The REWORK podcast

A podcast about a better way to work and run your business. We bring you stories and unconventional wisdom from Basecamp’s co-founders and other business owners.

EPISODE 0095

Exit to Community

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A group of startup founders, investors, and thinkers are reimagining corporate ownership to take into account all of the people who help build the business—not just executives and investors, but customers, users, and suppliers. Their vision for Exit to Community is outlined in this zine, and two of its authors come on Rework to talk about their vision for a more equitable and inclusive end game for tech startups.


The Full Transcript:

Nathan: [00:00:00] The response here isn’t just that, oh, we need more representation, like, give us more seats at the table. The shape of the table is the problem.

[00:00:08] Broken By Design by Clip Art plays.

Wailin: [00:00:09] Welcome to Rework, a podcast by Basecamp about the better way to work and run your business. I’m Wailin Wong.

Shaun: [00:00:15] And I’m Shaun Hildner. You know we love origin stories around here. Whether it’s a gritty antihero or a super villain, or a business owner. We like to hear how people got their start. But when it comes to start-ups, there’s a story that’s just as important. And that’s the exit.

Wailin: [00:00:29] Even when we talk about start up exits, it’s often as a binary. Either you don’t do one because you’re bootstrapped and just happily running your company. This is the Basecamp model. Or, you take venture capital, grow to some gargantuan size as quickly as possible and then return money to your investors, usually by getting acquired or going public.

Shaun: [00:00:51] But there are a lot of start ups that don’t fit neatly into either of these categories. Or don’t want to. They’re looking for alternative structures, a model that will let them grow sustainably while spreading the benefits beyond just a small group of investors and founders.

Wailin: [00:01:03] Today on the show, we’re talking about something called “exit to community.” The idea is that a company can transition to a structure where it’s owned not just by investors or the original founders, but by employees and its own customers.

Shaun: [00:01:16] Zebras Unite is a community of entrepreneurs that we’ve talked about on the show before. They recently published a zine that explains this concept of exit to community. And, full disclosure, Basecamp helped sponsor that publication.

[00:01:30] Now, Zebras Unite is going to be working with a cohort of start ups who want to explore this idea of exiting to community. We have two of the zine’s coauthors on today’s show. Here is Wailin’s conversation with them.

Mara: [00:01:51] I’m Mara Zepeda, I am the cofounder of a company called Switchboard, which recently merged with Hearken. And I’ve now assumed the role of managing director of Zebras Unite, which is an international movement of founders and investors that’s aiming to create a new capital culture and community for the next economy.

Nathan: [00:02:10] I’m Nathan Schneider and I’m a professor of media studies at the University of Colorado Boulder where I run the Media Enterprise Design Lab. And for the past year I’ve been working with Mara and Zebras Unite around this idea of exit to community, helping start ups to become more than they currently can. To become true community assets.

Wailin: [00:02:33] I was wondering if you could talk about the genesis for this project. When did you start thinking about exit to community and were you thinking about it individually and then happened to meet up and come together, realize you had a shared vision, or how did this start coming about?

Nathan: [00:02:51] For me, it came out of years of work with efforts to create cooperative start ups that are owned and governed by the people that use them. Using the old cooperative business model. I’ve accompanied a lot of projects in this work and got to know Mara through that work. And working with a lot of these co-op start ups, it made me wish that this was a model that was more available to a wider range of start ups.

[00:03:20] Even to companies that weren’t even sure at the beginning that this was what they wanted to be. Some of the most exciting, new co-ops starting to emerge that I was seeing were ones that didn’t necessarily start with that idea. They came to it. As many start ups kind of stumble into what becomes their ultimate reality, their ultimate fate.

[00:03:43] So it made me realize we should really focus on that exit point. Not necessarily the founding moment, because the founding moment is kind of ambiguous, as in any creative project. You know, where did it really begin? But the exit moment is a really critical moment for any start up. It’s really the moment that everything leads toward, and so it seemed to me really focusing on that exit moment might be more strategic, more powerful for unlocking the potential for community ownership.

