Her CEO Journey™: The Business Finance Podcast for Mission-Driven Women Entrepreneurs

Weekly show where my featured guests and I explore the financial and business challenges women face on the entrepreneurial journey to success. You'll hear them talk about the money side of their businesses in ways you've always wanted to know about, but wouldn't dare ask. They openly share their disappointments, failures, successes, and everything in-between as they grew sales ranging from 6 to 9 figures. Knowing where your business stands financially helps you make critical decisions with confidence. It's simply the best way to be sure you grow a business that fuels the life you want to live.

https://www.christinasjahli.com/

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episode 137: Steward Ownership: A Method for Preserving Business Owner’s Legacy and Purpose - The Journey of Sarah Joannides [transcript]


As a mission-driven founder and business owner, you want to know that your company’s mission is still being carried out despite you not being active in it any longer. You may worry that as you exit, your business may be controlled by entities that aren’t in line with how you intended for your business to run. The founder’s dilemma may also trouble you. That is, you wonder if you’ll have to choose between liquidity and legacy. We’re here to tell you that your concerns are heard, and there’s a great way to address them.

This episode’s guest tells us that you can choose both liquidity and legacy. Sarah Joannides joins us in Her CEO Journey™ to share the beauty of steward ownership. With steward ownership, you can lock down your business’s purpose and independence. Through it, you can empower and give value to your stakeholders, rethink your company’s profits, and ensure the health and vitality of your ecosystem.  

If you’re a founder or business owner that wants to be prepared for your business’s future, then this episode is for you!

Episode Highlights

  • [05:59] Sarah’s Journey 
  • [08:40] The Founders’ Dilemma of a Business Owner
  • [09:21] About Steward Ownership
  • [10:53] The Founder and Business Owner’s Options Under Steward Ownership
  • [12:58] When Does Steward Ownership Make Sense?
  • [15:40] Preparing for the Transition to Steward Ownership
  • [18:29] Financing Steward Ownership
  • [23:27] The Four Major Models of Steward Ownership
  • [29:40] Choosing the Right Form of Steward Ownership
  • [31:23] When to Consider Steward Ownership 
  • [37:38] Giving Up Control in Private Equity vs Steward Ownership
  • [40:22] The Profitability of Steward Ownership Businesses
  • [44:57] Steward Ownership for Technology Companies
  • [48:28] Steward Ownership Business vs Public Benefit Corporation
  • [51:52] Steward Ownership Around the World
  • [52:52] The 1, 2, 3s of Steward Ownership
  • [55:30] Sarah’s Parting Words

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Connect With Me

Ready to transform your purpose into an impactful business financial story, profit, and joy? Schedule a chat with me at any time.

Resources

  • Download the Forecasting Guide so you can create an improved finance strategy for your business!
  • Exit to Community
  • Purpose Economy
  • Alternative Ownership Advisors
  • Connect with Sarah: LinkedIn | Email


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 2021-10-14  59m
 
 
00:05  Sarah Joannides
Steward
00:05
ownership is a method to align
00:07
ownership, governance and
00:07
financing to lock down purpose
00:11
and independence. And this is a
00:11
broad umbrella that has two key
00:15
principles. The first is that
00:15
the profits of the company
00:18
should primarily be reinvested
00:18
in the business and shared with
00:22
stakeholders not just extracted
00:22
by shareholders. We call this
00:27
principle profits serving
00:27
purpose. The second idea is the
00:31
idea of self governance and
00:31
independence.
00:36  Christina Sjahli
When you are a
00:36
mission-driven female founders,
00:38
likely at some point down the
00:38
road, you start thinking about
00:42
how you can protect your mission
00:42
after you are no longer active
00:46
in the business. You are likely
00:46
to think differently as well
00:50
about your exit strategy. For
00:50
example, suppose you wonder,
00:54
what are your options for
00:54
exiting your business in the
00:57
future because the traditional
00:57
exit strategies of selling to a
01:02
bigger business, selling to an
01:02
investor, or becoming a publicly
01:06
listed company are not aligned
01:06
with your mission.
01:10
You would be happy to know that
01:10
actually, you have a different
01:13
option for exiting your business
01:13
and protecting your mission. And
01:17
this new podcast series of
01:17
alternative ownership is for
01:22
you. Alternative ownership is
01:22
better known as steward
01:26
ownership. It is not a new
01:26
concept. But steward ownership
01:30
is more popular in Europe than
01:30
North America. As more and more
01:35
founders realize, we need to
01:35
exercise conscious capitalism
01:39
instead of traditional
01:39
capitalism, the movement of
01:43
stored ownership is on the rise
01:43
in North America.
01:47
In the next few weeks, we will
01:47
take you on a journey to explore
01:50
the alternative ownership model
01:50
and exit strategies that allows
01:55
you to protect your mission over
01:55
the long-term. As you move along
01:59
from one episode to another in
01:59
the series, you will learn the
02:03
purpose of alternative
02:03
ownership, the different option
02:07
of alternative ownerships, learn
02:07
from female founders who made
02:11
the transition to alternative
02:11
ownership, the different types
02:15
of investor that you need during
02:15
the transition, the legal side
02:20
of one specific kind of
02:20
alternative ownership that is a
02:24
rising movement in the United
02:24
States.
02:27
By the end of this podcast
02:27
series, you know there are other
02:30
exit strategy option which
02:30
likely more in alignment with
02:34
who you are as a mission-driven
02:34
female founder. You will also
02:38
have a good understanding of key
02:38
steps you need to think about if
02:44
you are interested in
02:44
alternative ownership.
02:47
Today is the first episode of
02:47
the alternative ownership
02:50
podcast series. Sarah Joannides
02:50
is the managing director of
02:55
Alternative Ownership Advisor, a
02:55
firm specializing in helping
02:59
founders and owners of private
02:59
companies design and implement
03:03
ownership, governance, and
03:03
financing solution that align
03:07
with the mission and protect
03:07
independence.
03:10
In this episode, Sarah share
03:10
valuable information amongst
03:14
others. What steward ownership
03:14
is, the stage of business that
03:18
should consider a transition to
03:18
steward ownership, and the steps
03:22
to get your business ready for
03:22
the transition from traditional
03:26
to steward ownership. You're
03:26
listening to Her CEO Journey,
03:29
the business finance podcast for
03:29
mission-driven women
03:32
entrepreneurs, I'm your host,
03:32
Christina Sjahli.
03:36
If you are new here, a big warm
03:36
welcome. If we are not connected
03:41
on LinkedIn, please reach out
03:41
and say hi, because that's where
03:45
I hang out and share my business
03:45
finance steps. If you have been
03:49
listening to this podcast for a
03:49
while, and you are a regular
03:53
listener, I want you to know I
03:53
appreciate you. My podcast won't
03:58
be around without your support.
03:58
This is a free weekly show where
04:02
my guests and I want to inspires
04:02
you to balance between mission
04:07
and profit, to create an impact
04:07
in this world, and to achieve
04:11
financial equality through your
04:11
business for good.
04:16
One of the key factors you need
04:16
to develop in preparation for
04:20
steward ownership is a financing
04:20
strategy that raises the right
04:25
amount of capital that you can
04:25
afford to pay and is in
04:29
alignment with your mission.
04:29
There is one key point that I
04:34
really want you to understand.
04:34
An effective financing strategy
04:38
can only be accomplished if you
04:38
as the founder have a good
04:43
understanding of both the
04:43
historical and forward looking
04:46
results. We cannot change the
04:46
past, but we can learn from the
04:51
past. Learn from what has
04:51
happened and done and use those
04:56
pieces of information to build
04:56
the future.
04:59
That's what financial
04:59
forecasting is all about. If you
05:04
are at a stage where you realize
05:04
you need to build a more robust
05:08
financial forecast but don't
05:08
know where to start, you can
05:11
download our forecasting guide.
05:11
Use the link in the show notes
05:14
to download the guide and start
05:14
creating a better and improved
05:18
financial forecasts. At the same
05:18
time, know that we are here to
05:22
partner with you and guide you
05:22
in building a financing strategy
05:27
that is both purposeful and
05:27
profitable. Connect with us at
05:31
christinasjahli.com/lets-chat.
05:35
Sarah Joannides, welcome to Her
05:35
CEO Journey. It is a pleasure to
05:40
have you here today.
05:42  Sarah Joannides
It's my
05:42
pleasure, I'm really honored to
05:44
be here.
05:44  Christina Sjahli
Before we dive
05:44
into more details about what is
05:48
alternative ownership is all
05:48
about, let's start with your
05:52
journey to get where you are
05:52
today as the managing director
05:56
of Alternative Ownership
05:56
Advisor.
