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So, are you a business or a charity?

Rebecca, December 18, 2020

When traditional for-profit and non-profit models weren't working for Library of Things, directors Bex, Emma and Sophia went on a journey to design a new governance ecosystem for the social enterprise.

Since starting in 2014 as a volunteer-powered, grant-funded item lending library, Library of Things has become a more professional operation that is now starting its journey to replicating around London – still with the same values & mission at its heart.

Directors Bex, Emma and Sophia realised in 2018 that the non-profit company limited by guarantee structure was no longer serving Library of Things. But a typical for-profit structure wasn’t suitable either.

So we recruited Patrick Andrews, corporate lawyer reborn as facilitator and governance advisor for social businesses, cooperatives and non-profits.

Together with Patrick, we had long conversations about our values and LoT’s mission, role-played future relationships between LoT borrowers, volunteers, community spaces, investors and LoT team members – and drafted a lot of paperwork.

And now we have governance structure 2.0 – one that allows flexibility of finance, and integrity and external accountability to the company’s values and mission.

1. Why not a typical non-profit structure?

We realised it was no longer viable to both keep our non-profit company and grow Library of Things, because:

Grants and philanthropy were keeping us in a state of dependency: Like every good leadership team, we want Library of Things to become financially self-sufficient. But like many non-profits, we’ve spent months of our lives writing and providing evidence for grant applications, 80% of which result in a ‘no’.

Many grants are restricted: “No you can’t actually use this grant to pay for the core operational and business development work that you need to do to stop needing us – you have to use it on this particular outreach project” (see here for a very entertaining blog on this).

To truly transform fundamentally broken systems like consumerism and inequality, though, we need to build systems and services that are better than mainstream offers. We need headspace to build new partnerships and ecosystems. And that takes time and money.

Giants like Amazon that power the consumerist machine major on affordability, convenience and user experience – within two clicks you can order just about anything in the world to your front door – sometimes within hours. And they have ready access to millions of pounds of capital.

To make borrowing better than buying, Library of Things needs slick technology and a great team. And that costs money.

So, whilst we will continue to apply for grants from the most progressive funders, we can’t be entirely dependent on them for this development work. Grants can be a useful springboard at first – and we’re seriously grateful for the support we’ve received from Tudor Trust and Nesta – but long-term, grants risk keeping you small.

Many non-profit structures don’t allow for team ownership: The LoT team has worked voluntarily or part-voluntarily for years getting LoT to where it is now. We wanted team members to have a genuine stake in the future of the company, and share in the success of LoT – just like John Lewis does with employee-ownership. We knew this would also help us to attract brilliant tech talent. But the non-profit company limited by guarantee structure doesn’t have any share capital to distribute.

A top-down board doesn’t always make good decisions: Operational decisions should be made by the people working for the organisation – not by a distant board of trustees or non-executive directors, a top-down system that several grant funders insist on.

2. Why not a typical for-profit structure?

We decided against a standard for-profit company, because we saw the following failings:

Personal profit motive & shareholder influence: Private companies in the UK and US are legally obliged to maximise shareholder value, rather than considering people and planet alongside profit. That results in ‘mission-drift’ at best, and at-worst, activity and decision-making that is destructive for society and the environment.

Obsession with an ‘exit’: Achim and Adrian Hensen, co-founders of the ground-breaking Purpose Foundation, talk about the ‘madness’ that many start-ups find themselves in – where an exit (such as a trade sale) seems to become the purpose of the business.  

How can you ensure that businesses don’t just serve a few and are bought and sold like a pair of shoes? How can you ensure that companies are no speculative commodity but people working for a purpose?” – Achim Hensen, Purpose Foundation

No external accountability to mission and values: Nobody could block the founders of much-loved food brand innocent drinks from selling the business to Coca-Cola. As LoT grows across London and the UK, it will become increasingly important to hold it accountable to delivering its social mission and values. We want that accountability role to be held by members of the wider LoT community and network.

3. So what is the new Library of Things governance structure?

A private company limited by shares called Library of Things Limited (LoT Ltd), with:

A clear social mission – to make borrowing better than buying: more affordable, convenient, socially-rewarding and environmentally friendly. This is enshrined in our legal documents, stating that Directors are legally obliged to consider People and Planet equal to Profit in decision-making.

A business model where wealth stays with communities – 85% of revenue earned through borrowing fees goes straight out to pay for local jobs and a rental contribution towards the local Host Space. After direct costs are paid, a further 15% of revenue stays local – going directly to the Host Space like a library OR into a pot for skill-sharing events / other community activities.

A social mission lock with external accountability – in the form of one Guardian share, currently held by its non-profit, asset-locked company, Things Trust. Its legal members are non-shareholding, external individuals representing community and planet. Their role is to ensure Library of Things stays true to its social mission, and have rights including the need to give consent to any exit or significant asset sale that could be in tension with its mission.

Legal advisor Patrick said:

“The fact is that any purpose can be overridden by the owners [even if they’re a B-Corp or CIC], unless there are other safeguards in place. A proven way to prevent this is to give a measure of control to an independent trust, that acts as the guardian of the company's values. Examples of this around the world abound - Cafedirect, Robert Bosch, Tata Group, ThyssenKrupp AG and John Lewis all have a trust that safeguards their long-term development”

3 share classes with different rights:

1. Guardian Share: 1 share held by Guardian shareholder Things Trust, with certain voting and veto rights

2. ‘A’ shares: 3 voting shares held only by directors

3. B investment shares: Shares with dividends, capital distributions & certain voting rights issued to directors and mission-aligned investors

This means decision-making power is balanced between LoT Ltd directors, Things Trust directors and members, and shareholders.

And finally...

Ultimately, the major problems of our time that organisations like Library of Things set out to tackle – wealth inequality, fragmentation of community and ecological destruction – cannot be understood or tackled in isolation. These are systemic problems that are interconnected and interdependent.

This means our organisational (and cross-sector) governance structures need to be interconnected and responsive – with engaged participants, healthy feedback loops and clearly-articulated intentions – rather than restrictive top-down structures such as boards of trustees, or all-powerful, profit-motivated shareholders.

The rise in B-Corp accredited companies like Pukka Herbs and Ben & Jerrys, and of Purpose Foundation accredited companies like Ecosia and ShareTribe – shows a broader drive towards balancing profit with purpose, and moving to ‘steward ownership’ rather than speculative ownership.

Legal advisor Patrick says, “Library of Things structure draws on these precedents to create a company that embeds integrity of purpose into its very design."  

We hope that where relevant, our social business peers – and ultimately the people and institutions that finance them – follow suit.

“Wildnerness is the bank on which all cheques are drawn”

– John Aspinall, zoo-keeper & bookmaker