The Regenerative Community Organism or RCO for short is a novel organizational structure that comprise of two legal entities, a limited company and a non-profit association. The RCO is designed to put purpose at the center and then organizing all other resources to serve the purpose in the best way possible. The RCO takes seriously that organizations become organisms – it introduces a life cycle for the organism which lets it progress through stages with different focal points and ultimately to die and distribute its resources back into the ‘soil’. The RCO is a bridge between the economic/financial paradigm for startups towards a regenerative paradigm that includes ideas for creation and governance of commons, involvement of more stakeholders and considerations for generating resources for ecosystems organized around specific purposes.
As long as all the shareholders of a company are in agreement there are very few limitations to what the company can do and change. The RCO is designed to create maximum engagement by inviting the community into the governance of the company (indirectly). It also creates an entity for channeling non-profit engagement into the purpose the company is contributing to.
It does require owners to give up a part of the company to the association. It requires a restructuring of the board of directors where the association elects half of the directors. What is important to consider for existing companies is the transfer of ownership into the association and the design of this so that it does not trigger unnecessary tax effects. This can however usually be navigated.
The RCO is currently available and implemented in Sweden which has a Germanic law system. Differences between jurisdictions are important to consider. The basic entities of the RCO is a limited company and a non-profit association, these are present in most jurisdictions as entities.
The RCO does combine the for-profit motive, power and direction of the limited liability company and the non-profit engagement of an association. By creating separation between purpose and profit driven business the RCO creates clarity in making explicit several implicit assumptions. The RCO introduces responsibility for owners and board members in the RCO for the economic as well as the purpose and ethical principles in the operations of the entities. The life cycle also introduces a discussion around thresholds for when the organization should transition between different focuses. E.g: When have we reached an initial size that is large enough? When have founders and financial investors received enough returns in order to start building resources for the ecosystem as a whole? What are the key values and drivers that founders can see that need to be protected? The RCO is designed to keep the purpose at the center and create barriers against capture by financial interests as the company grows and evolves while keeping this possibility dynamic. It does however require conscious transition and an argumentation in each step around why we should change our initial intention. As long as all stakeholders agree such an evolution is absolutely possible.
This type of construction is getting positive feedback in the impact investor space. There are individual preferences as well as a discussion that depend on what investors need to deliver in terms of returns to themselves or to their funds. Given that the life cycle allows for companies to initially will be able to grow aggressively to establish itself on the market (if that is the intention of the founders). This is the period when financial capital is the most valuable to the company. As the company progress through the lifecycle there is a discussion to be had about the distribution of resources and eventually to allow financial investors to exit.
The RCO requires that founders and investors also look at, now how one wishes things turn out but how things actually are in the market. The RCO is a break in the current market logic to some degree, and it contains the mechanism for building an ecosystem rather than a single company and hedging risks by increasing the footprint in the selected industry over time. The RCO is a structure that captures the impact investor logic of ‘sustainable’ (yet profitable) financial returns and maximizing ‘impact’ returns.
The RCO model contains a lower degree of control given some of the existing models like the combination between for instance a foundation and a limited liability company. The benefit of this is that the entity can evolve and adapt to changing circumstances. The association does not have the right to assert what the company should do but is rather employed as a fall back to prevent divergence (unless for good reason) from the initially stated intention. The main power that the association has in the company is through the nomination of half of the company’s board of directors. This is a significant power but it resides with the board of the association and not directly with its members. In other words there is quite a bit of friction built into the system that defacto prevents take over and capture of the organism.
The RCO has incorporated aspects of the B-corps into its ideas. Like focusing the company on not just economic profit but also on other aspects. The company’s board is personally responsible for how the company conducts its business as well as the delivery upon the purpose of the business which is formulated beyond simply profit in the bylaws of the company. There are several similarities and yet the connection to the association and its dual focus on building both the business and the association in parallel is fundamentally different. It offers a possibility to channel engagement from its stakeholders into the business in more ways.
A DAO is a different way of structuring companies. The RCO is highly compatible with the ideas of most DAOs.The entities that are grounded in the current system can be translated into the on-chain reality or could be transferred and supported by blockchain when the entity reaches sufficient scale and when the blockchains support the growth and evolution of the organism. The main difference is that the RCO encourages a building bottom up of the principles so that the ones that are later encoded on-chain are the ones the organization are practicing rather than the conceptual principles envisioned by a small team of founders. We believe that humans are layer-0 and have been inspired by the DISCOs movement. In short words the RCO is highly compatible with many of the different aspects of the DAO and our starting point in our work has been that technology is secondary to relationships.
We see several exit possibilities for the companies in the RCO. The exit possibility of the association itself is contained in the life cycle. In the succession phase the companies have grown and started maturing. There is a level of discernment to be said about the shape and operations of the company going forward. The company has progressed ‘down’ through the cynefin framework from the chaotic towards the complicated – it is doing something that works and it has a structure to do it. This stage can be initiated by any of the shareholders (founders, financial investors or the association) as a response to how the next steps seem to shape themselves.
- Exit to purpose: The association sees that the business is deeply aligned with its core operations and would do well to be part of the association to support its building of its activities. Perhaps through the investment company the association has created perhaps in other ways.
- IPO: there is a possibility that the company is best served by entering the public market. Perhaps with the association as the strong, long term owner, perhaps with the founders and their family offices as the strong long term focus. Perhaps the IPO can be used to further fund the purpose.
- Other opportunities: It might be that the association and the purpose is not served by the continued connection between the entities or that the company would do better as part of some larger other entity. In this case the company could be divested and sold off.