05:59  Sarah Joannides
My journey has
05:59
been this kind of winding road
06:02
to corporate jobs to business
06:02
ownership and back again. I
06:05
worked for big brands like Nike
06:05
and American Express. Then I co-
06:09
owned a restaurant with my
06:09
husband for 10 years. After that
06:13
experience at small business
06:13
ownership which I absolutely
06:16
loved, I wanted to find a
06:16
company where I could earn a
06:19
steady paycheck, but that I
06:19
could also be really proud. Just
06:23
as proud as to say I worked for
06:23
as I had been when I had my own
06:27
business. Oddly enough led me to
06:27
a company called New Seasons
06:30
Market, which is a natural and
06:30
organic grocery store in
06:33
Portland where I live.
06:35
So in the beginning, I supported
06:35
the CEO with whatever projects
06:38
or priorities arose.
06:38
Fortunately, one of my projects
06:42
for the CEO, this was back in
06:42
2012, she had asked me to help
06:46
build the business case for
06:46
becoming B Corp Certified. We
06:49
needed to take that to our board
06:49
for approval before we can move
06:52
forward. And it was in that
06:52
process that I realized that
06:56
sustainability and social
06:56
responsibility was exactly where
07:00
I wanted to specialize.
07:01
New Seasons was an exceptional
07:01
example of a
07:04
socially-responsible business,
07:04
and I'm a passionate proponent
07:08
of third party certifications,
07:08
such as B Corp Certification.
07:11
However, there is one weakness
07:11
to certification and that is
07:15
that a company can choose to
07:15
walk away at any time from their
07:18
commitments. Especially this
07:18
could happen when ownership or
07:21
leadership changes. So a few
07:21
years ago, after I had left New
07:25
Seasons, a CEO friend of mine
07:25
shared that the company she
07:29
leads, which is called
07:29
Organically Grown Company, was
07:32
just completing a transition to
07:32
something called trust
07:35
ownership.
07:36
She told me that this meant that
07:36
the company would remain
07:39
permanently independent, and
07:39
that the trust would be
07:42
responsible to ensure that the
07:42
company operate in service of
07:46
their purpose, not just in
07:46
service of profits. She also
07:50
said "We're thinking about
07:50
starting a consultancy to help
07:54
other business owners transition
07:54
to trust ownership, would that
07:57
be something you're interested
07:57
in?" I mean, honestly,
08:00
Christina, my head exploded.
08:00
Because to me, this was like the
08:04
next evolution for those on the
08:04
B Corp path. It's a way to truly
08:08
lock down purpose and
08:08
independence. So here I am.
08:13  Christina Sjahli
Wow, that is
08:13
an interesting story. And then I
08:15
can understand when you said
08:15
your head exploded. My brain
08:20
exploded when I found out about
08:20
Alternative Ownership Advisor.
08:24
You kind of alluded a little bit
08:24
about what is Alternative
08:28
Ownership Advisor is doing. But
08:28
in addition to creating the type
08:33
of ownership that is more
08:33
permanent, what other problem
08:38
your organization is solving?
08:40  Sarah Joannides
We know and we
08:40
meet all the time mission-driven
08:44
business owners who are coming
08:44
towards the end of their career
08:47
and realize they don't know what
08:47
to do with their company. We
08:50
call it the founders dilemma.
08:50
They want liquidity and they
08:53
deserve liquidity, but they
08:53
worry about what will happen if
08:56
they just sell to the next
08:56
biggest guy. Will their vision
08:59
be watered down? Will their
08:59
staff be taken care of, you
09:02
know, will positions be
09:02
consolidated and staff laid off
09:05
and headquarters moved out of
09:05
town? They have this dream that
09:08
their business could last for
09:08
generations. And they want
09:11
liquidity and legacy both, they
09:11
don't want to compromise.
09:16  Christina Sjahli
How can
09:16
steward ownership solve this
09:20
problem?
09:21  Sarah Joannides
Steward
09:21
ownership is a method to align
09:23
ownership, governance and
09:23
financing to lock down purpose
09:26
and independence. And this is a
09:26
broad umbrella that has two key
09:30
principles. The first is that
09:30
the profits of the company
09:34
should primarily be reinvested
09:34
in the business and shared with
09:38
stakeholders not just extracted
09:38
by shareholders. We call this
09:42
principle profits serving
09:42
purpose.
09:45
The second idea is the idea of
09:45
self governance and
09:48
independence. So in stewarding
09:48
ownership, no one has the rights
09:53
to sell the underlying company.
09:53
The voting rights are held by
09:57
stewards who are actively
09:57
involved in or close to the
10:00
business. So unlike conventional
10:00
ownership, in steward ownership
10:05
models, voting rights and
10:05
economic rights are
10:07
disconnected. This means that
10:07
the profit maximizing incentive
10:11
is switched off. A company can
10:11
focus on running a healthy
10:15
business where profit serve
10:15
purpose and benefit
10:18
stakeholders, not just
10:18
shareholders.
10:21
Steward ownership can take many
10:21
forms. But they all share these
10:25
two key principles. It's really
10:25
about ownership not equaling
10:30
control. So voting rights aren't
10:30
allocated based on who controls
10:34
the company. They're based on
10:34
who is best to steward the
10:37
company. And so management is to
10:37
function as the leaders and the
10:43
drivers of where the business
10:43
goes without just having
10:47
entities that are only
10:47
profit-driven directing their
10:51
actions.
10:53  Christina Sjahli
When a founder
10:53
decide to move away from
10:57
traditional ownership to the
10:57
steward ownership, where do they
11:02
sit in this whole picture? Do
11:02
they have to let go a portion of
11:07
their ownership? Or can they
11:07
still be part of the company?
11:11  Sarah Joannides
That's a great
11:11
question. So it depends. And
11:15
you're going to hear me say it
11:15
depends a lot today, because
11:18
that's one of the things about
11:18
steward ownership is it can be
11:20
designed how you like. So it
11:20
depends on where the founder is
11:24
in the process. So let's say you
11:24
have a founder that's exiting
11:27
because they want to retire and
11:27
they really want to walk away
11:30
all together, but they want to
11:30
leave it in good hands. They
11:33
might help to select the
11:33
stewards that are going to move
11:36
the organization forward and
11:36
ensure that their leadership
11:39
team is ready to take it on and
11:39
then they're bought out of their
11:43
ownership and they walk away.
11:45
But you also might have a
11:45
founder that they might be ready
11:47
to retire and they don't want to
11:47
do the day to day but they don't
11:51
mind the idea of still being
11:51
involved in some way as sort of
11:54
a benevolent overseer. So they
11:54
might become one of the
11:57
stewards, they might actually
11:57
decide to be the only steward,
12:00
they can decide how they want to
12:00
form that. But they may still
12:03
want a hand in ensuring that the
12:03
vision of the company moves
12:06
forward so oversight at the
12:06
purpose.
12:09
But that doesn't necessarily
12:09
mean that they're going to get
12:12
the profits as an owner because
12:12
they're disconnecting those two
12:15
things. So it really depends.
12:15
Some owners decide to stay, hold
12:20
some ownership, or to just have
12:20
a stewardship role. And then
12:23
also, it's important to
12:23
understand that these aren't
12:26
only solutions for founders that
12:26
are retiring.
12:28
So sometimes you have companies
12:28
that are midstream in their
12:32
process. Organically Grown
12:32
Company is a good example of a
12:35
company that it wasn't a
12:35
retirement of a single founder,
12:39
it was a restructure of the
12:39
organization. So sometimes the
12:42
founder is still actively
12:42
involved in the business going
12:46
forward, their role just changes
12:46
slightly, and how they think
12:49
about their role might change
12:49
slightly.
12:51  Christina Sjahli
So those are
12:51
the three situation where
12:54
founders can think about this
12:54
steward ownership.
12:58  Sarah Joannides
There's a
12:58
couple triggers. The most common
13:00
for us in terms of our clients
13:00
has to do with founders nearing
13:03
retirement. Finding themselves
13:03
in that space between thinking
13:07
about liquidity and legacy. But
13:07
we also speak to a lot of
13:10
younger entrepreneurs, actually,
13:10
that are thinking about taking
13:13
capital for the first time.
13:13
That's a really important
13:16
juncture.
13:17
So you can imagine that as an
13:17
entrepreneur, you've started
13:21
this business, you have your
13:21
hands firmly on the steering
13:24
wheel, you are in control. But
13:24
as an investor comes in, there's
13:28
a fear often that even a
13:28
well-intentioned, well-aligned
13:31
investor might pull them off
13:31
course, because they might be
13:34
driven by maximizing profits. So
13:34
that juncture of taking capital
13:39
can be a really important place
13:39
for people to think about
13:42
ownership.
