Holacracy Community of Practice Archive, 2015-2019 Community Holacracy Web Site

Holacracy setup for Startup Founders?

Hello all,

First time posting here and hope to become a fellow positive contributing member to the forum as I want to incorporate Holacracy with my startup right from the start.

I am a big believer in Holacracy and the principles & benefits it promotes.

However, I am still unclear in two specific areas and have not been able to find any answers online after several days of asking the Google.

1) While I want me and my co-founders to have equal equity ownership to be fair to everyone, I am concerned that due to the consensus based decision making process of Holacracy, one co-founder may do something that does not align with the mission of our startup (helping independent musicians, artists and children) and I'd like the power to be able to override that decision.

As I have invested the most capital and time, I would like to put something in the bylaws that give me some sort of final right of refusal and/or maybe differentiating between the type of shares that we all own as I think this is what Mark Zuckerberg is doing with Facebook where he still retains the voting rights despite giving a lot of the company away to charities.

2) I am also very paranoid about working my butt off to get this company off the ground only to have it bought out and/or taken over by some outside entity in the future where the new owners may have ulterior motives.  Two examples are when eBay bought Craigslist or Ben & Jerrys.  See this Yale article on pg 14 here:

http://cbey.yale.edu/sites/def...BEY_BCORP_Online.pdf

Thus, I would like to set up something similar to what the creator of Sociocracy, Gerard Endenburg, did with his company by setting up a 2nd entity that is a shareholder/membership association to own 51% of the company so that our company will effectively OWN ITSELF and never be a "slave" company.  For more details, look here:

http://www.transitioncville.or...cy-7-self-ownership/

and also this Harvard article where Terra Viva did the same:

https://hbr.org/2015/09/the-bi...lding-holacracy-back

Would appreciate any help and feedback.

Thanks in advance and have a great weekend all!

Cyrus

11 Replies
Jean-Michel Gode
03/24/2018

Hi Cyrus,

I'd suggest having a look at encode.org work.

Regards,
Jean-Michel

Cyrus
03/24/2018

Hi Jean-Michel,

Thank you. I'll check it out and get back to you.  It's 1 in the morning now here in US so will get back to you in a few days.

Regards,

Cyrus

Cyrus
03/24/2018

Quick comment as I just scanned your homepage.  We're setting up a Public Benefit Corp in Delaware via Clerky and per the B Corp website, startups automatically get a Certified B corp pending status for a year.  Is this what you guys do or do you do something different?  Possibly with the 51% ownership aspect?  I'm very familiar with LLC/S corps/B corps but non-profits and shareholder associations (per the Harvard article), I'm clueless about

Chris Cowan
03/26/2018

Welcome Cyrus! 

I can respond to this part..."

1) While I want me and my co-founders to have equal equity ownership to be fair to everyone, I am concerned that due to the consensus-based decision-making process of Holacracy, one co-founder may do something that does not align with the mission of our startup (helping independent musicians, artists, and children) and I'd like the power to be able to override that decision.

As I have invested the most capital and time, I would like to put something in the bylaws that give me some sort of final right of refusal and/or maybe differentiating between the type of shares that we all own as I think this is what Mark Zuckerberg is doing with Facebook where he still retains the voting rights despite giving a lot of the company away to charities.

A few comments: 

A) Holacracy is not consensus-based in the sense that you never need people to agree on a solution. If it were, then your own problem would be solved, because if you don't want someone doing something that doesn't align with the mission, then you could just not agree with it, and it wouldn't happen. Authorities, restrictions, and expectations are captured in governance, so if you need to prevent something from happening, then you just capture that prohibition there. 

What you cannot do, is as you said, just override a decision someone else makes without having to provide a justification (i.e. having it pass in a governance meeting). Meaning, you can capture anything you need to in governance, but anything you propose must be shared with the other roles in the circle and they must have an opportunity to object to that particular solution...but "object" isn't the same as "not agree with..." and it would never actually prevent you from processing your tension...it just would mean that there may be another solution which would still solve your issue, but also wouldn't cause an issue for anyone else. The specifics of what makes a valid objection is kinda technical, so I'll skip it for now, my point is simply that any restrictions you need to capture can be captured in governance, which doesn't prevent you from controlling things the way you think they should be controlled, but neither does it disempower or limit others in processing their own tensions or having control themselves.  

B) Regarding ownership representation/authority, I would just generally recommend differentiating ownership stakes from operational decisions. In the case of HolacracyOne, we have a policy which specifies different partnership tiers based on several factors (including investment in the company), which then allows us to involve partners at different tiers to appropriate levels of impact...like hiring, dismissal, etc.....but it is definitely NOT a blanket authority to veto others decisions. 

Baking in some sort of veto rights, while trying to successfully practice Holacracy, will not work. But it's not because having control is a problem. The problem is the universal/general/blanket/non-specific nature of that kind of authority. It has no boundaries. Holacracy is simply saying that your authority, as well as everyone else's, need to have some defined boundaries if we are going to work together in a way that maximizes our individual and collective intelligence. Or another way of saying it, you can't control everything, but you can control anything. 

