Etsy Courageously Half-Stepped its Talk

Etsy filed its “Red Herring” prospectus on Tuesday and began its IPO roadshow yesterday. There is good news and bad news….

The good news is that Etsy will become the second publicly traded Certified B Corporation in the US. CEO Chad Dickerson’s inspiring letter on page 91 of the prospectus (see www.sec.gov and search for Etsy) challenges the conventional business wisdom of Wall Street by proclaiming that “companies can and should use the power of business to create social good, which is reflected in our status as a Certified B Corporation.” Etsy’s IPO portends that business as a force for good is the future.  This is the Etsy Economy.

Mr. Dickerson’s letter succinctly expresses the key principles of the emerging responsible and sustainable business paradigm where corporations exist to optimize not only profits but also their social and environmental impact. Etsy aspires to be a public company that “holistically integrates the concerns of people and the planet, the present and the future, profitability and accountability.” He aims to “build a company that lasts” with success measured in “years and decades” with a mission to “re-imagine commerce in ways that build a more fulfilling and lasting world”.

Mr. Dickerson boldly declares Etsy’s independence from the prevailing paradigm of profit maximization by proclaiming that as a public company “we do not plan to give quarterly or annual earnings guidance” out of the belief that “providing quantitative earnings guidance is misaligned with Etsy’s mission,” whose success will be based on strategies that evolve over years and decades.” It’s remarkable to see such statements by a CEO in an IPO prospectus, especially in one underwritten by top tier investment banks, Goldman Sachs and Morgan Stanley.  That’s courageous!

Etsy’s pending IPO validates the credibility of the Certified B Corporation movement. The prospectus’ fourth risk factor highlights the importance of Etsy’s Certified B Corporation certification to its business, and acknowledges that “our reputation could be harmed if we lose our status as a Certified B Corporation, whether by our choice or by our failure to meet B Lab’s certification requirements, if that change in status were to create a perception that we are more focused on financial performance and are no longer as committed to the values shared by Certified B Corporations. Likewise, our reputation could be harmed if our publicly reported B Corporation score declines, if that created a perception that we have slipped in our satisfaction of the Certified B Corporation standards.”

The bad news is that Etsy only had the courage to half-step its talk. It did not convert into a Delaware public benefit corporation and thus lost a golden opportunity to set a new global governance standard. Since its principal stockholders had agreed to vote their shares in favor of a conversion pursuant to a voting agreement, Esty most likely could have obtained the 90% vote currently required. Unfortunately, since this agreement expires upon the IPO, it will be much more difficult for Etsy to make this conversion as a public company.  In addition, Etsy omitted to state in the prospectus that it will lose its Certified B Corporation status if it does not convert by 2017.

Esty’s mission and goals are laudable, but without the force of benefit corporation law, it remains to be seen whether Etsy’s courageous CEO can uphold them in the face of Wall Street’s obsession with profits. By converting into a legal form perfectly aligned with its mission and values Etsy would have had another tool to protect and fulfill its mission by being legally committed to operate “in a responsible and sustainable manner” and committing its board to balance the interests of stockholders with the interests of its community and its chosen public purpose. Without these legal commitments, Etsy’s noble mission and values risk becoming corporate ephemera in the face of the market’s obsession with profits.

Whatever the outcome, however, Etsy’s courageous half-step will make it easier for a Certified B Corporation that is also a Delaware public benefit corporation to go public.

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