13:43
Then I'd say sort of the third
13:43
place is more of the Organically
13:46
Grown Company example where they
13:46
are a company that had been
13:49
around for 40 years, had done
13:49
very well over time, had had
13:53
multiple ownership structures
13:53
but realize that where they were
13:56
at their point in time, the
13:56
ownership structure actually
13:59
wasn't serving them. They were
13:59
in an employee stock ownership
14:02
plan that was causing the
14:02
organization to funnel basically
14:07
the majority of its profits into
14:07
buying back the stock of
14:09
retiring staff as they leave,
14:09
which is how an employee stock
14:13
option plan works.
14:14
They felt really constrained by
14:14
that. And they were really
14:17
concerned that over time, that
14:17
their obligations would outstrip
14:21
their availability of capital.
14:21
And so they were looking for an
14:24
option that was going to help
14:24
them change that dynamic, while
14:28
still enabling them to involve
14:28
all of the stakeholders in their
14:31
organization. They were a very
14:31
multi and are all very multi
14:34
stakeholder organization. They
14:34
wanted to retain that
14:38
opportunity to have governance,
14:38
participation by a broad group
14:41
of stakeholders, and they wanted
14:41
to change the incentives for
14:45
their current employees.
14:46
They didn't want to have them in
14:46
a retirement plan, which is when
14:50
an employee stock option plan
14:50
is. They wanted to find a way to
14:53
share the benefits in real time,
14:53
share the profits in real time.
14:57
Finally, they just really wanted
14:57
to be sure that the company
15:01
would never be sold. And with an
15:01
employee stock ownership plan,
15:04
the trustees of the plan, have a
15:04
fiduciary duty to maximize the
15:10
return to their beneficiaries,
15:10
which are the employees.
15:13
So if an offer comes in, that is
15:13
good from a financial standpoint
15:18
for the employees, the trustees
15:18
job is to say, "Yes, we will
15:21
sell the company." That made
15:21
them very nervous, they thought
15:23
that independence was really
15:23
part of their competitive
15:25
advantage. And that's how they
15:25
made it to trust ownership.
15:28
That's how they landed there,
15:28
because it solves all their
15:30
problems in one fell swoop.
15:32  Christina Sjahli
So to make
15:32
steward ownership work, what
15:36
does a company needs to think
15:36
about?
15:40  Sarah Joannides
If a founder is
15:40
starting to think about it,
15:42
like, "Hmm, I think I might want
15:42
to go through this process," I'm
15:46
assuming this founder has
15:46
already decided it's what they
15:48
want to do, they're gonna need a
15:48
transition team, for sure. So
15:52
they're going to need their
15:52
trusted advisors all on board.
15:55
Almost every business owner has
15:55
a legal person, an attorney that
15:59
they've worked with probably for
15:59
years that they trust, a CPA
16:02
that they trust, maybe a
16:02
financial advisor that they
16:04
trust.
16:05
People that they go to that
16:05
understand what the business
16:07
owners personal needs are, as
16:07
well as their business needs.
16:10
You have to kind of start an
16:10
early on ramp into those
16:12
conversations to help them
16:12
understand what you're trying to
16:15
achieve, and why you're trying
16:15
to achieve this type of
16:18
transition, to get them ready to
16:18
help you. You need to find your
16:21
community of other steward
16:21
ownership, either companies or
16:25
organizations that are helping
16:25
move this kind of work forward
16:28
so that they can help you on
16:28
that process.
16:30
You mentioned staff and you're
16:30
absolutely right. There's kind
16:32
of two levels to that. So if
16:32
you're a larger organization,
16:36
you're probably going to want to
16:36
start with your leadership team.
16:39
In fact, I wouldn't even say
16:39
probably. You absolutely need to
16:42
make sure you get these folks on
16:42
board before you make a final
16:45
decision. We really believe in a
16:45
facilitated process where
16:49
stakeholders come together to
16:49
co-create that future state.
16:52
So it's really important that
16:52
you get them on board, because
16:55
they will have a different type
16:55
of purview going forward,
17:00
potentially. They might not have
17:00
the same structure they've had
17:03
in the past. So you have to make
17:03
sure they're on board with you.
17:07
Having everybody from top to
17:07
bottom feel great about the
17:10
transition is really important.
17:12
So I'd give you an example.
17:12
We're working with another
17:14
grocery retailer, a small
17:14
business owner here in Oregon,
17:17
who has just one grocery store,
17:17
transition to trust ownership.
17:22
Before he finalized for himself,
17:22
even though he's really the only
17:27
person who needs to make a
17:27
decision about this, he would
17:30
not say for sure he was moving
17:30
forward until he had shared it
17:34
with all of his staff, he has
17:34
110 staff members, gotten their
17:37
feedback, and tried to
17:37
incorporate their feedback into
17:41
as much of the trust design as
17:41
possible. They're using a trust
17:44
for their form.
17:46
That is really making all the
17:46
difference, because instead of
17:48
the staff being like maybe it's
17:48
a takeaway, they could have had
17:52
an employee stock ownership
17:52
plan, they could have had a
17:54
cooperative maybe where they'd
17:54
have more of a voice potentially
17:58
in there. You could think that,
17:58
right? They instead see this as
18:02
something that they're part of,
18:02
and that they're very excited
18:04
about.
18:04
So that's important for the
18:04
process to go smoothly during
18:09
the transition as well as after
18:09
the transition. And it's also
18:12
important for your company's
18:12
stability, and resiliency over
18:15
time, because this can be part
18:15
of your competitive advantage.
18:19
It can be what makes you
18:19
stronger and different than your
18:22
competitors. So you want to
18:22
really build that strength in
18:24
early on.
18:25  Christina Sjahli
What about
18:25
investors? Do you need
18:28
investors?
18:29  Sarah Joannides
It depends. So
18:29
it depends on what the structure
18:33
of the ownership is, and whether
18:33
or not the founder, how the
18:36
founder is going to handle the
18:36
transition. So in the majority
18:39
of cases, the founder is getting
18:39
bought out in some manner. It
18:44
could be self-financing, though.
18:44
So in the conversation or in the
18:47
example I just used around this
18:47
grocery retailer, he's doing a
18:50
note, he's doing part of the
18:50
buyout in a note that I know
18:54
that he's structured over I
18:54
think, five years with a very
18:57
reasonable interest rate. Then
18:57
he's doing part of it as
19:01
preferred non-voting equity.
19:03
We will transition his common
19:03
stock, a portion of his common
19:06
stock, into non-voting equity.
19:06
So he'll have a dividend stream
19:09
that will come over time. And he
19:09
will have a note that will get
19:12
paid off over a number of years.
19:12
He can afford to do that he's in
19:15
a position to be able to do
19:15
that. Other companies, or other
19:19
founders, I should say, don't
19:19
have the luxury necessarily to
19:22
buy themselves out, so to speak.
19:22
So they need other investors to
19:25
come in.
19:26
Organically Grown Company is a
19:26
great example of that. They
19:29
needed to raise quite a bit of
19:29
money actually to buy out their
19:32
employee stock ownership plan,
19:32
as well as their long-term other
19:37
owners who had been farmers and
19:37
staff members and a number of
19:40
different people. So they had
19:40
quite a heavy lift to do. They
19:43
spent about a year, a little
19:43
over a year, raising money. They
19:47
raised a significant amount of
19:47
money. And again, they did this
19:50
with non-voting preferred
19:50
equity.
19:52
Part of the reason, I'd say
19:52
there's kind of two types of
19:55
investors that were interested
19:55
in this. One type of investor
19:59
was interested in this because
19:59
of their investment philosophy
20:02
around organic and sustainable
20:02
agriculture, and really wanting
20:05
to ensure that Organically Grown
20:05
Company made it another 40
20:08
years, and that was their, what
20:08
they got excited about.
20:14
Then there was another subset of
20:14
investors that just thought this
20:17
whole trust ownership thing was
20:17
really cool and they're very
20:20
excited about this idea of
20:20
alternative ownership as a way
20:24
of sort of shifting the economy.
20:24
Making capitalism less focused
20:28
on profit extraction and more on
20:28
the benefit of rising up and
20:33
elevating the benefit of all
20:33
stakeholders.
20:36
So there were different
20:36
investors that came in, but all
20:40
had to have a particular
20:40
perspective around their
20:43
expectations. So knowing that
20:43
they weren't going to benefit
20:46
from the underlying assets
20:46
appreciation. The way the
20:50
non-voting equity is structured,
20:50
you come in with $100,000
20:54
investment, you get a dividend
20:54
as long as you're invested. When
20:58
you go out, you go back out with
20:58
your 100,000, there's no
21:01
underlying asset about
21:01
appreciation. So it needed to be
21:05
a kind of investor that was
21:05
happy enough to take a very
21:09
solid, predictable return and
21:09
that wasn't as driven by having
21:16
a big upside.
