Information systems evolve. Programming languages, databases and frameworks change over time, sometimes in fundamental ways. Certain elements persist - SQL and TCP/IP, for instance, have demonstrated impressive durability; but the way we construct large scale systems has changed dramatically from 30 years ago when we thought Pascal was pretty nifty. Today, it seems that exciting new decentralized solutions are just on the horizon. It's what we do: we reconfigure our information systems, redesign to keep the best aspects and discard the cruft that builds up over time, and are always ready to consider the next best idea.
Corporate structures, however, appear to be mired in ancient bogs. The corporations, the organizations most of us work for, are creatures based on century-old laws - the Delaware General Corporation Act was passed in 1899, and the Securities Act in 1933 - whose main recommendation is that they have been tested over time in expensive and complex court cases. Management fads are not the same as genuine evolution. The legal DNA of the corporate organism determines its behavior in the end, and the actual ownership and governance structures are identical from startup to startup across Silicon Valley and beyond.
Why is this so? Well, here is my experience as a co-founder of What's Cookin', a startup for neighborhood meal sharing and more: We started with the intention of creating novel work-weighted ownership and governance structures. So I asked in our funding accelerator if anyone had experience with these, and our coach answered:
"There are many places to get creative with your company. Legal is not one of them....This has to be as plain vanilla as possible or you will not get funded."
Investors in startups, who presumably accept a high risk of failure, cannot accept the risk of thinking.
And thinking is indeed a risk - or at least a cost. As anyone who has ever struggled to get a project approved by upper management can tell you, in centrally controlled systems decision making is a scarce resource. The startup ecosystem is supposed to address this high cost by creating a large number of independently run entities that compete, but only within accepted parameters that have been standardized by investors fueling them. Understandably so - the standard startup model has been tested, with measurable success indicators and known risks. Who wants to deal with unknown risks, after all?
Yet standard corporate structures have known problems, at multiple levels. The Onion piece "YouTube Removes Thousands Of Underperforming Covid Misinformation Videos" is funny only because of the truth in it: algorithms optimized for clicks have no protection against disinformation. This is not a new idea. Joel Bakan wrote the definitive work on how prioritization of profits naturally leads to externalized costs on everyone else; his view is that only external regulation, a change in the environment, can cause a real change in the behavior of the corporate organisms in it. (Although Bakan points out specific concerns with the agreement between a corporation and its shareholders, he is skeptical of new corporate forms solving them.)
What is a Corporation for anyway? Why do they exist in the first place, these legal bodies, what benefits to they provide? And what maladies do they suffer, that biological bodies do not? Do they behave differently and in what respects?
I am no lawyer; but having worked in many corporations, contracted and run a small business, here is a duck-typing look at the benefits of belonging to a corporation in practice:
- stability and guaranteed income: for larger corporations, in any case, the concentration of capital allows for an arrangement of guaranteed income.
- trust: the bar to entry of becoming an "employee" grants the employee access to a trusted area, where access is shared freely to valuable resources and information
- specialization: an employee of a corporation, unlike a sole proprietor, can focus on a single area of expertise and not worry about accounting or legal issues, for instance
- team: the presence of co-workers supporting each other to accomplish shared goals is perhaps the greatest day to day benefit that most of us experience
- continuity: even if individuals leave, the corporate creature can continue on.
- shared profit: shareholders, whether employees or not, share in the upside of ownership and profitability
- avoidance of risk: shareholders are not liable for the negative actions of the corporation, and do not incur a penalty if the corporation harms others
And the downside, of course -
- lack of control: one works the most productive hours of one's day and one's life, on a mission decided upon by others. (choosing who to work for can help, of course - but day to day, decisions about priorities are generally handed down)
- bottlenecks: centralized control, as mentioned above, leads to bottlenecks in decision making and fear of experimentation.
- bodysnatching: corporations, unlike biological organisms, can easily have brain transplants, in that the direction and mission can entirely change with new leadership. Thus resources or effort given to a corporation one admired could be later appropriated by bad actor.
