Startups Have a Sellout Problem. There’s a Better Way

Onetime startups like Meta, Twitter, and Amazon are now part of the world’s infrastructure, acting as today’s local news, phone lines, and postal service. They don’t just drive economies; they’re public goods that serve a social purpose, that define and enable countless aspects of society. PIA MANCINI is co-founder & CEO at Open Collective, as well as Chair of DemocracyEarth Foundation, a democracy activist, and an open-source sustainer.

ALANNA IRVING builds open source tools and communities for radical participation and collaboration. She co-founded Enspiral, Loomio, Cobudget, the Open Source // Open Society conference, and Dark Crystal. NATHAN HEWITT is an NYC-based fiscal sponsorship professional, governance nerd, local activist, and ambient musician.

He considers himself a “radical administrator” in service of community resilience and autonomy, currently serving as Program Manager at Open Collective. The problem is, businesses like these are not accountable to the communities they serve. Like most companies, they are structurally obligated to maximize value for their shareholders, with no real obligation to the public.

Societies are left to deal with profit-obsessed, rent-seeking, unaccountable infrastructure that ignores or even exacerbates social problems—and, unfortunately, examples of the consequences abound . The origin of these challenges lies in tech startups’ early days, when founders have little more than a good idea. To build their dream, leaders often sacrifice control of the company in exchange for investment capital—an understandable trade-off, especially when the goals of the company and investors are aligned.

But over time, misalignment can emerge, especially if the demand for exponential growth in shareholder value at all costs replaces the company’s core mission. Startups find themselves stuck between a rock and a hard place: They need funding to make something special, but their only options are infinite growth, or to escape—to sell. And the options for selling, also known as “exiting,” are limited.

Companies can either “go public” via an initial public offering or work to be purchased by another company through an acquisition. In both cases, the company is at further risk of losing focus and being beholden to stakeholders that do not include the communities served. Neither can protect the mission the founders originally set out to accomplish.

So, how might startups chart a new course? Open Collective is seeking an answer. Thousands of communities all over the world, cultivating projects in areas like mutual aid and technology, depend on its open source finance platform. These groups have raised and spent over $65 million so far, in full transparency with their financial activity visible to the public.

At the same time, Open Collective is a venture capital-funded tech startup—owned by founders, investors, and employees—with an obligation to make returns. Navigating the space between these two realities required focus from the beginning. The company decided early on that, in order to achieve its goal of becoming digital infrastructure for the public good, the cofounders (and not investors) needed to maintain control.

(One of the cofounders, Pia Mancini, is an author of this article. ) Through three rounds of investment, the cofounders retained not only majority ownership, but also all the board seats, which is uncommon. They knew that they did not want to jeopardize Open Collective’s purpose in return for capital, so they found investors that shared their dream of, as articulated in 2016 , “a global infrastructure on top of which anyone can start an association anywhere in the world as easily as creating a Facebook group.

” The cofounders also chose to set a ten-year vesting period for their shares, far longer than the typical four years founders take. As cofounder Xavier Damman wrote at the time , “There is something to be said about setting the right expectation from the beginning. ” In taking a long vesting period, the cofounders signaled the intent to slowly grow a mission with long-term impact.

Founder control during the company’s first seven years allowed Open Collective to balance building a business, now profitable and growing steadily, with the company’s mission. But the founders will not be here forever. So, who can hold the dream in the long run? Over the past year, Open Collective has been talking to other companies like it, seeking an answer to the question of how it might avoid this problem of misaligned incentives and future-proof its platform for the communities around the world that rely on it.

With the help of groups like Common Trust , Zebras Unite , MEDLab , and E2C Collective ; collaborative projects like E2C. how ; and in conversation with many others, the company has an inkling of what its path forward might be: an “exit to community,” a transition to steward ownership, and community governance. The community’s entrance may be found at the “exit,” the point in a startup’s life when founders and early investors “cash out” and get a return on their investment.

Sounds like an ending, but it is also a beginning: When someone sells, someone else buys and becomes a new owner. “ Exit to community ” is an emerging movement that advocates for startups to become owned and controlled by those who value and depend on them. It is less a specific approach to governance or ownership, and more a broad call to action for startups to explore other options and chart a new course.

Pulling off an exit to community requires a legal structure that allows community members to become stewards of a company. The movement does not prescribe any particular legal structure, and instead gathers a menu of different options for startups to explore. Open Collective believes one of the most compelling options, and one it is exploring, is steward ownership , in which financial and legal tools are used to permanently embed a company’s purpose in its structure, and goals and incentives are retooled to ensure that the company remains independent and values-driven.

The practice of steward ownership, which can take many forms, allows companies (including long-standing successful businesses like BOSCH, Novo Nordisk, and Zeiss) to balance profits with community impact. One example of a tool used to set up a steward ownership structure is a perpetual purpose trust, which was deployed in Patagonia’s recently-announced ownership transition . The Chouinards are transferring their controlling shares into a perpetual purpose trust, and the rest of their shares, which do not have voting power, into a nonprofit that will fund groups fighting climate change.

This ensures that future owners of Patagonia will not divert the company toward purely profit-driven decisionmaking. The lesser-known story of Berrett-Koehler Publishers ’ transition to steward ownership, perhaps the country’s first true “exit to community,” also shows the impact of this approach. Berrett-Koehler has a long tradition of community governance, first through employee ownership, and in the past few years has moved the largest share of the company into a perpetual purpose trust.