21:18  Christina Sjahli
So what you
21:18
are saying, to become an
21:21
investor's in this type of
21:21
steward-owned companies, the
21:25
mindset needs to change. These
21:25
are the type of investor that is
21:31
really focusing on the goal, on
21:31
the vision of the company. It's
21:36
not profitability the goal. It's
21:36
the greater good for the people
21:40
and the planet. Seems like it.
21:40
Is that fair to say?
21:44  Sarah Joannides
Yeah, no, I
21:44
think that's absolutely true. We
21:46
hear all the time, you hear the
21:46
term impact investor. That's
21:49
what you think of right,
21:49
somebody who's concerned with
21:51
impact. There's a spectrum of
21:51
impact investors. So there are
21:55
impact investors who are very
21:55
much driven by impact as in the
22:00
specific measurable impacts that
22:00
they can see from their dollars
22:04
that are doing some good in some
22:04
area that's very important to
22:06
them.
22:07
Then there's other impact
22:07
investors that are impacting in
22:09
areas that people are very
22:09
emotionally, not emotional
22:12
necessarily, but very
22:12
passionately attached to, but
22:15
they still have expectations of
22:15
profit and return levels that
22:20
are beyond what you would deem
22:20
as necessarily healthy for the
22:24
organizations that they invest
22:24
in. So we are looking for a very
22:28
specific subset of those.
22:30
I just would also add that what
22:30
I'm describing in terms of the
22:34
non voting preferred equity is
22:34
just one way that you can
22:36
structure it. There was one
22:36
interesting example we looked at
22:39
recently that was a profit flip
22:39
where the investors get I think
22:43
it was 2x their investment.
22:43
Until they get 2x of their
22:47
investment, I should say, they
22:47
get 90% of the distributable
22:50
profits and 10% goes to the
22:50
employees. Then after they get
22:54
2x their investment, it flips,
22:54
and then only 10% goes to
22:58
investors and 90% goes to
22:58
employees.
23:00
So there's all different ways
23:00
you can think about it. But it
23:03
all has to be predicated on this
23:03
idea that it's not about a
23:07
terminal exit. It's not about
23:07
the underlying value of a
23:10
company having to be sold at
23:10
some point to someone else for
23:13
the investors to get their
23:13
return.
23:15  Christina Sjahli
Because I know
23:15
there are about four models of
23:18
steward ownership. Can we talk
23:18
about it in more detail
23:21
specifically?
23:22  Sarah Joannides
You're right,
23:22
you've been doing your homework,
23:24
I know you have. We talk about
23:24
it in terms of four major forms.
23:28
I think this is continuing to
23:28
evolve and there are hybrids and
23:31
or other forms that will evolve.
23:31
But the four major, the first is
23:36
this umbrella of perpetual
23:36
purpose trusts. That's kind of
23:39
the full name of the trust
23:39
ownership that was adopted by
23:42
Organically Grown Company.
23:44
One of the things that we love
23:44
about perpetual purpose trust is
23:48
how flexible they can be
23:48
structured, both from how they
23:51
benefit stakeholders, how
23:51
stakeholders are involved in
23:53
governance. There's just a lot
23:53
you can do to really make sure
23:56
it aligns with your company
23:56
ethos. Within purpose trust,
24:00
there's also this subset called
24:00
employee ownership trusts, which
24:04
are kind of just what they
24:04
sound. So the purpose of an
24:07
employee ownership trust is to
24:07
benefit the current employees.
24:10
They are an interesting
24:10
alternative to employee stock
24:13
ownership plans, which as I
24:13
said, that's the dominant form
24:16
of employee ownership in the US.
24:16
A lot of the requests we get
24:20
from folks right now are from
24:20
folks who have heard about trust
24:23
ownership as an alternative way
24:23
of doing employee ownership. So
24:26
that's a big piece of the
24:26
movement right now.
24:29
So you have trust structures,
24:29
and then a company could also be
24:32
steward-owned if it was nested
24:32
under a foundation or nonprofit.
24:36
So similar to trust. In both of
24:36
those two examples, you have an
24:40
entity that holds the common
24:40
stock, and so there aren't
24:43
individuals holding the common
24:43
stock. Now, again, I'm talking
24:46
about 100% ownership solutions,
24:46
you can have hybrid partial as
24:50
well.
24:51
So in contrast to that, there's
24:51
two other models where you do
24:55
have individuals holding stock.
24:55
One of those is a cooperative.
25:00
So cooperatives, as I'm sure you
25:00
know, are formed to serve the
25:03
needs of a particular group,
25:03
like producers or wholesalers or
25:06
employees. They generally
25:06
operate on this idea of one
25:10
member, one vote under the seven
25:10
rules of cooperative membership.
25:14
This is a long standing
25:14
ownership form in the US and
25:18
elsewhere.
25:19
More recently, there's been this
25:19
movement around something called
25:22
a limited cooperative
25:22
association or an LCA. It speaks
25:27
a little bit more to alignment
25:27
with steward ownership in that
25:29
they talk about the fact that
25:29
it's not intended to be sold. So
25:32
one of the drawbacks of
25:32
cooperatives from a steward
25:35
ownership perspective is that
25:35
the members can vote to
25:39
demutualize, so to break up the
25:39
coop, so it can be sold. That is
25:44
important to some cooperative
25:44
groups who want to be able to
25:48
build the wealth for their
25:48
members. That's perfectly
25:51
wonderful.
25:51
But from a steward ownership
25:51
perspective, the goal is to set
25:55
the foundation for independence
25:55
in the future, so not to buy and
25:59
sell. So either the LCA model
25:59
where it speaks specifically to
26:03
not being demutualized and sold
26:03
kind of fits well under the
26:06
steward ownership umbrella, or
26:06
you can have just a traditional
26:11
cooperative model, where you
26:11
instill some method to ensure
26:15
that it won't be sold. That
26:15
could look like a poison pill.
26:19
So an example I would give you
26:19
is, some companies set something
26:23
in their bylaws that says, if
26:23
the decision is made to
26:26
demutualize and sell other
26:26
organization, no single
26:29
individual can benefit
26:29
financially from that. So any
26:33
profits above and beyond what
26:33
they need to take care of their
26:36
debts, etc, their obligations,
26:36
would be distributed, perhaps to
26:40
charity. So something that
26:40
disengages that individual
26:44
profit method to vote for
26:44
selling and demutualizing. So
26:48
that's cooperatives.
26:50
The last one is called a golden
26:50
share model. So essentially,
26:54
with golden share, you just
26:54
establish different classes of
26:58
stock, different share classes,
26:58
and you use those to separate
27:02
out the voting and economic
27:02
rights. So say, for example, you
27:05
could have voting shares that
27:05
are assigned to stewards and the
27:09
stewards are merit-based. So it
27:09
might be the CEO, and maybe the
27:13
CFO, and some subset of people
27:13
within the organization, and the
27:17
shares, they can't be sold.
27:19
So even though you have the
27:19
voting shares, you hold it, you
27:22
can't sell them. They aren't
27:22
inherited, so you don't pass
27:25
them on through blood, as you
27:25
would say. Instead, they are
27:29
passed along through merit. So
27:29
say, for instance, if somebody
27:32
is holding the voting share of a
27:32
golden share model company, when
27:36
they leave, there's a decision
27:36
made by the other stewards of
27:39
who is going to hold that share.
27:39
So it's kind of a ceremonial
27:43
thing in a sense, where you're
27:43
holding the share.
27:45
At the same time, you establish
27:45
classes of economic shares that
27:48
entitle the holders to some
27:48
share of the future company
27:51
profits. So you could imagine
27:51
that maybe there'd be a
27:55
circumstance where you have a
27:55
founder who decides to instill
27:58
this golden share model, and
27:58
they actually give themselves
28:02
founder shares that enable them
28:02
to have some sort of dividend in
28:05
the future. So they get that
28:05
economic right. And the founder
28:08
might actually also decide that
28:08
they want some number of voting
28:10
shares as well.
28:12
It's a little harder to get your
28:12
head around about how you
28:14
actually structure it in a way
28:14
that disengages voting and
28:18
economic rights, because it's a
28:18
little less clear how that is.
28:22
But it's, where it seems to be
28:22
working well, is with folks that
28:26
are starting businesses.
