadership must do at all costs, lest they find new leadership. But Golden Shares and Perpetual Purpose Trusts allow the duty of the company to legally shift from return maximization to purpose maximization. That way, as a founder, whether you stay in the business or not, you know that the business will continue to perpetuate its intended mission for years to come.