This perpetual purpose trust shares many similarities with that of Patagonia, except where the governance of the outdoor company’s trust is unclear, the publisher’s trust will be governed by a multi-stakeholder board representing its diverse community. It’s called a “perpetual purpose” trust because unlike other trusts, it exists in perpetuity, and the trust is created to further a particular purpose. Its core governing body is a trust stewardship committee, sometimes called a trust protector committee, elected by the community on a regular basis.

In a typical arrangement, the trust stewardship committee selects the board of directors for the company, delegating to the board and then to company leadership the oversight of the company’s day-to-day operations. A trust enforcer is responsible for ensuring that the trust does not deviate from that purpose and, in Open Collective’s case, would block sale or cooptation of the company. A trust management firm also maintains the administrative requirements of the trust, and all of these arrangements are encoded in the perpetual purpose trust’s founding documents.

Perpetual purpose trusts get rid of the dichotomy between for-profit and nonprofit. The trust, technically a nonprofit but not a charity, owns a for-profit entity and has the ability to distribute the dividends of that venture as it chooses. This means that a venture can be run as efficiently as a traditional company, taking on investment while still having the added accountability to a larger community and the public.

Transitioning Open Collective to steward ownership could happen in several different ways. One option is for the perpetual purpose trust to buy shares from founders, investors, and employees. The money could come from some combination of external social-impact investors, crowdfunding, and the company’s free cash flow.

Another option does not involve a financial transaction, and instead involves creating a new set of shares that have special voting power without diluting the percentage of the company owned by founders, investors, and employees. Dual-class structures like this are commonly used by Silicon Valley founders like Mark Zuckerberg or Larry Page and Sergey Brin , as well as companies like Berkshire Hathaway . Open Collective would be taking that power—the special shares—and putting it in a perpetual community-governed perpetual purpose trust.

An exciting attribute of steward ownership is that the community could share in the company’s financial success—value that the community creates in the first place. Employees and users might be able to receive a portion of the company’s revenues (transparently through Open Collective’s online platform). A portion of funds could also be set aside for a participatory budgeting process so that community members can decide what the company should invest in next, whether it’s a new platform feature, a new offering, or supporting aligned social good projects.

Community governance doesn’t mean everyone will be happy and always get what they want. It also doesn’t mean everyone will be involved in every little decision. In the beginning, it may fall on the Open Collective team to decide how best to involve community members in the company, but that will change over time, as control shifts more and more to users.

A key benefit of steward ownership, and perpetual purpose trusts in particular, is its flexibility. Since one can define specific, unique relationships within the trust agreement, there is space for experimentation. One can encode almost any governance structure one wants in the trust’s founding documents.

One can also encode ways for that governance structure to evolve. It would give the company, and an eventual trust stewardship committee, room to practice good governance of digital infrastructure. In the simplest possible version, Open Collective community members, including users, employees, and aligned experts, would be able to run for seats and vote on representatives on the trust stewardship committee.

The company is, however, well aware of the limits of representative democracy, and the way it puts a damper on participation. Whether as a result of politics, bureaucracy, or simply the limitations of such a committee in comparison to the diversity of the Open Collective ecosystem, a traditional small committee would never be able to truly represent its global community. To Open Collective, harnessing real participation and then balancing it with efficiency and nimbleness seems to be the key to deepening the community’s connection while still ensuring the company serves its ongoing needs.

Many related experiments are ongoing in the governance world, with organizations like Metagov , Cobudget , and RadicalxChange leading the way. Plural (or quadratic) voting and funding, participatory budgeting, sortition, and meaningful multi-stakeholder governance, among other fresh ideas, have garnered attention. As an alternative to traditional representation, one can imagine a hybrid between these new tools and the stability of legal structures, something that still enshrines a trust stewardship committee but also engages regular users where their input is most impactful.

Perhaps a company can use plural voting , where people indicate the strength of their preference, rather than traditional voting. Perhaps representatives are incentivized to vote in alignment with the community members they represent. Perhaps a randomly selected representation of usership will steward a certain phase of decision making.

Perhaps user groups will lead projects, or fund the development of specific features that meet their specific needs. Perpetual purpose trusts are only one example of steward ownership, which is in turn only one way to pull off an exit to community. There are many other options available, from platform cooperatives to employee stock ownership plans, to golden shares and much more.

Every startup will have its own specific needs. So is this path actually replicable for other tech startups? Should founders reading this consider it for their long-term strategy? Open Collective believes that the four broad ideas of founder control, an exit to community, steward ownership, and community governance can be replicated. Even for traditional firms, finding the “right” investor is always a challenge.

What is most important when seeking investors is the relationship between founders and investors, and the trust between them. A company’s desire to exit to community is only one element among many that investors must consider. Startups and investors oriented solely around extreme growth will not be likely to consider an exit to community, but there are many ventures and investment funds out there that want more than a big return.

As word spreads, more and more companies might explore which combination might be right for them. Open Collective knows from experience that there are investors out there looking for impactful ventures. It was clear with its goals and long-term focus, and in turn, investors trusted that it would focus on its mission, and literally “bought in” to its purpose of making communities sustainable.

Not every tech startup will be worthy of community control. But there are many other projects that are centered on a social purpose, that seek to become resilient, community-oriented, life-giving organizations. They need a new kind of “exit.

” Founders can build social, digital infrastructure—a commons—that is accountable at its core. .