28:26
Especially say for instance,
28:30
they are in a situation where
28:30
they are taking on capital, and
28:35  they say
"Okay, at this juncture, before
28:35
we take on capital, we're going
28:37
to restructure our share
28:37
classes, we're going to appoint
28:40
a few stewards that are going to
28:40
hold on to the voting rights,
28:44
and then as founder, I'm going
28:44
to get some economic rights. I'm
28:47
going to also have a different
28:47
share of class that my investors
28:50
are going to come in on, that
28:50
gives them economic rights, but
28:52
they're not going to get voting
28:52
rights."
28:54
Then the final thing that you
28:54
have to have to make this work
28:57
is something called a golden
28:57
share, or a veto share, which is
29:02
essentially held by maybe a
29:02
nonprofit or some other person
29:06
outside of the company,
29:06
generally nonprofit is who you
29:08
would use, that is there to veto
29:08
any attempt to change the
29:13
purpose or to sell the company.
29:13
So that's the mechanism you use
29:18
to ensure that that company
29:18
won't be sold in the future and
29:21
that purpose will be maintained
29:21
in the future.
29:24
So as I said, you've got kind of
29:24
two buckets. You have the trust
29:27
and the foundations, which are
29:27
where individuals don't hold
29:30
common stock or don't hold
29:30
shares. Then you have golden
29:33
shares and cooperatives where
29:33
individuals to hold on to voting
29:37
rights.
29:38  Christina Sjahli
What do
29:38
businesses need to consider in
29:42
choosing the right form of
29:42
steward ownership?
29:46  Sarah Joannides
Good question.
29:46
This is our ethos is that your
29:49
ownership form and how you take
29:49
in financing and how you
29:51
structure governance should all
29:51
align really well with these
29:55
coreelements, the head and the
29:55
heart, they call it right? So
29:58
the head is all about your
29:58
strategy, your business
30:02
strategy, your financial model,
30:02
your competitive advantage, the
30:06
things that make your operations
30:06
sustainable and resilient in the
30:11
future. What do you need for
30:11
that. Then the heart being your
30:14
mission, your mission and your
30:14
values, your operating culture,
30:17
how you want to lead. All of
30:17
those things we think need to be
30:21
considered, as you're thinking
30:21
about ownership structure.
30:24
So the process that we use
30:24
basically is going through an
30:28
evaluation and a study of that
30:28
with founders to really dig into
30:33
what drives them. What is their
30:33
purpose? What do they want to
30:36
protect into the future? What is
30:36
the service or the product that
30:39
they're doing that is making the
30:39
world a better place? And how do
30:42
they want to lock that down as
30:42
they move forward? How do they
30:46
want to engage their staff? Who
30:46
do they want at the table? Who
30:49
do they want to have
30:49
decision-making ability? Who do
30:52
they want to share the profits?
30:52
All of those kinds of questions,
30:54
we try to tease out with owners
30:54
because you do have options, and
30:58
not every structure is relevant
30:58
for every business owner.
31:03  Christina Sjahli
Is it possible
31:03
for a business that is in their
31:09
early journey, let's say like
31:09
five years, but they already
31:13
started thinking about this, is
31:13
it possible to take the trust
31:18
model or the coop model?
31:20  Sarah Joannides
I suppose you
31:20
could. One of the things that I
31:23
would want to share with your
31:23
listeners, and that I share with
31:26
a lot of folks is that as much
31:26
as I adamantly am excited and
31:30
believe in steward ownership, I
31:30
do caution people when they're
31:33
early in their lifecycle at
31:33
their company, in making a
31:36
decision that is as permanent as
31:36
steward ownership is. So you
31:41
could be very excited about this
31:41
premise and it could make
31:46
perfect sense to your business
31:46
at this point in time.
31:49
But until you have a track
31:49
record of profitability until
31:52
you have an understanding of
31:52
what the future looks like, it
31:55
can be very difficult to make a
31:55
decision like this. That, in
31:58
essence means that as a founder,
31:58
you will not be able to sell
32:03
your company later for what
32:03
could be a very large payday. So
32:08
not that you can't get that
32:08
liquidity as a founder when you
32:11
transition to steward ownership.
32:11
But there is a there's a
32:14
difference there, right?
32:16
I recently did a talk with some
32:16
folks at a business accelerator
32:19
at Portland State University and
32:19
I was talking to them about this
32:22
exact thing. You really need to
32:22
pause and think about what
32:26
you're going to want in the
32:26
future. And do you know what you
32:28
want right now? Do you know
32:28
what's going to be right for you
32:30
as a founder 30 years from now,
32:30
or might that change over time?
32:35
I certainly feel like my own
32:35
experience in the corporate
32:39
world and in business ownership
32:39
has changed over time. So I
32:42
caution people to really think
32:42
long and hard about that, and
32:46
make sure they're not moving too
32:46
quickly into something that they
32:49
can't easily reverse.
32:50  Christina Sjahli
So is there a
32:50
right moment to make this
32:55
decision? I know it's probably
32:55
it depends. But I'm curious.
33:00
When is the right moment? Is it
33:00
a decade? Is it two decades?
33:04  Sarah Joannides
Yeah, it
33:04
definitely depends, right? I
33:07
mean, it definitely depends,
33:07
it's so hard to say. Really,
33:11
it's so much about the founders
33:11
and owners, whoever that current
33:15
business owner is now just
33:15
thinking through what they want
33:19
in the future and whether or not
33:19
they feel ready for it. Because
33:21
in the end, it's the decision of
33:21
individuals. Oftentimes, in the
33:25
situations we see, it's a
33:25
smaller group of individuals,
33:28
they're just making a very
33:28
values-based judgment about what
33:32
what they think the future looks
33:32
like.
33:33
What we try to help them think
33:33
through is objectively, how does
33:37
this fit with your business
33:37
model? How does this fit with
33:39
you in terms of how you lead and
33:39
how you want to be involved in
33:43
the future, and how much you
33:43
want to share that governance
33:48
with others, and how you feel
33:48
about sharing potentially more
33:52
broadly, in terms of the profits
33:52
versus you being the sole
33:56
controller of that.
33:57
There's so many things that
33:57
change so we just try to really
34:00
tease things out. I think for
34:00
us, what we found is it often is
34:04
a conversation that can last
34:04
couple of years before somebody
34:08
is actually ready to pull the
34:08
trigger. I think part of our job
34:11
is we're coaching and supporting
34:11
folks that are going through
34:14
that process. Then we're also
34:14
helping to coach and and help
34:19
support them through this
34:19
process of thinking about what
34:23
some would say is uncharted
34:23
territory. These are new
34:27
ownership models.
34:28  Christina Sjahli
Let's say that
34:28
you have outside investor, they
34:31
put their investment. Let's say
34:31
that the founder has a change of
34:35
heart and basically saying, I
34:35
want my purpose, my heart to be
34:40
the driving force for the
34:40
future. I'm not looking for this
34:45
hypergrowth anymore. Does that
34:45
mean that the business or the
34:50
company needs to start thinking
34:50
how they can buy back the
34:54
ownership from the investor or
34:54
is that even possible?
34:59  Sarah Joannides
It's a good
34:59
question. I would say we
35:01
actually have, we have been
35:01
through a situation like this.
35:04
It wasn't venture capital, it
35:04
was private equity but same sort
35:07
of situation. Where we had our
35:07
client who had been originally
35:11
an owner, and then over time
35:11
that private equity had taken a
35:15
majority position. In essence,
35:15
what he was trying to do is a
35:20
leveraged buyout. Try to figure
35:20
out a way to actually buy out
35:23
the the majority owners because
35:23
the he was nervous about what
35:27
was going to happen when the
35:27
company was sold because the
35:29
private equity timeline had run
35:29
its path, right and, and they
35:33
were getting ready to sell the
35:33
company.
35:35
He worked with us, asked us to
35:35
help him try to see if there was
35:39
a way for us to line up
35:39
investors and to create a
35:43
steward ownership structure that
35:43
would enable him to buy back the
35:45
company and put it into a trust.
35:45
And it was an incredibly
35:48
exciting and interesting journey
35:48
that we went on. But I would
35:51
have to say it didn't have a
35:51
happy ending in that it was very
35:55
difficult for the private equity
35:55
group to equate a Stuart
36:00
ownership offer. With the other
36:00
offers, they were getting,
36:04
More specifically, they were
36:04
getting offers from other
36:08
traditional buyers, traditional
36:08
sort of mergers and acquisition
36:11
type of activity, versus what we
36:11
were trying to do, which was
36:15
trying to bring together a group
36:15
of investors to create enough
36:19
capital to buy out their
36:19
ownership. The private equity
36:23
firm said, "Well, you know,
36:23
absolutely, we're gonna go over
36:26
here with these guys, because we
36:26
know these guys, and we've done
36:29
business with them before and
36:29
we've sold companies to them
36:31
before."
