Delaware's Public Benefit Corporation: The Traditional VC-Backed Company's Mission Driven Twin

88 University of Missouri-Kansas City Law Review 873 (2020)

53 Pages Posted: 11 Sep 2019 Last revised: 7 Aug 2020

See all articles by David Nows

David Nows

Central Michigan University

Jeff Thomas

Central Michigan University - College of Business Administration

Date Written: September 3, 2019

Abstract

Many entrepreneurs struggle when choosing an entity type for their new venture. It is a difficult decision that involves complex business and tax-related considerations, and several entity options. Numerous facts and circumstances must be considered, including how the venture expects to get capital. However, if entrepreneurs plan to raise venture capital (“VC”), sophisticated legal counsel will typically advise the entrepreneur to form a Delaware corporation (“Traditional DE Corporation.”) In fact, several of the world’s leading VC law firms and seed investors share formation and financing documents online and almost all of these resources steer new ventures into Traditional DE Corporations. By supporting the Traditional DE Corporation as the entity, law firms and other resource providers can more easily create and share standard documents, educational materials, and comprehensive platforms - all built to leverage best practices, lower transaction costs, and be compatible with Delaware law.

Choosing an entity type is arguably more difficult for founders of social ventures. In addition to understanding the pros and cons associated with the usual entity choice options (e.g., LLCs, S Corporations, and C Corporations), social entrepreneurs must often weigh the restrictions imposed on 501(c)(3) organizations against the benefits of being tax-exempt. Further, social entrepreneurs regularly compare and contrast conventional organizational structures with new hybrid entities (e.g., L3Cs and benefit corporations ) and consider third-party certifications (e.g., the B Corp certification administered by B Lab ). The authors aim to bring significant clarity to social entrepreneurship’s choice of entity analysis and empower social ventures to utilize the same battle-tested practices and resources used by traditional VC-backed companies.

Simply put, we believe many social ventures will aim to provide specific public benefits and will desire maximum flexibility with respect to raising capital. For these firms, forming as a Delaware Public Benefit Corporation (“DE PBC”) appears to be an easy decision – and yes, it is quickly becoming the standard. DE PBCs must serve a specific public benefit (a feature unique to the DE PBC), but they are also governed by many of the same corporate and tax laws as Traditional DE Corporations. This combination is powerful. Not only can social ventures leverage both purpose and profit to attract employees, customers, strategic partners, and investors, they can resemble traditional VC-backed companies as much as they like. As a result, the DE PBC does not have the challenge of developing its own formation and financing-related best practices, documents, and other resources from scratch. Instead, DE PBCs can tap the same practices and resources already serving as the gold standard for high-growth ventures. This Article examines the laws governing DE PBCs and provides examples of formation and financing-related practices and resources. This evidence clearly shows DE PBCs can be mission-driven twins of traditional VC-backed companies.

Keywords: entrepreneurship, law, entity formation, social ventures, social entrepreneurship, delaware, benefit corporation, public benefit corporation, certified b corporation, certified b corp, b corporation, b corp

Suggested Citation

Nows, David and Thomas, Jeff, Delaware's Public Benefit Corporation: The Traditional VC-Backed Company's Mission Driven Twin (September 3, 2019). 88 University of Missouri-Kansas City Law Review 873 (2020), Available at SSRN: https://ssrn.com/abstract=3447351

David Nows (Contact Author)

Central Michigan University ( email )

Mount Pleasant, MI 48859
United States
9897742624 (Phone)
48859 (Fax)

HOME PAGE: http://https://www.cmich.edu/colleges/cba/academic_programs/departments/ent/profiles/Pages/nows1ds.a

Jeff Thomas

Central Michigan University - College of Business Administration ( email )

170 Grawn Hall
Mt. Pleasant, MI 48858
United States

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