Brian Robertson
03/26/2018

Hi Cyrus - Welcome!  To build on what Chris shared, I'd encourage you to consider attending a Holacracy training - it'll fill in some gaps in your Holacracy knowledge and help you get a sense of how Holacracy can solve exactly what you're trying to solve for, without the need for an external control system (veto rights, etc.).

I'll also add that, were it me, I sure wouldn't use the Delaware Public Benefit Corp structure, especially if I wanted to use Holacracy; LLC statutes are far more flexible in most states, and leave you free to define pretty much any governing control system you can dream up, where most other legal entity types (especially anything corporation-law based) force all sorts of specific rules on you.  That's why Gerard Endenburg had to do what he did with the complex stock ownership scheme - the laws in his jurisdiction are similar to US corporate statutes.  It would be entirely unnecessary and overkill with LLC laws available today.  And if you want to legally adopt Holacracy as the organization's governance structure, it's easy with an LLC, and nearly impossible with most other entity types.

Of course, don't take that as legal advice for your case; consult your own attorney and all that rather than relying on anything I'm telling you...

Cyrus
03/26/2018

Hello Chris and Brian,

I am humbled and honored to be communicating with you both.  Thank you for your contributions to Holocracy and it's goals.

Also, thank you both so much for your detailed and thoughtful replies.  Especially the time spent in typing them.  I really appreciate it.

@Chris - Regarding your Point B, thank you for that link.  I remember seeing an older article (app) about the different tiers so I'll see how we can implement that into our startup.

Also, your comment "Can't control everything but can control anything" was a nice way of describing it!

@Brian - Thank you for shedding more light on the B corp/Holacracy/51% scenario.  While I fully understand you are not providing legal advice, at least I have more feedback to consider as there's really nothing else out there other than those links I provided above. 

Although, I'm a little saddened to hear Holacracy is not a fit for B corps as on the surface, one would think they compliment each other.  Holacracy works for evolutionary purpose and B corps are at least an attempt to support a public benefit.

Unfortunately, I'd still like to see if it was possible to have my pie and eat it too as I do believe in the core goals of Holacracy but equally important is the mission statement of a Public Benefit Corp.  Reason being I don't want to dedicate my life to something, only to have the risk of somebody else later down the road (or after I've died) to completely change the mission while leveraging the "brand" I'd worked hard to build.  And that Yale article above proves that a company with resources can easily do that and an LLC would not protect against that with B corps being the best option.  Time will tell if the courts ultimately support that or if the B corp should really be labeled a BS corp (drum hit!)

Here's a better website that shows the benefits of B Corps:

https://www.bcorporation.net/

I'll try to see if I can find an attorney to provide more feedback on the 51% but my challenge now is what should that second entity be?  Per the link below, their bylaws state it as a non-profit but to my limited knowledge, not-profits are not allowed to own shares so I have no idea how Terra Viva (per the Harvard article in my initial post) set up a shareholder's association?

http://www.sociocracy.info/byl...cratic-organization/

Thanks again guys!

Cyrus

Cyrus
03/27/2018

[@mention:449693036223847456] Hi Brian, I just re-read your message and think I might've come up with a solution and was curious what your opinion was (with the understanding you are NOT a lawyer and we'd need to double check with an attorney for final answer)

We would set up a Delaware B Corp as parent company with subsidiary LLCs in the individual states we will operate in future.  We were already planning on doing this on an event level (art/music street festivals) as this also helps from an accounting standpoint and asset protection strategy since if something goes wrong outside of our control, if someone were to pierce the corporate veil, we'd want that extra layer of protection.

Thanks in advance

Brian Robertson
03/27/2018

Honestly it sounds like overkill to me; anything you can do with a benefit corp you can do with an LLC, but the latter are more flexible.  I'm not saying that the default LLC regulation achieves the same thing - it does not - but with LLC law you can write virtually any set of governance rules you want, including all of the same ones the benefit corp structure provides by default in the statutes, or more or better than what that covers...

Barbara Buzanich-Poeltl
03/30/2018

Hi Cyrus - just have seen your post and I would like to recommend the purpose ag http://purpose-economy.org/en/ to you.

They are very experienced in legal aspects how to set up organizations in a way that it serves its original purpose on a long run. 

Hope that helps! barbara

Cyrus
04/05/2018

Thank you Brian and Barbara!  Appreciate your feedback and opinions.

[@mention:449693036223847456] - I see your point more clearly now.  If one can reap all the benefits of a Benefit Corp (no pun intended) in an LLC, but with more freedom due to "any set of governance rules", why not go with the latter?  Makes sense.

[@mention:498251187806746638] Thank you for referral.  I just signed up for their newsletter.  Looks very interesting but at initial glance, it seems more Europe based correct?  Or am I mistaken?  I've never heard of a Purpose Trust/Purpose Foundation per this link:

http://purpose-economy.org/en/ownership/

I only know of revocable, irrevocable, and self-directed trusts here in US but the principles of a Purpose Foundation definitely resonate with me.

I guess one factor that's missing from this analysis is how this might impact the end investor's risk/reward profile & appetite?

Thanks again all!

Cyrus

 

 

Barbara Buzanich-Poeltl
04/07/2018

My pleasure! I know that they support also companies in South America ... i guess you just can contact them and ask.