Students, professors and local entrepreneurs gathered in a business-school modular over dinner Tuesday to learn about the upsides and downsides of stock corporations, private companies and non-profits at Social Entrepreneurship Structures for Success, part of Stanford’s Entrepreneurship Week.
Criterion Ventures, a Connecticut-based consulting firm, and Stanford’s Graduate School of Business Center for Social Innovation, hosted the event to help inform decision-making about legal structures.
Most students came with fledgling ventures — from a red-pepper mill designed for women in Ethiopia to a substance-abuse treatment center in East Palo Alto — but many were unsure of the best legal structure for their projects.
“Some people have told me ‘you’re never going to succeed if you’re a non-profit,’ while others have said ‘don’t you dare become for-profit,’” Stanford Graduate School of Business student Monica Lewis said.
Her project, “From Farm to Cup,” connects Guatemalan coffee farmers with consumers, bypassing middlemen and increasing farmer profit. This lab, she said, gave her a better sense of what all the different structures are, how they relate to each other and how she should begin making decisions.
When thinking about governance, for example, it’s important to consider whom you want to give decision-making power to.
“Think of how you want to bind different people into your organization,” Karen Matthys, from the Center for Social Innovation, said.
“What are you trying to accomplish?” she asked. “Think about autonomy versus engagement, security versus risk and constancy versus nimbleness.”
“Structure also signals to the market about what your mission is,” Matthys said. “Corporations make decisions about maximizing shareholder returns,” so the mission has to do with growth.
Participants used the entrepreneurial yellow sticky-notes and cards labeled “lines of credit,” “vendors,” “investors,” “real property,” and more, to organize their assets and relationships and identify any gaps or strengths.
“Think of how to leverage the asset cards you have as a way of generating revenue,” Matthys said. “Think about what do you want to protect, leverage or share,” she added.
Examining the cards, Mechanical Engineering Ph.D. student Sam Hamner realized there’s a name for the way his project, the “Pepper Eater,” is funded: “fiscal sponsorship.” The Pepper Eater is a low-cost pepper mill designed for women in rural Ethiopia who process red pepper by hand.
Because Stanford holds his venture’s fiscal sponsorship, the Pepper Eater must pay a percentage of the raised-money to Stanford, and then Stanford, pending approval, will reimburse the venture’s expenses.
“I hadn’t realized that we fit in a real box,” he said. He explained that becoming their own non-profit didn’t make sense for his venture because of how inflexible and regulated the start-up process tends to be.
Matthys said that it’s important to consider what type of funder will be attracted to the venture and how fast and easy the structure is to create.
Non-profits often take longer to set-up than for-profit ventures, and legal fees can reach $10,000.
“We’re at the stage where we have to be nimble, so a non-profit just didn’t make sense,” Hamner said.
Lewis said an S-corporation for-profit structure made the most sense for her coffee venture, because it would allow it to scale quickly and have a big impact. “If we need to raise money to invest in a distribution network, we wouldn’t be able to easily do that as a non-profit,” she said.
“I’ve learned the business side of things from experience, but being exposed to the different models and knowing the language is helpful to broaden my scope of understanding for possible ventures like mine,” he said.