Mara: [00:04:13] Nathan invited me to speak at a conference three years ago and it was about platform cooperativism, which I knew about in theory, but I didn’t know any start ups that had adopted that form. And then over the years, I started to read more about Nathan’s work and co-ops, and then I kind of lived into the answer and we ended up having this interesting, kind of bonkers opportunity to explore what it would look like to acquire Meetup last year. This was around the time that WeWork was going through all of its distress and was trying to figure out what companies that it acquired that it might be able to offload, and Meetup was one of them.

[00:04:55] We started to go through this thought experiment of, gosh, if ever there was a company that should be a community asset, that was owned and governed by the incredible organizers and users, it would certainly be this company. And then actually tried to apply it by finding investors, potentially securing financing. And it didn’t work for a lot of reasons, and all of those reasons turned out to be learnings and lessons and wisdom that we could then bring forward to figure out, wow, if this was so complicated, then what are ways that we can make this easier for much smaller, less complicated companies.

[00:05:33] And I think just to echo what Nathan said, around this exit moment, you know, time and again with start ups we see that they don’t know what they’re going to be when they grow up. And yet, because of the rules and structures of both creating a corporate entity and then raising financing, you’re shoved into a set of clothing that might not actually fit you in a couple of years. And so the corporate form that you adopt at the beginning and the way that you’re organized at the beginning may turn out to look really different a few years down the line. And one of those look different end games that we were seeing was this really powerful urge for founders to begin to more equitably recognize the contributors who had built their company in the form of employees, end users and suppliers and all sorts of other stakeholders, and to actually make them shareholders and owners. And so that is what the path of exit to community allows for these founders to pursue.

Nathan: [00:06:31] Yeah, and Meetup was just the tip of the iceberg. It’s just one case, and a particularly appropriate case, right? Where you see a leader in a successful platform want this to be an option.

Wailin: [00:06:46] In the zine, you mentioned that there’s certainly many examples, historically, and in more recent history of co-ops that have been successful and that can act as models or as inspirations. Can you talk about some of those legacy examples, and what you use as inspiration to defy what could be possible in the future?

Nathan: [00:07:07] I always look down the road from where I am in Colorado. About an hour away, about a little less, there’s a $130 billon cooperative bank. And that bank was built out of policy that emerged out of the Great Depression among farmers struggling for the ability to control their own livelihoods. This is just a reminder. My grandfather was born on a farm with no electricity until cooperatives were enabled by the federal government to bring electricity to rural areas.

[00:07:41] Black communities for so many generations have used cooperatives for mutual aid, for insurance, for creating businesses and livelihoods in environments where white banks and businesses wouldn’t invest in them.

[00:07:56] So over and over, cooperatives, and similar kinds of models, enable communities to fill needs that the economy isn’t filling. Not just to support marginalized communities to do stuff that others are able to do. It’s actually enabling them to do something else. To create new kinds of business models that the other kind of economy doesn’t enable. And that’s what I really love about the Zebras Unite analysis, which is, this is born out of founders and leaders who have often been underrepresented in the tech and start up communities.

Mara: [00:08:34] There’s tremendous influences that are coming from other cultures and forming this, and when we look at indigenous communities and their cultures. The ceremony of the potlatch, which is where we get the word potluck really had to do with this idea of the host family, the one who’s bringing people together, distributing their wealth. And kind of thinking about how resources are flowing through their community. Thinking about how those resources then benefit everyone.

[00:09:06] And so, I think, for us, when we look to inspiration, it’s always really important to point to these much earlier traditions, and there are so many of them. We always just really want to emphasize that these ideas aren’t new, they’re really actually the status quo. They’re the ways that most communities have been sharing and distributing resources and caring for one another, really, for ages. And the system that we have now is actually kind of the anomaly.

