My last three blogs (Parts 1, 2 and 3) discussed the ideas behind creating an ideal start-up. But it takes more than a good idea and promising numbers – it takes customers!
Customers require a great offer and confidence in delivery. We have discussed the offer in detail in earlier articles. This article delves into how the start-up can earn customer confidence. The goal is to design the start-up well enough to meet public requirements and assure seed fund donors that their dreams will likely come true.
After many years of searching for a business model that allows for ongoing management of this start-up, I am particularly impressed by the Perpetual Purpose Trust model[i]. In brief, the shares are held in trust for a defined purpose, so no one owns the company, and no dividends are paid to shareholders, only to the purpose.
The defined purpose in our case is to raise money for charitable purposes for future generations. Both the Board of Directors and a separate Trust Stewardship Corporation (TSC) that acts as an enforcer ensure the company stays on track to its purpose. The TSC has representatives of the stakeholder groups on its Board: donors/ descendants and charities.
Soliciting funds for investment purposes must surpass Canadian or provincial Securities requirements. The Ben's Way start-up must provide potential seed fund donors with a clear outline of the planned company operations.
Further temptations arise as invested funds amass over decades and centuries, so the business must withstand fraudsters, thieves, and politicians.
And as time passes, the nature of the intended charity may change.
Essential start-up requirements are to initiate and sustain security, trust, resilience, responsibility, and flexibility (STRF). Typical STRF concerns include:
1. How legitimate is this offering of services to seed fund donors?
2. How can I trust the holders of this money? Who runs this start-up?
3. What protects Ben's Way fund generators from theft, fraud, or manipulation?
4. How transparent would the amount and use of funds be for the donor, their successors, and the public?
5. How do I know this fund will be used for charitable purposes? What happens over time if the target charity closes shop or merges with another? What if the need they serve now is no longer a need in the future?
6. How does the fund ensure reasonable returns? What is the nature of the investments?
7. How can future generations have some control over the uses and spending of accumulated capital while protecting the original donor payout intentions?
Lots of existing tools can work in concert to solve these issues. I will answer the above questions as best I can to show how the start-up can boost STRF using: Canadian contract law; Perpetual Purpose Trusts; Incorporation charter and bylaws; Board of Director selection and succession; Investment portfolio directives; Securities filings; Donor Advised Funds donor instructions; Ceremonies celebrating gift transfers; and Marketing to encourage copycat start-ups.
1. How legitimate is this offering of services to seed fund donors?
a) Problem: the offering needs third-party sanctioning.
Solution: register with the applicable securities commission
To offer a form of investment to the public requires meeting and exceeding securities requirements initially and on an ongoing basis. By complying with all securities-related regulations, the start-up attracts and can claim some legitimacy based on third-party approval.
2. How can I trust the holders of this money?
a) Problem: unknown directors run the company.
Solution: select heads of prominent organizations
To create a board of directors for the start-up, ask the heads of prominent organizations to nominate one of their members. Select from organizations that would never condone improper behaviour, such as major charities, foundations, or industry experts (e.g., local estate councils)
b) Problem: directors need to be replaced over time.
Solution: require the prominent contributing organizations to create a replacement process for their chosen candidates
3. What protects Ben's Way fund generators start-ups from theft, fraud, or manipulation?
a) Problem: payouts not made.
Solution: the TSC takes the start-up to court.
The start-up will serve donors by creating lasting contracts. These contracts would include the start-up, the donor, and the enforcer (TSC) as a third party. The TSC cannot be simply a committee within the start-up, as the TSC must have the ability to sue the start-up. The TSC as an independent third party could be a charity or other arms-length organization with proper succession plans.
Enforcing organizations so contracted would ensure no pilfering or avoidance of duties by the start-up, and payments to the receiving charity get made on time and in the correct amount per the contract. Charities become the defenders of the donor's intent, and having a contractual obligation would sue if needed the Ben's Way start-up and directors for non-performance. Centuries of precedential law would help define appropriate resolution.
b) Problem: internal pilfering of funds invested.
Solution: start-up is required, and enforcer is empowered to monitor continual process reviews and annual financial audits.
The corporate bylaws will require annual public audits. Discrepancies on financial reporting would trigger investigations by the start-up or the TSC. Charities expecting receipts and donor/descendants have rights to request clarifications and actions on discrepancies per the contract.
Since the start-up is accountable to the charities, donors or descendants of donors, and others, these parties and all public persons have a right to expect transparency.
c) Problem: start-up must be shutdown
Solution: all money given to charity
All contracts for seed funds would require any monies remaining to be distributed to the charities chosen by each donor in proportion to the donor's fund interest in the total fund.
The Board would have to first agree with whatever directives create the need to shut down, and the TSC must sign off.
d) Problem: shareholders agree to sell the company.
Solution: establish the start-up as a 'Perpetual Purpose Trust' [ii] which owns itself and cannot be sold.
By structuring the shares to be held in trust for the perpetual purpose, the Board of Directors do not own and cannot sell or transfer any shares. A "Trust Stewardship Corporation" (TSC) monitors the trust structure. The TSC is the compass and the keeper of the mission, ensuring that the company stays on track to its purpose and has certain authorities allowing for oversight of the Board.
e) Problem: unforeseen issues close Ben's Way operations
Solution: establish as many Ben's Way operations as possible
By creating thousands of seeds, nature ensures at least some will take root and succeed in carrying on the species.
