Employee Ownership as a Tool for Growing Social Enterprise

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June 1, 2009

The staff of Namaste Solar, an employee-owned solar power company in Colorado.

By Esther Park

Last month I attended the Beyser Institute & NCEO Employee Ownership conference in Portland, OR, specifically to learn the ins and outs of Employee Stock Ownership Plans (ESOPs).  As a newcomer to the subject, many of the regulatory requirements and the alphabet soup of acronyms flew by me, but I came away with a renewed sense of optimism that employee ownership could have a special place in the development of social enterprises.

By way of background, one of the questions we have been raising and debating at RSF is: how do ownership and the transfer of ownership affect the social mission of a business?  A few recent comments from various meetings and conferences have stuck out and stayed with me:

• “How do we get ownership into the hands of more people?”
• “That’s the fundamental problem with [traditional] venture capital” (in response to an assertion that the best and most effective partnerships occur when each partner is taking an equal amount of risk)
• “How did I get here?” (in reference to a previously profitable company that was driven to unsustainable growth by its investors)

The plain fact is that any enterprise needs capital to grow.  Some will grow slowly with patience and internally generated working capital or bank financing.  But many others, particularly the social enterprises that RSF encounters, have the opportunity to grow quickly and will often take on equity capital, whether it be through friends, family, angel investors, or venture capitalists.  With perhaps the exception of friends and family, investors will want to (or assume to) know how they will exit their investment and make their target return.  The prevailing thought for most investors is to sell the company to a larger company.  (Because of this, companies not well-suited to this type of potential sale often have a more difficult time raising capital.)  Whether selling to a conglomerate is an attractive option for a mission-driven entrepreneur is dependent on his/her theory of change.  Some would argue that such a company can have vastly greater impact by being a part of and influencing its parent company.  Others would argue that a company’s social mission is necessarily diluted by a profit-driven parent company.

Without taking sides on this particular debate (largely because I respect both arguments), the debate itself has spurred RSF’s exploration into alternative exit/liquidity strategies, as there are currently few available.  To return to my initial point, one intriguing strategy we have come across is the idea of selling the company to its employees.  ESOPs are nothing new, but these days, many ESOP companies are likely driven by clear tax advantages to the company, as well as to owners who sell a minimum threshold of their equity.  But I also see other benefits, particularly for social enterprises:

• A company can better control and maintain its values;
• A company can participate in wealth creation, not just job creation;
• A company can take its time and grow sustainably, without pressure from institutional investors;
• A true community of owners is created.

The idea is worth exploring.  Here at RSF, we aim to bring more visibility to the topic in order to seed the idea among both burgeoning and mature social enterprises in the hope of creating new and meaningful options for community ownership, wealth creation, and social impact.

Esther Park is the Director of the Lending Program at RSF Social Finance.

• Published by Jillian McCoy
• Categories: Investing, Lending, Money, Social Finance
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