Why Does Etsy’s IPO Matter to Silicon Valley?

The B Economy moved into Silicon Valley last week when Etsy became the second listed US Certified B Corporation.  Brooklyn based Etsy’s successful IPO priced at $16 on April 15 and closed its first day of trading on April 16 at $30. The shares of Palo Alto’s Accel Partners, Etsy’s lead investor, increased approximately $325,000,000 in value on the first day of trading.

The B Economy first arrived in Silicon Valley in April, 2013 when Boulder based Rally Software went public as the first US listed Certified B Corporation.  Menlo Park based Mohr Davidow and Greylock were among the lead investors in Rally Software.

What is the B Economy?

Certified B Corporations and benefit corporations are quietly creating the B Economy in which business is a force for good.  A Certified B Corporation is a business that has passed B Lab’s Certified B Corporation assessment, which measures its social and environmental impact (see www.bcorporation.net).  A benefit corporation is a relatively new type of corporation that is designed to optimize profit while providing a material positive impact on society and the environment (see www.benefitcorp.net).  There are approximately 1,300 Certified B Corporations worldwide and over 2,000 benefit corporations in the 27 US jurisdictions that have adopted the form since 2010.

This creates a foundation for an alternative corporate paradigm, the “B” Economy, in which corporations have been re-designed to optimize profit while doing the right thing for stockholders, society and the environment. The B Economy presents entrepreneurs, investors and customers with a clear choice as to what kind of corporation to do business with and in: one that maximizes profit for stockholders and externalizes as many of the negative consequences of its behavior on society and the environment as possible, or one that optimizes profit for stockholders while operating in a responsible and sustainable manner for stockholders, society and the environment.

Why is the B Economy Relevant to Silicon Valley?

The B Economy is relevant to Silicon Valley because doing good is good business as Accel, Greylock and Mohr Davidow have discovered. The preliminary economic data indicates that corporations built for the new paradigm with cultures of sustainability out-perform their conventional peers. (See, for example: The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance, Eccles et al, Harvard Business School Working Paper, November 2011).

Why is the Benefit Corporation Relevant to Silicon Valley?

The benefit corporation fits naturally in Silicon Valley because it is the most significant innovation in corporate law since New York invented free incorporation and limited liability in 1811. Those innovations were adopted globally and enabled the free flow of capital into easily-formed corporations that created the Age of Industry.  The benefit corporation endows the corporation with a social and environmental conscience that meets the need of a global market that increasingly demands that corporations act as responsible corporate citizens.  In the Internet Age, this disruptive technology has spread rapidly across America and is being considered in Canada, Europe, South America and Australia.

Since most venture capital financed companies incorporate in Delaware, the jurisdiction of choice for approximately 20% of America’s corporations and most of its listed companies, the Delaware public benefit corporation is the de facto global standard for for-profit corporations wishing to be a force for good.

Such corporations commit to operate in a “responsible and sustainable manner” by balancing the pecuniary interests of stockholders with the interests of those effected by corporate action and the corporation’s chosen public benefit(s).   Under the law, “public benefit” means a positive effect (or reduction of negative effects) on 1 or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.  The law also provides a number of safe harbors from liability for directors of public benefit corporations that conduct business in this manner.

Even though the preliminary economic data suggests that corporations engineered to do good provide better returns to investors, the prevailing corporate legal system makes it challenging and risky for directors to run Delaware corporations in this way.  The Chief Justice of the Delaware Supreme Court, Leo Strine, made it clear in a recent article in the Wake Forest Law Review “The Danger of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law” that doing the right thing for society and the environment under the Delaware General Corporation Law and common law of Delaware is not a legitimate purpose for a Delaware corporation.  Doing the right thing is only permissible under the current DGCL if it is a means to the only legitimate end of corporations to promote stockholder welfare by maximizing profit for stockholders.

In an article in Harvard Business Law Review, “Making it Easier for Directors to “Do the Right Thing”” Chief Justice Strine made it clear that the public benefit corporation currently provides the only legitimate vehicle in Delaware to shift the balance of power to give directors the ability to and impose upon them an enforceable duty to “do the right thing.” In short, the Delaware public benefit corporation is the best vehicle for Silicon Valley to participate in the B Economy.

How Can Silicon Valley become the Global Leader in Corporate Governance?

Both Rally Software and Etsy are Delaware corporations but are not Delaware public benefit corporations because Delaware did not adopt the form until after each company became a Certified B Corporation. Both will need to convert into Delaware public benefit corporations by 2017 in order to maintain their Certified B Corporation certifications and for their directors to avail themselves of the safe harbor liability protections.   Under current Delaware law, however, conversion is no easy task.  It currently requires a 90% vote with dissenters’ entitled to statutory appraisal rights.

Happily, Delaware expects to amend its public benefit corporation law by August 1, 2015 to make it easier for public companies such as Etsy and Rally to convert into Delaware public benefit corporations  The pending amendments are expected to change the approval required from 90% of the outstanding shares of each class of stock, whether voting or nonvoting, to 2/3 of the outstanding stock of the corporation entitled to vote.  The amendment will also eliminate statutory dissenters’ appraisal rights for stockholders of exchange listed companies such as Etsy and Rally that convert into public benefit corporations.

Assuming these amendments become law, either Etsy or Rally could seize the opportunity to become the global thought leader in corporate governance by converting to become the first listed US benefit corporation.  This would also put Accel or Greylock and Mohr Davidow at the vanguard of the B Economy in Silicon Valley and begin to establish Silicon Valley as its epicenter.


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