In a similar approach, by encouraging the creation of multiple clone operations, the ability to survive unknown issues is enhanced. To this end, an aggressive marketing campaign will offer start-up details to duplicate a Ben's Way operation freely and without restriction.
4. How transparent would the amount and use of funds be to the donor and their successors and the general public?
a) Problem: donors and successors want transparent reporting.
Solution: ensure process actions and status of accounts are audited and viewable online.
Once payments are made to the charity chosen by the donor, the start-up does no further accounting on those transferred funds. The remaining growing funds retained by the start-up are subject to the transparent reporting requirements.
5. How do I know this fund will be used for charitable purposes? What happens over time if the target charity merges with another? What if the need they serve now is no longer a need in the future?
a) Problem: assurance of uses of funds.
Solution: all fund transfer details are posted online and audited accounting for all expenditures.
Donors and successors, as well as enforcers, have access to this information in detail. The general public can have summary information that protects the identity of the individual fund receiving charities.
Public opinion eventually will become the guardians as donors and descendants lose contact over time. The start-up's goal then must be to build support in the public when every payout is made. Planned public celebrations of recent payouts commemorate the donor's gifts every decade.
The ceremony intends to show that this money is our new financial infrastructure and is not hoarded for any other reason than building up the charitable sector's financial independence. The goal is to garner the same public support for this enterprise as Canadians support their beloved public health care system.
b) Problem: charities merge.
Solution: if a merged charitable entity serves a similar charitable purpose, additional payments can continue to the new organization. If not, follow the Perpetual Trust Agreement objectives.
The start-up's objectives are legally codified in the Perpetual Purpose Trust Agreement. The agreement clearly defines the specific ways that the company will advance their purpose, and this creates the roadmap for the stewards and the operators of the company to follow.
The TSC must be satisfied this new entity is appropriate and aligned to the donor's original intent. The new entity must be a registered charity.
c) Problem: the charitable purpose is no longer required globally.
(Example a cure for cancer is found)
Solution: find a related charitable purpose and redirect funds to entities serving that need.
(Example help fund the search for cures of other cancers, and failing that, fund the costs of providing the cure)
Frequently the chosen receiving charity will be a Donor Advised Fund. These DAF organizations would be the ones to decide on alternate uses of funds following the donor's original agreement with the DAF.
From the start-up's point of view, if the charitable purpose is satisfied globally, then the enforcer must be satisfied this new entity is appropriate and aligned to the donor's original intent. The new entity must be a registered charity.
6. How does the fund ensure reasonable returns? What is the nature of the investments?
a) Problem: How to invest funds held by the start-up?
Solution: Use one or more investment management companies.
Diversified investments held for long periods protect against risk. Initially, the start-up may invest the funds in a basket of Exchange Traded Funds as a simple, low-cost way to achieve a diversified portfolio and 'normal' investment growth.
Professional investment managers would be appropriate for the start-up to hire as funds grow. As funds get very large, the start-up could add more managers. The investment objective is not to acquire highly risky investments for a significant portion of the portfolio.
Since all the investments are for the long term, a heavy weighting in equities would work as an investment strategy today. Yet this weighting might be better satisfied in future in some other strategy, and this is where the future guidance of investment managers would be paramount.
b) Problem: what is the nature of the investments?
Solution: donors may request standard investments or socially responsible investments
Ben's Way will initially offer two types of investment restrictions: traditional maximal return portfolios with no restrictions on types of shares held and, alternatively, diversified socially responsible portfolios supporting ESG objectives.
Note that these restrictions only apply to funds held by the start-up and do not apply to funds invested by charities.
The Board of Directors can choose to alter, add, enhance, or discontinue the types of investment portfolios offered with the approval of the TSC.
7. How can future generations have some control over the uses and spending of accumulated capital while protecting the original donor intentions?
a) Problem: who can change the donors' agreed payout usage plans?
Solution: donors specify which charities receive payouts in the contract. With the approval of TSC, the Board can alter the receivers of funds.
Suppose the original receiver charity agrees (or no longer exists). In that case, the Board can point fund payouts to a new receiver that is a sizeable well-established entity serving the public purpose of the original receiver.
If the need for the charitable purpose has been fulfilled, see solution 5 c) above.
b) Problem: who manages and can change the donors' agreed payout amount plans?
Solution: donors specify the amount per payout in the contract. With the approval of TSC, the Board can alter the payout plans within limits.
The Board could alter a payout plan by showing more significant benefits to defer or consume funds.
A limit per contract would be that the alteration from the original donor request cannot occur in successive payouts. Growth seed funds remaining after the payout of funds can range between a low of 25% and a high of 75% of total funds immediately before payout.
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A Ben's Way start-up offers many advantages ideal for the right individual or team as a start-up.
Humanity faces a vast and chronic shortage of funds when addressing social problems. Whether the solution takes one hundred years, two hundred years or more is not the issue; it is whether you believe this journey to better fund our society's future is worth starting now.
Humanity can generate enormous funds for social benefit by the next century. But we should start now. As the saying goes, the best time to plant a tree was many years ago; the second-best time is now.
Based on the above favourable views (biased as I am) plus the positive findings in my prior two articles, this looks like a good opportunity.
The above is Part Four of a four-part series on the Ideal Startup.
Contact me if you are interested at Cam@FutureLegacies.ca
[i] See Perpetual Purpose Trusts Explained — Alternative Ownership Advisors [ii] See Perpetual Purpose Trusts Explained — Alternative Ownership Advisors
Photo by Towfiqu barbhuiya on Unsplash