We have been asked a number of times why Innovocracy chose to become a Benefit Corporation (sometimes known as a B-corp), as opposed to operating as a traditional for-profit entity or as a non-profit.  Like for many organizations that have as its main mission an activity that could clearly be characterized as benefiting society, the decision of what legal form Innovocracy should take was a difficult one.  There are various considerable pros and cons to each type of legal entity.  But after New York State became the most recent jurisdiction on February 1, 2012 to allow entities to form as B-corps, we ultimately decided to become an early adopter of this potentially transformative hybrid model.

A B-corp largely operates as a for-profit entity, in that it is able seek profitability and pays full taxes in relation to those profits, the same as would a for-profit.  Importantly, the ability to make and distribute profits also means that B-corps are able to have investors.  In many cases this is crucial and was one of the main factors in Innovocracy’s decision.  While the non-profit model is best for some types of endeavors, what Innovocracy is doing in utilizing crowdfunding to support university-based innovation takes considerable and often rapid deployments of investment.  This is needed to hire enough qualified personnel to work with the universities and innovator teams and to make sure our website and platform provide a truly great user experience for all involved.  There are of course many generous people and organizations out there that would have contributed to a non-profit version of Innovocracy, but these charitable funding streams are generally smaller and it is hard to control the timing of when they are given.  For instance, the process of applying to foundations and similar organizations for funding often takes many months of effort and waiting.  Plus, we did not want to take charitable dollars that could instead be going to other entities and causes that are only able to operate within the realm of charitable activity, when in reality Innovocracy could also operate by seeking investment dollars.

While a B-corp operates in many ways like a traditional for-profit, it also operates with one very considerable constraint in that it must pledge to operate in a manner beneficial to society (the benefit provided must be a “general benefit” that reflects the company’s activities as a whole, though companies can additionally designate “specific benefits” that they will achieve).  Very importantly, B-corps must also regularly be measured against a third-party standard to determine whether they are meeting their pledges, and the results of that determination are distributed to shareholders and otherwise made known in order to promote transparency around each B-corp’s beneficial activities.

Another main difference between B-corps and for-profits is that a B-corp can take into consideration how its actions affect its benefit-related goals and do not have to make decisions purely to maximize profit.  Directors and officers at traditional for-profits generally do not have this flexibility, as they have a fiduciary duty to maximize investor returns, and can even be sued and held financially liable if they fail to do so by taking into account some non-financial consideration.

When we weighed all of these factors, we decided the most appropriate path for Innovocracy was as a B-corp.  This allows us to raise investment dollars, so that our technology can be quickly iterated over time and so that we have enough great personnel to work closely with our university partners.  This framework also reminds us each day that what we are doing is not just a vehicle for profit and that our decision making can and should reflect the long term benefits we are trying to achieve rather than short-term thinking about financial returns.  It further makes everyone at Innovocracy keenly aware that we will regularly need to prove to our various stakeholders that we are operating to provide a benefit to society.

Over the coming years, we hope to provide a lot of value to society by enabling many amazing technologies to benefit the general population.  We also hope that many new companies will spring up as a result of our efforts, and we are already seeing this becoming the case.  Along the way we plan to make some investors that risked their hard-earned capital on our dream happy as well.  The B-corp status enables all of that and more, and we are happy to be among the small but growing group of companies that are using this new organizational vehicle to, as the saying goes, do both good and well.