36:31
They didn't necessarily put
36:31
value on the things that we were
36:35
trying to position as
36:35
differentiators, which was that
36:38
idea of trust, ownership and
36:38
longevity and independence and
36:42
sharing with stakeholders, that
36:42
wasn't important to them. I hope
36:46
over time that we will see
36:46
examples play out where other PE
36:48  Christina Sjahli
You were
36:48
talking about control and then
36:51
or VC firms will look at that
36:51
and say, "Oh, well, we've see
36:54
this happen before, and we se
36:54
how that can work
36:59
advising the early startup or
36:59
people that are interested and
37:04
still early in their journey to
37:04
think about are they ready to
37:07
give up their ownership. As you
37:07
were talking about that, the
37:11
thought process that I have in
37:11
the back of my mind, is that
37:14
"Okay, well, if you have venture
37:14
capitalists or private equity,
37:17
and then you're already giving
37:17
up like 50% of your ownership,
37:20
what difference does it make?
37:20
You're still giving up your
37:24
ownership to a group of people.
37:24
Why not giving it up to a
37:30
steward ownership?" Does that
37:30
make sense what I'm trying to
37:34
say? Like you're giving up
37:34
ownership anyway.
37:36  Sarah Joannides
Let me restat
37:36
your question. So are you sayin
37:37  Christina Sjahli
Yes.
37:39
"Is it really different to gi
37:39
e up control to private equit
37:43
51% versus giving it up f
37:43
om a steward ownership perspec
37:46  Sarah Joannides
Okay, so the
37:46
difference is that with steward
37:46
ive?"
37:48
ownership, you design, you as
37:48
the founder giving away that
37:52
ownership control, you design
37:52
what the governance structure
37:56
will look like, and what the
37:56
purpose is that's being held.
37:59
Let me use the example of this
37:59
grocer that we're working with
38:02
right now. He might have said,
38:02
"Well, doesn't really make a
38:05
difference whether or not I sell
38:05
to the trust, or I sell to
38:08
somebody else, because either
38:08
way, I'm not going to have
38:10
control."
38:10
But actually, in the situation
38:10
he created, he created a
38:15
Stewardship Council that will
38:15
oversee the trust that he is a
38:18
member of. So he has decided to
38:18
maintain some form of control.
38:23
The trust agreement states
38:23
specifically that the business
38:26
can't be sold. So he knows that
38:26
if it was owned by a private
38:30
equity company, it would most
38:30
certainly be sold in the future.
38:34
That's the next step in the
38:34
private equity cycle. So he can
38:37
control that outcome.
38:39
The trust also codifies what the
38:39
purpose is. So there's a
38:42
statement of what the trust is
38:42
intended to do. So the trust
38:47
goal is to shepherd the assets
38:47
of the company to make sure that
38:51
they're being used for the
38:51
purpose. So the purpose
38:53
statement is codified in the
38:53
trust agreement. Then you
38:55
generally have some list of
38:55
objectives and or metrics that
38:59
are measured to be sure that
38:59
you're moving in that direction.
39:01
So the founder has said, "This
39:01
is what good looks like, this is
39:05
what the future should look
39:05
like."
39:07
They design all of that. "I'm
39:07
gonna put all the pieces in
39:11
place to lock it down, and let
39:11
it fly out into the future, like
39:14
a little spaceship." You can't
39:14
do that with private equity. You
39:17
can have agreements and
39:17
discussions and conversations
39:20
about what good looks like but
39:20
in the end, you are not in
39:23
control. So the private equity
39:23
group can make whatever
39:26
decisions makes sense to them.
39:26
It's not that the private equity
39:29
folks are bad people by any
39:29
stretch of the imagination, but
39:32
they are beholden to their...
39:34  Christina Sjahli
Their
39:34
investors.
39:36  Sarah Joannides
Yeah, their
39:36
investors. Their limited
39:37
partners have an expectation of
39:37
a certain return. They don't
39:40
just sit back and say, "Well,
39:40
it's okay. We actually think
39:43
what they're doing is really
39:43
cool. We'll take the low
39:44
return." That's not the private
39:44
equity model, or the venture
39:48
capital model. That's just the
39:48
system and how it works. It's
39:52
not really about the people
39:52
behind it. It's not good or bad.
39:55
That's really where the
39:55
difference is.
39:57
There are many, I'd say the
39:57
majority of owners, when they're
40:01
ready to sell their business,
40:01
they're just ready to be done.
40:03
What happens in the future isn't
40:03
as important to them. Because
40:07
they've run their course and
40:07
they're happy with what they've
40:10
done. That's their legacy to
40:10
them is what happened in the
40:13
past. These founders, the
40:13
difference is they're very
40:16
concerned about the future, and
40:16
they want to control in some way
40:20
that future.
40:21  Christina Sjahli
As I'm
40:21
listening about the steward
40:23
ownership, it seems that as a
40:23
founder, the return of your
40:28
investment, your sweat equity,
40:28
may not be as big as if you
40:32
choose the traditional way.
40:34  Sarah Joannides
I would say
40:34
that that's not necessarily the
40:37
case. I mean, it could be that
40:37
there's trade offs in terms of
40:41
what you're giving away in order
40:41
to transition into trust
40:44
ownership. But it doesn't
40:44
necessarily mean that you're
40:47
going to get less. It's all
40:47
about the value of your company,
40:52
right? How strong is your
40:52
company? What is the
40:55
profitability of your company?
40:55
What will people be willing to
40:58
invest in, right?
41:00
So if you're bringing in
41:00
investors, they're going to pay
41:02
what they think is reasonable
41:02
based on the turnover, the
41:05
profit, the all of the metrics
41:05
of a company. It's possible that
41:10
you may get an equal part. What
41:10
you won't get is that blue sky
41:15
that investors will sometimes
41:15
give. Well they a look at a
41:18
ompany and they'll say, "Wow,
41:18
we know the levers we can pull
41:22
to increase profitabi
41:22
ity. We can consolidate operat
41:25
ons, we can reduce staff,
41:25
e can lower prices that w
41:28
pay to our vendors." Whatever
41:28
those levers are, and they
41:31
see that and they're paying
41:31
nowing that they're going
41:33
to get that upside.
41:34
What a lot of these vendors
41:34
would hope for is that those
41:36
things wouldn't necessarily
41:36
change into the future. So there
41:39
can be trade offs. But there's
41:39
also trade offs in that ability
41:43
to get that legacy that these
41:43
folks want. That ability to look
41:47
in the mirror at the end of the
41:47
day, when it's all said and done
41:50
and say "I did right by the
41:50
future of this company. And I
41:54
did right by the people that
41:54
helped to build it, and I shared
41:56
the value with them." That's
41:56
maybe harder to put a dollar
41:59
value on.
42:00  Christina Sjahli
One of the
42:00
things that you keep bringing up
42:04
in this whole conversation is
42:04
about profitability. A lot of
42:08
startup that receive money, even
42:08
up to their exit point, let's
42:14
say IPO, that's one of the exit
42:14
strategy or M&A, doesn't mean
42:19
that they have profitability.
42:19
Let's talk about the unicorn
42:24
unicorn of the world like Uber
42:24
or WeWork that was planning to
42:29
have IPO as their exit strategy.
42:29
They were not profitable. But it
42:34
seems if you are choosing this
42:34
way, or you are thinking about
42:40
this type of models through an
42:40
ownership model, you really need
42:45
to think long term, and make
42:45
sure that there is a track
42:49
record of profitability. Is that
42:49
fair to say, Sarah?
42:53  Sarah Joannides
Absolutely.
42:53
First of all, steward ownership
42:56
businesses are not nonprofits.
42:56
They are profitable businesses,
42:59
they just have a different focus
42:59
potentially, on how they view
43:02
profits and how a profit should
43:02
be shared. But they are not
43:05
nonprofits. The second thing I
43:05
would say is that steward
43:08
ownership is not a solution for
43:08
a distressed business. It's not
43:11
a solution for a business that
43:11
is not yet profitable.
43:14
Because as I said earlier, you
43:14
have to find a way to transition
43:19
the owners out of ownership,
43:19
which means buying out the
43:23
owners. So there has to be a
43:23
price paid for that, right. If
43:26
you are not profitable, yet,
43:26
it's going to be very difficult
43:30
to find investors who are
43:30
willing to give you money if
43:34
you're not profitable. So again,
43:34
when we get to those examples
43:38
that, not specific examples, but
43:38
when I'm talking about those
43:40
kinds of entrepreneurs that are,
43:40
or maybe early stage businesses
43:44
where they are in a situation
43:44
where they really need to raise
43:47
capital, and they're coming to
43:47
us and saying,
43:49
"I really love what you're
43:49
talking about and I love your
43:51
your models, but we need capital
43:51
now and we don't necessarily
43:56
have the fundamentals of our
43:56
business in a position where we
43:59
can raise money from people that
43:59
aren't going to speculate, that
44:03
aren't going to be looking at
44:03
this as an opportunity to change
44:07
the trajectory of the business
44:07
to increase profitability in a
44:12
single-minded way."