[00:09:37] What we see is people are feeling moved to reexamine their role in the bottlenecking and hoarding of those resources, or the distribution of them, and there’s never really been another moment in our lifetime that’s felt so urgent than right now, I think, with what we’re facing with these kind of twin pandemics of racial injustice and COVID.

Nathan: [00:09:58] Unfortunately, in building the infrastructure for shared ownership over the last century, it’s almost like our culture and politics have treated it like this dangerous thing that has to be contained. Whereas other sorts of business, like the stock market doesn’t care what business you’re in. You can just become a publicly traded company no matter what you do. But that cooperative bank, I mentioned, is only for farmers, essentially. It’s weird how specific and targeted and tailored all the rules around shared ownership are rather than just opening this up.

[00:10:37] And so, what we’ve been trying to do with the exit to community conversation is to figure out what tools can we use that are really tailored for the specific needs of start ups. ESOPs are really great for medium-sized businesses that are, especially in manufacturing, or brewing has been a big one.

Wailin: [00:10:57] Quick note here. ESOP stands for Employee Stock Ownership Plan and it’s a kind of shared ownership structure.

Nathan: [00:11:05] It’s not very well suited for the capital dynamics of a start up. So you just don’t see it there. And co-ops, too, are not really well set up, often, for the kind of dynamics that start ups need. So this has made us turn to structures that are emerging now, like purpose trusts, revenue-based financing. And this is stuff that the Zebras network has been exploring for a long time, too. But we’ve really had to open up the logic from just one model, like cooperatives to a much more broad palette, or menu, of possibilities.

Wailin: [00:11:41] Yeah, and I want to kind of go into some of those menu options and explore what those could mean. Before we do that, can you talk a little bit more about the unique capital dynamics of a tech start up and what comes out of those dynamics that necessitate a different thinking when it comes to these structures?

Mara: [00:12:00] When you incorporate as a start up, very often you’re shuttled into the corporate form of a Delaware C-corp, and that’s because in Delaware, they have particularly friendly laws on the books for business and for investors. And so once you’re shuttled into a Delaware C-corp as your container for your business, maybe the next step that you might want to do would be to raise financing, which is way easier when you’re a Delaware C-corp. Whether it’s angel funding or a seed round or a Series A, and so you’re raising equity financing, which means you’re giving a percentage of your company away at a speculative value, which you anticipate will be something like that in the future, and which it rarely, if ever, is.

[00:12:43] Quickly enough, you can imagine a couple rounds of this down the road, you have now lost control of your company, you’ve lost the vision. There are employee options, which many people are familiar with, where you may have these relatively token amounts of equity that you’re able to grant to employees, but it isn’t the lion’s share of the company by and large, because you’re saving it for the investors to continue to finance it.

[00:13:08] And so what ends up happening, you can quickly see, is you are now stuck between a rock and a hard place when, if your company doesn’t become a unicorn as so many, the majority of them, won’t. And let’s say you don’t go on to raise additional financing, you now have all of these people on your cap table who have maybe at one point thrown in money, but now are not aligned with the values and vision of the company that you may now have.

[00:13:35] And so the question is, how do you get out of that bind? And how do you begin to plan for it earlier on so that the next logical step isn’t really just, okay, we have to close the company so that these investors can have a write down, which is such an unbelievable waste of resources and energy, especially if that isn’t what the hope and dream is of the group of people who have created this product.

[00:13:59] So you can see quickly how, essentially, the corporate structure is a domino effect that gives way to the financing, and the financing then creates this double bind for these companies where they’re not really then able to find another option.

[00:14:13] And so what ends up happening is often they will close the company or they will sell to the highest bidder, and so in that instance what you have is a larger company buying a smaller company and now you have these forces of market consolidation and the seeds of monopolies, and honestly, just the stripping away of diversity in the broadest sense.

Wailin: [00:14:36] Then, going back to the menu of options for what exit to community could look like, some of the ones that you talk about are a for profit company, a trust, a cooperative, a non-profit, a policy tool. Do you want to pick a couple of those, maybe ones that folks might not be as familiar with and kind of talk through what they might look like?

