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  • 04.11.17

How Founders Can Ensure Their Companies Are World-Positive From The Start

When they sign up investors, startups should put in writing the values that they plan to live by–and not take money from people who won’t support them.

How Founders Can Ensure Their Companies Are World-Positive From The Start
[Illustration: Nongkran_ch/iStock]

When startups and investors decide to work together, they enshrine the deal in something called a term sheet. It’s a nonbinding document that sets out equity shares and funding amounts, delineates control (like who sits on the board), and offers a template for actual legal agreements. Typically, they’re a dry recitation of particulars. But, according to James Joaquin, a serial-founder-turned-venture-capitalist, they could be something more exciting and expansive: a way to assert a company’s values before the struggles of the business make them harder to fulfill.

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Joaquin, who cofounded impact investor Obvious Ventures, says term sheets are an opportunity to lay out how a startup intends to treat its employees, its position on the environment, its stance on diversity and inclusion, and how it plans to give money to charity when it becomes successful. And more companies should take that opportunity, he argues.

[Illustration: Nongkran_ch/iStock]
Many founders leave the “soft stuff” behind when making investment deals, Joaquin says, tending to consider such issues later when they’ve established teams, products, and markets. That’s an error: The term sheet, he says, is an ideal moment to make a stand and set out how the key founder-funder relationship will work over the long term.

“Great founders have choices about who their investors will be. The term sheet is like a personality test or a dating service. If you can tease out cultural alignment early on, it pays huge dividends later,” he says. Though term sheets don’t offer legal certainty, they do send signals about a company’s reasons for being and the values it will uphold.

Joaquin started Obvious Ventures with Evan Williams, of Twitter, Blogger, and Medium fame, and Vishal Vasishth, a former executive with social business pioneer Patagonia. It subscribes to a philosophy of “world-positive investing,” which says companies needn’t concede profits to do good for the planet.

In drawing up world-positive term sheets, Joaquin recommends startups consider four main areas: core values; diversity, equity, and inclusion; sustainability; and philanthropy (he writes up an example here). Here’s a bit more detail on each of those:

[Illustration: Nongkran_ch/iStock]
Core values: This covers what business or social problem the startup wants to solve and what incorporating structure it might take. That could include setting up a benefit corporation (a legal designation) or certifying the company as a B Corp (a popular accreditation offered by B Lab, a nonprofit). Legal experts are split on the merits of either course. Some say benefit incorporation offers greater legal protection for pursuing social values. Others say benefit corporations are too new and the legalities are yet to be tested in the courts. Either, both, or neither may make sense, says Joaquin. Obvious Ventures is agnostic. (We covered some of the differences, merits, and demerits in the explainer here).

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[Illustration: Nongkran_ch/iStock]
Diversity, equity, and inclusion: Say you believe, as lots of evidence suggests, that diversity leads to better business decision-making and better performance over time. You want to avoid the “bro culture” that pervades Silicon Valley (see Uber). You may want to put something in the term sheet about following the Rooney Rule, a NFL-inspired policy that says teams should always consider–though not necessarily hire–minority candidates for senior positions. By committing to diversity early, says Joaquin, founders can more easily hire who they want later on.

[Illustration: Nongkran_ch/iStock]
Sustainability: This might cover everything from a product’s supply chain to office policy on water bottles and recycling. It could contain commitments to Cradle to Cradle certification, or another well-regarded environmental standard. If you want the marketing department to source its tote bags from North Carolina rather than China, it may be better to say so early on.

[Illustration: Nongkran_ch/iStock]
Philanthropy: Many startups are now committing to giving pledges through organizations like Pledge 1% or Founders Pledge. Pledge 1% commits you to giving equity, product, profit, or time to charity as the pledge is made. The Founders Pledge is less legally binding, committing owners to give to charity at least 2% of proceeds when they exit.

Obvious’s impressive portfolio includes startups like Mosaic Solar, a crowdfunding platform for solar leasing, Diamond Foundry, which “cultures” synthetic diamonds (avoiding the conflict and environmental implications of natural diamonds), and Proterra, which makes electric buses. To Joaquin, they’re all examples of business that have a social purpose but also have potential to deliver decent returns (Proterra, which could get an IPO soon, was recently valued at more than $400 million).

“There is a large movement around how you measure impact as part of a justification of why you might have a lower return on [investment],” Joaquin says. “We think if you pick the right companies, all you have to measure is revenue and profits, because the revenue has some natural environmental and social impact.”

Some impact investors disagree with this have-it-all point of view. They say taking account of workers, customers, the environment, and communities often involves compromises. (It may also be easier to have to it all as a startup than as a public company.) But Joaquin’s world-positive term sheet offers another option for companies to enshrine their values from the outset, and set out how they expect investors to treat such issues. If you’re serious about doing good, it may make sense to do it from the beginning.

About the author

Ben Schiller is a New York staff writer for Fast Company. Previously, he edited a European management magazine and was a reporter in San Francisco, Prague, and Brussels.

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