44:13
So that can be a real challenge
44:13
for folks. Because you do have
44:19
to have a strong business model,
44:19
you have to understand what your
44:22
core value is, and how you
44:22
deliver that in the marketplace,
44:26
and why it's special to your
44:26
customers. And you have to be
44:29
able to show a track record of
44:29
profitability and being able to
44:32
pay off your obligations,
44:32
whatever they may be, in order
44:35
to convince investors to invest
44:35
in your company.
44:37
So steward ownership isn't right
44:37
for people because of maybe
44:41
their philosophy perhaps.
44:41
There's people that
44:44
philosophically are opposed to
44:44
it. There's just also those that
44:47
just aren't in the financial
44:47
position to be able to explore
44:50
this alternative because they
44:50
just don't have the foundation,
44:53
the financial foundation.
44:55  Christina Sjahli
It makes me
44:55
wonder though, if this steward
44:58
ownership can be applied to a
44:58
technology company, because
45:02
majority of technology company,
45:02
they require upfront capital.
45:07  Sarah Joannides
It's a very
45:07
challenging field or industry, I
45:10
should say, to tackle the
45:10
ownership question, I think for
45:14
sure. Maybe it's a golden share
45:14
model early on for folks, where
45:18
they have some sort of ability
45:18
to lock down the long term
45:23
independence of a company
45:23
through some sort of mechanism,
45:26
like a golden share, while still
45:26
providing the return that their
45:29
investors are looking for.
45:31
But it's a real challenge,
45:31
because as you said, so often it
45:33
takes years and years and years
45:33
to get to profitability and the
45:36
upside potential is huge. But
45:36
then there are all the people
45:40
that never make it to that,
45:40
right. There's all the ones that
45:42
never turn into that unicorn,
45:42
but instead fall to the wayside.
45:47
So how do you convince investors
45:47
to look at their investment
45:51
structure differently when
45:51
there's so many options for them
45:54
to invest elsewhere?
45:56  Christina Sjahli
Maybe there
45:56
would be like impact investor
45:58
later on that just like
45:58
specifically focus on this goal,
46:03
they are thinking in the long
46:03
term, and then they just
46:06
structuring their fund in a
46:06
different way where the focus is
46:11
not the return in the short
46:11
term, maybe they're expecting
46:13
return in 20 years, maybe
46:13
expecting return in 30 years. It
46:16
got to take a specific type of
46:16
investor, like you said, to
46:20
really change the ecosystem.
46:22  Sarah Joannides
Yeah, there are
46:22
evergreen funds out there that
46:24
have more like a 30 year
46:24
timeline than a 10 year timeline
46:27
that might be well suited for
46:27
this. There's an interesting
46:29
thing that's happening now is
46:29
there's a group of folks that
46:32
have started this movement that
46:32
they call Exit to Community.
46:37
They're definitely sort of
46:37
enmeshed in the tech field.
46:40
Their thought isn't so much
46:40
around locking down independence
46:44
and things early on, it's just
46:44
being thoughtful early on about
46:49
how you want to get to that
46:49
later.
46:51
So it doesn't necessarily
46:51
precede the idea, or I should
46:54
say, preclude the idea of
46:54
investment early on. I think
46:57
it's more about how do you think
46:57
through who creates the value in
47:01
your community, and your
47:01
community might be your users?
47:05
If you're a tech platform, for
47:05
instance? And how do you get to
47:09
the point where over time, the
47:09
user, however the users are
47:13
paying to be part of the system,
47:13
whatever fees they're paying,
47:16
are building maybe ownership
47:16
equity for those individual
47:18
users.
47:19
So that over time you sort of
47:19
flip the model where you're
47:21
buying out, whatever the
47:21
investors are, and it's the
47:24
community that owns it in the
47:24
end. It's sort of a different wa
47:27
, sort of a longer term sort
47:27
f view. There isn't any s
47:31
ecific kind of solution that s
47:31
mebody has pointed to and s
47:33
id, "This is the solution." But
47:33
it's more just a group of
47:36
entrepreneurs who are all
47:36
starting out and saying, "W
47:39
have an idea of what we think w
47:39
want the future would look li
47:42
e and we're not sure how we w
47:42
nt to get there. But we want to
47:44
ind of come together around t
47:44
is idea and see if we can help
47:47
find the solutions that will w
47:47
rk for us down the line." So I
47:51
o think tech is a unique ind
47:51
stry to consider.
47:56  Christina Sjahli
I think
47:56
there's got to be a movement out
47:59
there is about long term profit,
47:59
instead of short term gain. I
48:06
just feel like there's got to be
48:06
a mindset change over there. I'm
48:10
just running a series right now
48:10
about business for good, which
48:14
is, I was talking to female
48:14
founders in the B Corp
48:18
communities and then they all
48:18
bootstrap. I know there is a
48:23
concept about public benefit
48:23
corporation. Can you explain the
48:27
difference, the key differences
48:27
between steward ownership
48:30
company versus the public
48:30
benefit corporation?
48:34  Sarah Joannides
Absolutely. So
48:34
public benefit corporations,
48:36
it's really relatively new
48:36
incorporating structure. I think
48:39
it's now 35 states that allow
48:39
you to incorporate in that
48:42
manner. What it does is it
48:42
allows the company to include
48:45
specific public benefits in
48:45
their incorporation documents as
48:49
legally defined goals in
48:49
addition to profitability. So in
48:53
doing that, you create latitude
48:53
for your directors to pursue
48:56
social goals related to save the
48:56
environment or their workers or
49:00
their community without fear of
49:00
being sued by their
49:02
shareholders.
49:04
For this reason, many social
49:04
entrepreneurs from the very
49:08
beginning, like from the onset,
49:08
choose to incorporate as PBCs,
49:11
which is great. But sort of the
49:11
differences between PBCs and
49:16
steward ownership is that in
49:16
PBCs, the shareholders typically
49:20
retain control of both
49:20
governance and economic rights.
49:24
In addition, ownership can be
49:24
sold, and the commitment to a
49:27
PBC can be undone by a majority
49:27
vote of the shareholders.
49:30
So for example, after their IPO,
49:30
Etsy who was very famous for
49:35
becoming a B Corp, they gave up
49:35
their B Corp status under
49:39
pressure from their activist
49:39
investors. They specifically
49:43
said that being a public company
49:43
and a PBC are incompatible. In
49:49
contrast to that, steward
49:49
ownership companies, what we've
49:52
talked about, they decouple
49:52
governance and economic rights.
49:56
So the commitment to purpose and
49:56
self governance, independence,
49:59
it can't be undone by
49:59
shareholders, and the company
50:02
itself can't be sold to an
50:02
outside party.
50:04
So that's the main difference. I
50:04
will tell you that in my own
50:06
personal situation, going from
50:06
New Seasons Market, which was a
50:10
B Corp Certified company, I was
50:10
very concerned that at that
50:13
certain point, ownership would
50:13
change. And that would be walked
50:17
away from. I always had a bit of
50:17
a fear around, because that was
50:22
part of who I was. That was the
50:22
portion of the business I led
50:26
was the B Corp side of the
50:26
business, right? I felt like
50:29
maybe I didn't have a future
50:29
there. Because of that, that was
50:33
locked down.
50:34
Now, I'm happy to say that,
50:34
let's see, it's been three years
50:37
since I've gone and they're
50:37
still very committed to their B
50:39
Corp status, and hopefully,
50:39
knock on wood, that continues in
50:42
the future. They continue to be
50:42
a good actor in that way. But
50:45
there's no guarantee about that.
50:45
That's what I really loved about
50:48
the idea of steward ownership is
50:48
it takes off the table the idea
50:52
that you can just walk away.
50:53
Now people always ask us now how
50:53
can that be? How can that be
50:56
that absolutely, there's no way
50:56
the company can ever be sold?
51:01
What happens if the company goes
51:01
bankrupt? So I always want to
51:04
acknowledge that you do have to
51:04
have something stated in your
51:07
trust agreement that talks
51:07
about, if you use a trust, that
51:10
talks about what happens if the
51:10
company is insolvent.
51:13
Or if perhaps there might be a
51:13
situation where the company is
51:17
struggling and needs something
51:17
else to become stronger. Maybe a
51:22
merger would actually further
51:22
benefit purpose, more so than
51:26
them operating independently. So
51:26
you want to write in elements
51:30
into your trust agreement that
51:30
that logically help you think
51:33
through what could happen in the
51:33
future, and how to protect
51:35
against those.
