B-Corps vs. PBCs

You may have heard of a B-Corp or seen the “B” logo on a product. The B-Corp certification and its logo, created and issued by the B Lab, show that a company has deeply scrutinized it’s operations according to B Lab’s criteria before asserting that the company is “good for the world”. But this has created some controversy.

Some clothing and food companies for example flaunt their B-Corp certifications despite being majority owned by firms which are actively destroying the climate. Such companies have been accused of “greenwashing” or dressing up their goods as good for the world without making any meaningful change to their exploitative ways. In my view, B Lab’s efforts are noble but it’s unsurprising that folks would try to game the system. As I’m fond of saying “once you have rules, you have a game” that people will learn to play to their own values. So why would I advocate for PBCs?

Well, Public Benefit Corporations (PBCs) and B-Corps are not synonymous. Unlike the certification, a PBC is a legal entity which was also created and championed by B-Lab by introducing legislation in different states to change the underlying logic on which businesses operate. Companies which achieve certification may also change their legal entity status or structure in order to be considered by B Lab as “best for the world” - but you can also organize as a PBC without the certification. This is the course of action I recommend for startups as an alternative to forming as a C-Corporation.

C-Corps vs. PBCs

A PBC's primary distinction from a C-Corp lies in its commitment to create value not just for shareholders, but for all stakeholders - including employees, customers, and the public. This is known as “stakeholder governance”. This broader focus is reflected in the company's incorporation documents, which clearly define the public benefit it aims to achieve via a benefit statement. PBCs otherwise operate much like a C-Corp making the PBC completely compatible with existing standards and norms in venture capital, meaning that:

• PBCs are also non-pass-through entities making them attractive to investors
• Equity can be issued the same way to investors and employees so cap tables can be managed in the same way
• SAFEs and other standard documents do not need to be re-written and the same terminology and fundraising process (pre-seed, seed, Series ABC+) work the same way
• There are attorneys who specialize in PBCs but any corporate attorney familiar with C-Corporations can easily do the same work for PBCs
• There are no taxation differences or other legal ramifications aside from the requirement to consider all stakeholders in decision making and to produce bi-annual statement to shareholders (in Delaware)

Because stakeholder governance is enshrined in the law, PBCs provide a powerful strategic advantage to founders who *really* want to change the world: legal protection for ethical decisions. In a c-corp founders have a fiduciary duty to do what is best for shareholders regardless of how that affects employees, customers, or the public. But in a PBC, the founders have the same legal obligation to consider the impact on all stakeholders - investors, employees, customers, and the public, when making decisions, and have liability protection in the event they are sued by shareholders for making a decision in the best interest of all stakeholders.

Unethical practices are not guaranteed in C-Corps as long as the company has ethical owners and board members. But all humans are fallible, and humans further away from the problem whose only interest in the company is financial interest for themselves are structurally set up in a position that might as well be designed to encourage unethical decision making. Under that structure, making a decision that you think is right but which may not be the most favorable decision for shareholders is actually a punishable offense. In most public companies, CEOs which do not fulfill the expectations of their owners and board members get replaced or even sued. Let’s dive into a case study to see how this works.

PBC Case Study: Ethical Ice Cream

Ben & Jerry's reorganized as a Public Benefit Corporation (PBC) in 2011 to avoid an acquisition that went against the founders' values. The company had been acquired by Unilever in 2000, but the founders, Ben Cohen and Jerry Greenfield, remained involved in the company and continued to advocate for social and environmental causes.

In 2011, Unilever announced that it would be sourcing some of its palm oil from suppliers that were engaging in deforestation. This decision went against Ben & Jerry's commitment to sustainability and environmental responsibility. Cohen and Greenfield were concerned that the acquisition by Unilever had compromised the company's values and mission.

To address this issue, Ben & Jerry's reorganized as a PBC. Because PBCs are legally required to consider the impact of its decisions on all stakeholders, including employees, customers, the community, and the environment, in addition to shareholders. By becoming a PBC, Ben & Jerry's was able to uphold its commitment to social and environmental responsibility and ensure that its values were protected.

The reorganization as a PBC allowed Ben & Jerry's to maintain its independence and continue to operate according to its values. The company has since become a model for other businesses seeking to balance profits with social and environmental responsibility.

The Rising Popularity & Performance of PBCs

Ben & Jerry’s is not the only major company to reorganize as a PBC as part of it’s commitment to support ethical operations. Yancey Strickler of Kickstarter fame championed Kickstarter’s conversion to a PBC in in 2015. Before that, Patagonia’s founders, Yvon Chouinard and Craig Mathews, were concerned that as the company grew, it would become more difficult to maintain this commitment to sustainability and social responsibility, and reorganized as a Public Benefit Corporation (PBC) in 2012. This is not to be confused with their 2022 decision to make “Earth their only shareholder” by making their non-profit foundation the main shareholder of the PBC. But has it been good for business? Later I’ll argue that’s not the only important question, but to address it: according to Forbes, Patagonia's revenue has grown from $540 million in 2013 to $1.5 billion in 2019 (about 3x in 6 years).

When & how to make the switch

Hopefully you’re starting to consider the upside of organizing your company under stakeholder governance instead of shareholder governance, and may be wondering how to make the switch. The best time to organize as a PBC is on day one because it will cost you nothing extra. I formed my last company as a Delaware PBC on Clerky.com for $800, which also comes with free legal documents for the lifetime of the company. Clerky partnered with B-Lab in order to do this. But the transition for an early startup that is currently a c-corp can also be done by most corporate law firms for several thousand dollars and with approval from your board, and does not involve much time from the founders, especially when compared to the much higher time and cost commitment of achieving certification. If you’re interested in certification, registering on Clerky will give you 1-year to apply, though I recommend only applying for certification that early if it’s crucial to your business. You can always apply later, and you get the benefits of the PBC legislation without every becoming certified. The longer you wait, the harder it gets, so the best time is now.

Creating and operating a Delaware PBC is very simple: you basically just have to define your public benefit statement and comply with modest reporting requirements. The statement is included in your Certificate of Incorporation and must explicitly state one or more specific public benefits the corporation will promote. PBCs must also produce a statement at least every 2 years for shareholders detailing how you’ve promoted your public benefit(s) and the best interests of those materially affected by your corporation's conduct. Detailed requirements can be found in numerous publications or straight form the Delaware Code in § 366.

Closing thoughts

Personally, I think we need to empower the next generation founders to build companies which are structurally designed to enable more ethical decision making. We need systemic change as a society to reverse dangerous trends like increasing wealth inequality, climate change, and linear waste. This change will be brought about not by incumbents, but by startups. Still there’s risk that as startups mature within the confines of the greater system, their success will become an opportunity to greenwash more exploitation from corporate America. As a startup founder, you can expect to eventually lose some modicum of control over your company as you scale or exit, and organizing as a PBC is a good way to hedge against your technology being used in a way that causes societal harm without any recourse to achieve balance. My interest in PBCs stems from a cause I truly care about - changing the nature of economy from short-term and exploitative practices, to long-term and regenerative ones. To achieve that mission, one of my personal goals is to dramatically increase the number of PBCs in operation over the next decade, and to look for other ways to create a similar impact. To do that I want to help founders evaluate and create their public benefit statements and implement low-maintenance ways of measuring and reporting on their impact. If you’re interested in going through that process and would like to work with someone let me know - I’d be eager to spend my time with you.

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