- disposability: for workers lower on the totem pole, the stability and guaranteed income may not exist; and for gig workers not at all.
- avoidance of responsibility: little incentive exists for corporations to take genuine responsibility for avoiding harm to others, if such harm is profitable.
The list above begs the question: can some of the benefits be realized using a different organizational form, and can such a form prevent some of the downsides?
Is central control really central to the benefits corporations provide?
Some hope for the resurgence of cooperatives. Nathan Schneider has written extensively on cooperative models; Astrid Scholz and others are carefully cultivating a cooperative ecosystem at Zebras Unite and Social.coop. Cooperatives can offer the benefits of trust, specialization, team and risk avoidance; to an extent shared profits, and if well-funded, stability. The voting structures in cooperatives provide protection against bodysnatching and disposability.
For our startup, however, we decided against a cooperative, at least as currently defined. The one-person-one-vote model is good for countries, but in a joint effort it seems to me the vote should be proportional to the work invested; and it is not clear to me that the existing cooperative models allow the organization to scale without the usual problems of bottlenecks and central control.
So what animal, then? Can we change from a dinosaur model of a tiny brain running a giant hungry predator to a mammalian model of communication and cooperation among many independent entities? As a confirmed Linus Torvalds aficionado, I am wary of overdesigning any new creature early on; but the model must be flexible enough to adapt over time, and robust against attackers who will certainly try to bodysnatch it if it is successful.
As a good designer, let us focus on the main pain points. Control and genuine ownership seem to me to be key. As a starting point then, how do we effectively share ownership among contributors?
With What's Cookin', we found slicingpie.com early on. We did not pay for the full legal agreement, but for sixteen dollars a month we could fluidly track self-reported, approved contributions and transparently view the current shares in real-time:
The first benefit this provided was a lack of resentment among partners - if one partner did more work, they simply gained a larger share of the company; but the other partners could easily catch up by just digging in.
Self-reporting can obviously be gamed, but in our actual experience contributors tended to under-report rather than over-report. Most people joined the startup for a combination of reasons - desire for experience with a team, appreciation of the mission of bringing communities together, perhaps the feeling of belonging to something and creating something together. So in our early reality the first year or so, pretty much no one tried to overreport hours.
Slicing pie only goes so far, however. The shares are agreed upon, but then how are they actually doled out? Issuing stock to large numbers of individuals is costly to the issuer and may have tax consequences to the receiver; and once issued, the shares are no longer fluid.
Luckily in today's world, any problem likely already has someone trying to solve it, and we found another innovator, fairmint.co, with an ethereum-based smart contract that provides continuous liquidity with tokens that can be issued, bought and sold. Essentially it provides a secondary market for shares (after a 12-month lockdown period), that allows work-based contributions to live in the same ecosystem as purchased ones, with some limits to protect investors. We are in the process now of setting up what is called a CAFE agreement for our startup, to actualize the ownership of all of our contributors up to this point, and to provide a flexible vehicle for small investors to buy in.
Side letters can put legal force behind the concept that those actively working on the company will be empowered to make decisions, with perhaps some veto power by investor stakeholders. A system of checks and balances, one that does not slow down day to day decision making, we hope will provide future protection against bad actors. We're writing them now - currently our bylaws talk about votes of confidence and the ability to remove leadership, creating accountability below as well as above.
We don't yet have the problem of scale, as our startup has only a few handfuls of really active contributors, and perhaps a hundred with small stakes. When we grow, then it may be time to spin off children organizations that can communicate with each other, each with a more specific purpose but with enough shared DNA that they can cooperate with a high level of trust. Since our product is coordination of local sharing in close-knit communities, we may be a good candidate for decentralization/federation of our servers and services as well, since a global index will not be required.
Keeping an eye on the future while building the present, our immediate goal must be to find product-market fit, build something that people love while creating a proof-of-concept that a small variation on the standard corporate structure can indeed grow and thrive. It feels like we are doing just that, and on the way are finding others who are interested in intentionally creating an ecosystem that might be a bit healthier for our shared future.
original artwork by Carmelita Levin