The association and the company share their purpose. They also share the principles by which they operate as well as the ethical commitments these entities make. The design relies on the economical interest coming into conversation with the non-profit purpose of the companies. We see that in order for the company (the financial/economic entity) to come into relationship with the larger whole it will benefit from the perspective of those that are engaged on a non-profit basis in the association. Therefore the company is free to act as it will in order to meet the economic logic with some imposed boundaries around: ethical conduct (e.g. UN earth charter), its operations (restricted by purpose and principles) as well as the increased the transparency that all the members get into the operations and agreements by the company (social regulation). The association exercise its power through the board members (they hold half the seats) and through certain dedicated veto rights that can be exercised at the annual general meeting of the company. In return for these limitations the company gets a loyal, engaged community which will work and act as ambassadors in an economy that is increasingly based on attention and engagement from the other stakeholders. Through the association the company will get to see a wider slice of reality which it, if leveraged with skill, can channel into better products and a competitive advantage.
Each entity is economically self-sufficient. The main income streams of the association are memberships and potentially sponsorships. The association may also offer services like certifications, audits, digital platforms, crypto currency etc. to the ecosystem. The company will have to sustain itself financially based on its planned operations. I.e. the building of the company is just like building any other new company. It is important that these entities are independent yet connected in order to not create co-dependence but rather generative inter-dependence between the entities.
If there are direct contributions between these entities one should carefully consider the formed dependencies and how they influence the entities to perform their roles in relation to one another. Another important aspect are tax consequences of such dependencies.
Boards should be designed to be able to support the operations of the organizations. Conventional thinking and sound practices with regards to board instructions, owner directives etc will go a long way to cover the board design. The restriction is that board members of the association cannot serve as board members of the pledged companies. It is also important to consider that the board of the association has an important commitment to fulfill in relation to the company in electing 50% of its board members. The board should either have this skill or know well how to delegate it to another entity like an election committee. The board of a start up is instrumental in the initial stage of the company’s life cycle, much more so than later in a company’s growth. On a side note: if the company is planning on raising funding, this will be an important parameter to show investors that the association is contributing with actual value to motivate the RCO model.
We believe that the governance model of a company is in response to what it’s trying to do. If companies operate in highly uncertain contexts, self management practices and more decentralized structures might serve the company’s purpose. In other industries and contexts however a leveled model with a more rigid structure may serve the purpose. The RCO does not take that into account. It is however important to consider as a founder that the company may require one structure while other values including more democratic principles for decision making may be constructive in the association. The association will call in engaged people with expertise in the subject matter that feel called by the calling question. This is a different dynamic than employees in a start up – the structure and governance should reflect this.
If you have an evolutionary purpose in a field already and people are flocking to it. Why use a limited company at all? If you come from the nonprofit sector that might be a natural question. It is a really good question. The limited company, because of its institutionalization in our current moment, is an extremely powerful tool for channeling resources and attention toward a common objective. It is also well suited for dealing with and directing financial capital. Both in terms of investors funding a venture as well as rewarding individuals working in the company. Tax law is favorable for limited companies in most jurisdictions and they have more freedom and better possibilities to limit and direct the risks associated with starting a venture.
The other aspect is that in order to build something robust it takes work, effort and usually quite a bit of time. The limited company is a good construction for doing just that. Taking part of ourselves and directing them jointly to another project. The damage done in the wake of the limited company has been due to how we relate to this new entity, giving up all our power to it enshrining quantity (growth) as the primary value we’re deliver from it (see Meditations on moloch that describe dynamics called multipolar traps as a part explanation to why that is). At times in a new ‘evolutionary purpose’ or a new organisms life it does require everything from us, but not always. There is a way to interact with a limited company because of its separate legal status and its risk limitation that allow us to interact without being owned by it. The RCO is only up front directing 10% of the shares of the limited company, the rest of them are up to you as founder to direct as you see fit for what you are trying to do which gives you a lot of freedom in working with your fellow co-founders as well as financial investors and other contributors. We believe in that complexity science concept of the ‘adjacent possible’ i.e. working with what is here in new ways. For some parts of the evolution of an evolutionary purpose a limited company happens to be the best tool available.
If you are coming to this from the start-up or financial world you might wonder why bother with the commons or the ecosystem at all? There are many reasons, some more idealistic than others. One important part is the concept of Ergodicity. When we invest in a new venture most investors invest in the founders, of course in their business plan, but mainly in the founders and the general area or industry they are active in. Investors rarely make only one investment, that is too high risk, instead they would invest in a portfolio of companies.
The RCO initially follows the current conventional investment logic where investors would invest into one company at a higher risk (and therefore higher return). If that company is successful (and investors and founders decide together upfront what financial success looks like) the company will direct the ‘additional profits’ into the ecosystem. This concept is borrowed from the micro finance work done by for instance Gramin Bank (2 and 3rd models) where the community gets to keep and direct resources. Investors that have a good track record and relationship with the founders would be invited as investors into the full ecosystem which is then an investment strategy into a particular industry with several founders i.e. more of a portfolio approach driven where insiders in the industry do the investing. This significantly lowers the risk and in terms of ergodicity drive profits towards the time and ensemble average instead of standing the risk of losing a full investment as a result of one investment failing to deliver. For founders this is of course interesting as they can, if they are successful with the initial venture, build a strategy for further investment into the space and ‘growing the cake as a whole’. It also gives them access to additional capital for investments into expansion potentially at a lower risk and therefore cost of capital.
There are resources on this webpage like articles, podcasts and different canvases and a canvas that you can fill out to get started and get clear. We are currently working on developing a curriculum that you can go through to shape your RCO. There is also a possibility to employ us (Amit Paul and Nils von Heijne) as consultants to workshop your idea and through that also gain access to our network of legal assistance.