51:37  Christina Sjahli
I know you are
51:37
focusing on the US businesses
51:41
right now, helping US
51:41
businesses. What I'm curious
51:45
about, can the steward ownership
51:45
model be implemented anywhere in
51:50
the world?
51:51  Sarah Joannides
Well, I mean,
51:51
honestly, steward ownership
51:53
forms have actually been around
51:53
for over a century in Europe. I
51:55
mean, that's where our influence
51:55
comes from. It's predominantly
51:58
been in the UK and Germany. In
51:58
2015, there's actually a
52:01
nonprofit called Purpose Economy
52:01
that was founded in Germany, and
52:05
they were founded to study
52:05
ownership forms that have
52:07
enabled independence and the
52:07
ability to be purpose driven.
52:10
They were the ones that coined
52:10
the term steward ownership.
52:13
It didn't start with the
52:13
philosophy of steward ownership.
52:15
It started with people saying,
52:15
"Look at these companies, and
52:18
how they've operated for 100
52:18
years with these really unique
52:20
ownership models. What's the
52:20
similarity between these models?
52:23
And how can we bring them
52:23
together in a way that people
52:26
can emulate this and we can
52:26
spread this kind of ownership?"
52:30
They realize that they were
52:30
making great headway in Germany
52:33
and UK, but they realized, okay
52:33
for them take on capitalism, we
52:37
should get to the US. So they
52:37
brought a foundation, they
52:39
started an arm of their
52:39
foundation in the US, and now
52:42
they're in Latin America as
52:42
well.
52:44  Christina Sjahli
I know, you
52:44
touch on the stuff to become a
52:46
steward ownership. Can you
52:46
summarize it in 123?
52:50  Sarah Joannides
So one, you
52:50
need your transition team. So
52:52
your lawyer, your CPA, your
52:52
advisors, you need their help,
52:55
so get them first.
52:57
Then second, is really sitting
52:57
down and doing a formal
53:00
assessment of your financial
53:00
viability. That is an incredibly
53:03
important step. So like I said,
53:03
not every company is a good fit
53:06
for steward ownership from a
53:06
financial perspective. So they
53:09
really need to have robust
53:09
projections in place to
53:13
understand what is your cash
53:13
flow? And what is your ability
53:17
to service debt and equity that
53:17
you might take on to finance the
53:20
transition. I would also
53:20
recommend they do really
53:23
extensive modeling and
53:23
contingency planning to
53:26
understand outcomes under best
53:26
and worst case scenarios, right.
53:29
So just a really solid financial
53:29
plan.
53:32
Then third, you need to design
53:32
your structure, your ownership
53:35
structure and your governance
53:35
structure. In a conventional
53:38
business transition, the focus
53:38
is on who assumes ownership.
53:41
With steward ownership, the
53:41
focus shifts to how you
53:45
structure the ownership and
53:45
governance after the transition,
53:48
right? So looking forward,
53:48
deciding which legal entity form
53:52
is right for you, how you want
53:52
to identify your purpose, or
53:55
codify your purpose, how you
53:55
want to divide up rights, who
53:58
gets voting rights, who gets
53:58
economic rights, etc.
54:02
Then the last step is to create
54:02
just like a really good roadmap
54:06
to implement your plan. I think
54:06
the roadmap is really critical
54:09
to ensure you stay on track and
54:09
navigate your transition. So
54:13
that you can have a project
54:13
management template of some kind
54:16
for your internal team and your
54:16
external advisors all to be
54:20
keying into to make sure you're
54:20
moving forward with the right
54:23
level of input and oversight.
54:25
I mean, whether you're thinking
54:25
about selling all or part of
54:27
your business or transferring it
54:27
to a family member or an
54:30
employee or transitioning to a
54:30
steward ownership, it's always
54:34
important to give yourself
54:34
plenty of runway to make really
54:37
well informed decisions. Because
54:37
I mean, after all, how and to
54:42
whom you transition your
54:42
business to is potentially the
54:45
most important decision you make
54:45
for your personal financial
54:48
situation and certainly for the
54:48
legacy you leave behind. So you
54:51
need to give it time and you
54:51
need to give it attention.
54:54  Christina Sjahli
So how long is
54:54
a reasonable runway, Sarah?
54:58  Sarah Joannides
Because there's
54:58
the time you spend visioning
55:00
about what you want, there's the
55:00
time you spend with viability
55:04
questions around if it's
55:04
financially viable, there's time
55:08
you spend with the nuts and
55:08
bolts of trying to get through
55:11
the legal process and
55:11
potentially the investment and
55:14
financing process. When we start
55:14
engagements with people, we
55:19
usually say, "You shouldn't be
55:19
surprised if this takes a couple
55:22
of years."
55:23  Christina Sjahli
Is there
55:23
anything else that you want to
55:25
share with my audience before we
55:25
wrap up?
55:28  Sarah Joannides
Yeah, I mean, I
55:28
think we've spent most of the
55:30
time talking about sort of the
55:30
benefits to the owners in terms
55:33
of sort of what they can do,
55:33
what they can gain in terms of
55:37
legacy, how they can stay
55:37
involved, how they can set the
55:40
future. I think the other thing
55:40
that I just, it's very different
55:43
about steward ownership is this
55:43
idea of rewarding value that
55:47
comes from all stakeholders. And
55:47
this idea of ownership not being
55:51
the sole reason why person has
55:51
the rights to profits. And just
55:55
this different idea.
55:56
It's been such an interesting
55:56
process for me to have these
56:00
long conversations with founders
56:00
who are getting to a point in
56:03
their career where they're
56:03
starting to really think about
56:06
the value that they're taking
56:06
out of the organization. Their
56:09
draws, whatever that might look
56:09
like, and what they're sharing
56:12
with the rest of the employees.
56:12
At what point in time, do you
56:15
say, "I've taken enough, or
56:15
maybe I need to take less."
56:19
Those are really, really hard
56:19
conversations to have. But to
56:23
me, I think it's really
56:23
interesting to open up this
56:26
dialogue around "Is the way that
56:26
we think about business
56:29
ownership is really the right
56:29
way to enable the vitality and
56:36
health of everybody in our sort
56:36
of ecosystem." And this idea of
56:41
thinking differently about how
56:41
you share those economic profits
56:45
can be really exciting to think
56:45
about.
56:47
So if you take a founder who is
56:47
leaving the company, and perhaps
56:51
he's starting an employee
56:51
ownership trust, and he's taken
56:54
X amount of dollars out of the
56:54
company every year, we're gonna
56:58
have to have some amount of
56:58
dollars set aside to pay him
57:01
back as he transitions out.
57:03
But once you've gotten past
57:03
that, then all of those dollars
57:06
that were going out as that
57:06
owner's profit can now
57:10
potentially either be invested
57:10
back into the company or shared
57:13
in a more vibrant or a larger
57:13
way with their staff. And that,
57:17
to me is really exciting. Just
57:17
this idea that a different set
57:21
of players within a company can
57:21
get value or be paid for the
57:28
value they bring in a different
57:28
way.
57:30  Christina Sjahli
So it's more
57:30
regenerative instead of
57:33
extractive like you keep
57:33
mentioning right?
57:36  Sarah Joannides
That's a really
57:36
good way of saying it. I like
57:37
that.
57:38  Christina Sjahli
So Sarah, this
57:38
has been a pleasure. I learned a
57:42
ton, and I'm sure my audience
57:42
learn a ton. Now, if they want
57:48
to continue this conversation
57:48
with you, where can my audience
57:52
find you?
57:53  Sarah Joannides
Well, it's easy
57:53
to find us on the web. Our
57:55
website is
57:55
alternativeownership.com and I
57:58
am happy to speak with folks
57:58
directly. You can reach me at
58:03
sarah@alternativeownership.com.
58:03
Christina, thank you. This is my
58:07
first podcast ever and you made
58:07
it an absolute joy. And it was a
58:10
great conversation, and I hope
58:10
others enjoy it as well.
58:13  Christina Sjahli
Thank you so
58:13
much. It's really a pleasure to
58:16
have you here.
58:17  Sarah Joannides
Thanks again.
58:19  Christina Sjahli
And that's
58:19
bring us to the end of another
58:21
show. Thank you so much for
58:21
listening to another episode of
58:25
Her CEO Journey, the business
58:25
finance podcast for women
58:29
entrepreneurs. If you want to
58:29
create a proactive financial
58:33
plan and process for your
58:33
business, so you are ready to
58:37
weather the financial storm over
58:37
the next few months, let's chat
58:41
and see what's possible for you.
58:41
Book in a time to speak with me
58:45
at
58:45
christinasjahli.com/lets-chat.