Nathan: [00:14:56] One that might be less familiar is the trust. Trusts are often used by wealthy people to manage their assets. And, in particular, the kind that has been the most actively explored recently in our network is the purpose trust. Which, one common use case for this is something like, supporting a wealthy person’s dog after they die. In the new context, for instance, a purpose trust could have the purpose of holding shares of a company for its users. And so it creates a kind of intermediary that simplifies the ability for, say, a company like, if you imagined it on the scale of something like Facebook, that would hold company shares in trust for these billions of people using the service so you don’t have to issue stock certificates to all of them.

[00:15:48] Another example is the revenue-based financing which is a model where, rather than, essentially, handing the company over to investors and then aiming to sell it off to another higher bidder, the aim is just to say: As the company grows, the investor also sees the benefits alongside other stakeholders. The way this plays out is you can’t really build a kind of flush with case VC stereotype where suddenly you’re pouring millions and millions into a new thing. It’s a more conservative vehicle.

[00:16:19] And this, I think, is actually a benefit. Is, when we’re talking about these new approaches, we’re not talking about doing all the same stuff that venture capital can do. We’re talking about, actually, different kinds of companies. Different options becoming available. And that’s what I think is really exciting, is when we stop thinking about just how can we do the same old start ups better, and more about how can we unlock a whole new side of what a start up could mean.

Wailin: [00:16:47] In a cooperative structure where ownership might be shared among not just the workers, but perhaps the users of whatever the product or service is, as you look very broadly and very creatively about who actually makes up that community… How do you think through how to make decisions, especially big ones, as a big group? When you decentralize the ownership like that, how do you think through the decision-making?

Mara: [00:17:16] Your question gets at so much because as I’ve started to realize in my own life, it’s very rare that we talk about ownership other than assets, really, like, frankly, real estate or a car. You have objects that you have been raised to, and habituated to think is something you can own. And then this notion of being an owner of something that you create with other people is, to my mind, very unfamiliar to most people.

[00:17:47] Honestly, a huge part of the work that we’re doing is to create the narrative and culture and story that someone can begin to see themselves as an owner of what feels like a nebulous, ephemeral thing, which is a company that they might be contributing to.

[00:18:03] And then the second thing I’ll say is just as a culture, also, we have moved toward such a place of individualism and the myth of this hero, and the myth of having one founder, a couple founders that take the glory. A huge motivation for me is to figure out how we change the narrative and recognize the incredible power of collectives and how we can begin to help them and serve them towards having group decision-making processes.

Nathan: [00:18:32] We’ve got to recognize that already, companies do governance with large distributed communities, so to speak, which is their shareholders. If you look at a public company, it’s got tons and tons of owners all over the place. And there are systems that enable those owners’ interests to be channeled into the company’s governance. Without those owners breathing down the necks of the managers and the leaders, right?

[00:18:58] One way of thinking about this is just replacing the existing stockholders, who are like random people who just want more money for their retirement, and instead just think of that crowd as being people who actually care about the company and who are invested in it in their participation. And so that just changes the accountability structure, but the basic idea of having a crowd is not new.

[00:19:21] On the other hand, one thing we learned from employee ownership experience and from a lot of data and research on that is that when you involve people more directly in day to day management and governance who are also owners, it really creates powerful feedback loops that end up supercharging the productivity of the company.

Wailin: [00:19:43] The notion of involving end users of a product or service as part of the community that could have a potential ownership stake to me sounds like one of the most radical mindset shifts. As users of technology, we’re conditioned to just think of ourselves as being used.

Mara: [00:20:00] Yeah, I don’t know if you want to tell the story, Nathan, of Twitter, like, that early experiment.

