At Fresh, we’re not simply looking to build impactful ventures. Our ventures are built to nudge the entire system into a more desirable direction, to make a positive impact that exceeds the narrow bounds of their surface-level activities. We want our ventures to be fundamentally mission-driven, working with a razor-sharp focus on achieving their purpose of accelerating the transition to a regenerative food system. We believe we need to rethink ownership to make that possible. In this article, we explain in more detail how we intend to go about that.
One of the interesting things about the startup studio model is that it allows you to fundamentally rethink every aspect of how a venture is built and run. Like Ford, who with his Model T production line radically innovated the way cars were produced so that the transportation system was forever changed, startup studios have the opportunity to completely rethink how we build and structure new ventures so that they can help accelerate the transition to a fairer and more sustainable world.
In order to achieve that, we need to break the prevalent conventional wisdom on how to build, structure, and finance ventures. In our search for ways to build truly mission-driven ventures, we have come across a number of ground-breaking new approaches to designing ownership, corporate governance, and investment instruments that help ensure that our ventures are mission-driven by design. Although we’re still only scratching at the surface and have much more to learn, we have been working with our partners and funders to develop a first answer to the problem: how to design financial instruments that align the interests of founders and funders towards achieving our mission to transition to a regenerative and circular food system. And we have implemented an initial approach with four venture teams officially part of the Fresh studio.
The key question we faced was how to attract sufficient funding for the ventures that we will be co-founding during our four-month program early next year, while ensuring that they can always prioritize their mission - transforming the food system - over shareholder returns. One of the answers, we found, is to fundamentally rethink how we structure the ownership of the ventures we build so that the core purpose of the venture is structurally embedded in the organisation’s DNA.
Steward ownership is an ownership and governance model which aligns the interests of entrepreneurs, workers, investors and society. It is based on two principles: 1) Entrepreneurship equals ownership, and 2) profits serve the company’s purpose.
Conventional financing tools and ownership models often do not work for most mission-driven organisations, with a huge percentage not receiving the financing they need. This happens for two primary reasons. First, excessive return expectations lead to unrealistic growth trajectories and leave viable businesses (that cannot become “unicorns”) without funding. Second, equity financing is often designed so that investors gain as much control over the business as possible. This is counterproductive for mission-driven founders and could jeopardise the impact focus of the company in the long term if and when a company is bought.
Steward ownership is a set of principles rather than any one particular method to governance and finance. To create Fresh’s approach to steward ownership, we started with a couple of pathways we felt were promising, which we’ll lay out here.
Splitting shares: One mechanism often used in steward ownership is splitting decision-making and profit-sharing rights. Founders and some employees get exclusive decision-making rights, while their profit-sharing rights are capped in order to avoid conflicts of interest and, more importantly, mission drift. Investors, on the other hand, get no decision-making rights but instead, receive greater priority over dividends and repurchase prices. The advantage of this is that the organisation is able to focus on fulfilling its mission while still securing returns and liquidity for investors.
Revenue-based finance: Revenue-based financing offers a sustainable alternative to conventional finance approaches that allows founders to retain more ownership in their businesses while offering investors clear opportunities for liquidity and returns. How it works is that it effectively promises financiers a portion of revenue (or free cash flow), ceasing after a cap is reached. For example, a financier could receive a 5% revenue-based return on an initial investment of 100k. The amount of return flowing back to the financier will increase over time as the venture presumably grows. Once the financier receives an agreed-upon multiple of its initial investment (e.g., 4x, so 400,000 in total), their shares are automatically dissolved and the venture is able to operate independently again.
So, how does steward-ownership work at Fresh?
We found that it would be challenging to create one approach that would work for all the ventures we build. We also found that identifying the right formula for any given venture takes time.
So for starters, we decided on a two-stage process, where the first stage incorporates a limited liability company (a BV in The Netherlands) that creates an organisational structure that is ‘Steward Ownership Ready’. Ventures commit to developing a steward ownership structure within 12 months of entry into the studio as part of their studio agreement, but we delay for two reasons:
The initial limited liability company, in order to be ‘Steward Ownership Ready’, includes the following types of share classes:
A - Purpose share - The Fresh Foundation is an independent foundation that holds a veto right over mission-critical decisions to ensure that Fresh and our ventures remain forever steward-owned and mission-driven. The Foundation’s board is composed of the Fresh team, as well as a small group of relevant stakeholders, including investors, founders, and advisors. The veto right is limited to decisions that undermine the organisation’s commitment to steward-ownership, including the sale of the company. This doesn’t mean that the company can’t be sold – but this will only be approved if it clearly contributes to achieving the company’s mission.
B - Founder shares - These are non-voting shares that can only be held by the founders of the venture. These shares have dividend rights but no voting rights. (The founders, as executives of the venture and through their Steward Shares (see below), have decision-making power through other mechanisms). These shares are bought back by the venture over time at a predetermined return, and present the upside for founders to compensate for the early venture risk without the need to work towards making an exit or selling out.
C - Investor shares - These are non-voting shares held by outside investors. They can be issued in the case of an investment, and they are redeemable from a fixed percentage of revenue, cash flows, or gross profits. When the investors have achieved a predetermined return, the shares are automatically dissolved.
D - Steward shares - These are the only class of voting shares and can only be held by natural persons who are actively engaged in the day-to-day management of the venture. Initially, these shares will be held by the founders, though later founders can decide whether they might also be issued to staff and/or other stakeholders.
In this first phase, Fresh also makes an EPOS agreement with the ventures we work with. Easy Repayment on Shares (or EPOS), is a financial construction that is similar to a SAFE (or “Simple Agreement for Future Equity”), which was developed by Y-Combinator. Both an EPOS and a SAFE work towards the same goal, which is to quantify the amount being invested but to hold off on equity stakes until a triggering event in the future. This means that Fresh does not take equity stake upon the start of our collaboration with ventures we help build. Instead, we postpone a valuation and build in as much flexibility as possible for the founders to succeed in the early phases.
Within the EPOS agreement, the value of Fresh’s investment includes the value of the Fresh program and the support of the Fresh studio over time. When we convert our investment at a future moment, we do so according to steward ownership principles. We have set a 4.3x capped return on our investment and we receive shares with non-voting rights.
In our mission to transform the food system and build truly mission-driven systemic ventures, we are on a journey to rethink how early-stage startups are built and structured. Join us on our journey to push the boundaries of what business can mean for moving our society forward.
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You can find more information on the program on our website or you can apply now via this link and start transforming the food system and economy with us.