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Nonprofit Startups Can Learn From The WeWork IPO Debacle

By: Jess Birken

Tel: 612-200-3679
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I work with a lot of nonprofit founders, and all of them have a certain kind of pride in their work. And they should! Lots of people have ideas, but there's not that many people out there who are willing to put their time, effort, knowledge, and money into it. We need entrepreneurial founders in the nonprofit sector.

But sometimes the entrepreneurial mindset can get founders into trouble.

You see, nonprofit founders don't have full control over the organizations they've started. Founders have to hand over that control to other board members, and the board as a whole makes decisions for the nonprofit. In other words, the board may choose to do things that founder doesn't necessarily agree with.

It's a tough dynamic for anyone – and I think it's made tougher if founders are super familiar with the for-profit world, where it's a lot easier to hack the system and make sure that the founder has total control.

Take the WeWork IPO debacle, for example.

If you were watching the headlines in the fall of 2019, there was tons of drama surrounding WeWork. On September 24th, Adam Neumann, WeWork founder and CEO, stepped down after weeks of news about his questionable behavior and business practices, and the decision to delay the IPO that had been in the works for months.

So how did we get here?

Well, it's definitely in part because of Founder's Syndrome, or Founderitis or whatever you might call it. Neumann set up this crazy governance structure to make sure he was in power. Check this out – Rani Molla says in her Vox article:

"To ensure that he could maintain control over WeWork, Neumann set up a multi-class voting structure for the company — which we’ll call super voting stock — that gives his shares much greater voting power than those sold to regular people.

In the case of WeWork, Neumann’s shares are worth three votes each now that he’s stepped down, according to Bloomberg reporting. In the updated version of WeWork’s IPO filings, Neumann’s voting shares had already declined to 10 votes for every one vote a regular person would get when they buy a share of WeWork. That was down from the first public offering filings, where his shares had been worth 20-to-1."

You read that right – originally, Neumann's "super votes" were each worth TWENTY TIMES MORE than other votes. Meaning the "board" that was supposed to govern the business was really just for show – Neumann basically held all the power. As the debacle played out, in hopes of going public (and making his shares worth way more $$), he was forced to reduce his voting power and step down as CEO.

But it was clearly a journey for him to get to that point. Before then, it was all about maintaining power as the founder.

This isn't specific to WeWork either. Plenty of other for-profit companies can have these "super votes" in their governance structure so that founders and other people involved early on have the most power. And that's possible (though maybe not always advised) in the for-profit world. But for nonprofit organizations, this is not permitted. Nonprofits have no shareholders and cannot issue dividends. Their assets are seen as being held in trust for the public community they serve. And the board must do whats in the best interest of the organization and what furthers its tax-exempt purpose. Things are more black and white. If founders sit on the board of directors, they legally get one vote, the same as everyone else because they don’t hold stock or shares that can tip the scales in their favor. Even the gray areas are more black and white when it comes to accepted practice. For instance, voting by proxy is discouraged by the sectors thought leaders (although it may be legal depending on your state statute). And if a founder opts to be a paid Executive Director / CEO, then sector best practice says they should answer to the board as an employee or hold a seat that is ex officio (with no vote).

That can be a really hard pill to swallow for the people that put their blood, sweat, and tears into starting a new nonprofit. It's hard to give up control, especially when you're the one with the original idea and vision. Who knows what crazy ideas the other board members will have?

But ultimately this is a good thing – having a strong and functioning board helps bring in new ideas and expertise. And from the WeWork fiasco, it's clear that the founder isn't always the right person to bring an organization to the next level. In the nonprofit sector, you just can't get around working together, and that's a good thing. All of us is stronger than any one of us.

Are you starting a new nonprofit? Check out my Six Essential Tips for New Nonprofits!

Jess Birken is the owner of Birken Law Office, a firm designed to help nonprofits. Ideal Client Engagements are nonprofits looking for a strategic partner who will give pragmatic advice and keep business operations on track so the mission work stays a priority.

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