Nathan: [00:20:05] Well, yeah that was something that a few years ago, start of 2016, where Twitter was up for sale and a group of us, several of whom are now working on exit to community ran a little campaign, a petition campaign and ended up bringing a shareholder proposal to the company asking the company to just consider forms of user ownership. It was a fun consciousness raising effort, but it really is about just raising that question and asking people what would it be like? How would your relationship to the platform change if you were a co-owner?

Mara: [00:20:42] Another thing that’s surfacing is there’s so much talk now of the mental health of founders and it takes a toll to have a couple of people, two or three people, that are ultimately responsible for every single decision. And as companies grow and especially as you have first time founders, as you have all of these unforeseen circumstances… I’ve witnessed time and again the pressure that founders and majority owners face in having to make these decisions. And so the notion that we can question that myth that it’s these founders that are sort of carrying the load and you have this sort of board of overseers, and instead imagine what it might look like to distribute the load and to have other people be carrying some of this work together. Honestly, when I think about that as an experience, as an emotional and psychological experience, I have to believe that there are some founders out there that are listening to this right now, that are intrigued by that notion and are interested in exploring more.

Wailin: [00:21:48] You’re starting a formal program, you’ve got a cohort of companies and you’re going to be in conversation and collaboration with them to figure out what exit to community looks like for them. Can you talk about how you think about the supports you give to start ups at the beginning of the journey when, like you said at the beginning, they’re not sure what they’re going to be when they grow up. So how do you structure a program that walks them through this process and gives them the flexibility they need to figure out what the optimal structure is for them at the end.

Nathan: [00:22:18] We’re really thinking of it as a pure learning experience more than a structured curriculum. Founders need to learn from each other. And, again, that’s the logic that Zebras Unite has always taken as opposed to the conventional accelerator which has created a lot of efficiencies by essentially homogenizing the process by saying everybody… You know, as Mara was saying earlier, like, everyone get in your Delaware C-corp, follow these logics, do all these things and we’ll get you to your big corporate exit.

Mara: [00:22:48] The founders that are coming to us have such phenomenal ideas for how they want to engage in this process with their company and there’s almost a different “playbook” for every single company. It’s not going to be a linear journey because it’s so dependent on your stakeholders, your investors, and then the community that you have of people that you want to exit to. One story comes to mind as we’ve been working with a co-working community. It’s a group of women who are interested in figuring out how they might share ownership. And I was talking to the founder and she said, “Yeah, you know, we found this framework called Care of Souls,” which really comes out of groups of spiritual leaders. And she said there is this framework that breaks up all of the roles. There’s the Gatherer, the Maker, I think the Elder, the Steward. And she said that framework really has united us in thinking about how we might distribute the roles and then go on to distribute ownership and governance. And that was the north star that they were using, was this really quite incredible PDF that’s so rooted in self-knowledge and wisdom traditions around faith and social justice.

[00:24:02] This never would have been a resource that we would have pointed to, to our founders to say, you might be interested in the Care of Souls as a framework that you could explore with your stakeholders. We’re drawing inspiration from, not these traditional sources of what Paul Graham has to say about this, and we’re drawing on so many other companies, sectors, experiences, models, ways of doing things.

[00:24:28] Broken By Design by Clip Art plays.

Shaun: [00:24:36] Rework is produced by Wailin Wong and me, Shaun Hildner. Music for the show is by Clip Art. The exit to community zine is available for free through the University of Colorado Boulder’s website and we’ll provide a link to that in the show notes for this episode at rework.fm.

Wailin: [00:24:52] You can learn more about Zebras Unite at ZebrasUnite.coop, that’s Zebras Unite dot C-O-O-P.

[00:24:58] Nathan Schneider is on Twitter at @ntnsndr and Mara Zepeda is on Twitter at @marazepeda. That’s M-A-R-A-Z-E-P-E-D-A.

Shaun: [00:25:10] We are on Twitter at @reworkpodcast, and if you have a suggestion for something you’d like covered on an upcoming episode, you can always leave us a voicemail at (708) 628-7850.