Etsy: Will ‘B-Corp’ Status Survive the IPO?

The planned initial public offering of shares in Etsy, the online handicrafts marketplace, will set up an intriguing test of mainstream investor appetite for companies that voluntarily submit their social and environment performance to scrutiny in order to become certified “B-Corps.”

It will also shine a light on new state legal structures intended to enshrine social purpose in a company’s charter.

Brooklyn-based Etsy filed paperwork with the Securities and Exchange Commission to sell shares to the public in an IPO that would allow Etsy to raise up to $100 million. Though not yet profitable, Etsy generated nearly $200 million in revenue in 2014, facilitating $1.93 billion in transactions between 1.4 million sellers and 19.8 million buyers. Its shares would trade on NASDAQ under the ticker symbol ETSY.

Etsy’s IPO would be the second among the more than 1200 B-Corps, for-profit businesses that voluntarily meet higher standards of social and environmental performance and that are certified by the non-profit B-Lab.

“Fundamentally, we believe that companies can and should use the power of business to create social good, which is reflected in our status as a Certified B Corporation,” CEO Chad Dickerson wrote in a letter included with the filing. “Our commitment to using business as a force of good manifests itself in the way we run our business.”

Denver-based Rally Software was the first B-Corp to IPO in 2013.  Natura, Brazil’s largest cosmetics company, obtained a B Corp certification post-IPO on the Brazil Stock Exchange. Other notable B-Corps include Warby Parker, Patagonia, and Ben and Jerry’s.

Losing its B-Corp certification, or a declining score on the publicly available B-Corp assessment, is a risk that could harm its reputation, Etsy says in the filing. In 2013 Etsy’s B-Corp assessment score was well above the B-Corp median.

That sets up the test. When Etsy obtained its certification, Delaware had not yet adopted its statute enabling the creation of public benefit corporations. That legal structure, versions of which have been adopted in nearly two dozen other states as well, expands a company’s fiduciary responsibility to allow it to take into consideration interests of the community, employees and other stakeholders in addition to those of shareholders. Delaware’s law gives shareholders a private right of legal action to enforce the social purpose and commitment to stakeholders.

B-Lab agreed to “grandfather” in the early companies, giving them time to register under the new state law. In its filing Etsy states that if its board “approves an amendment to our certificate of incorporation specifying that we become a public benefit corporation,” holders of more than 5 percent of the company’s stock are obligated to support it.

Etsy’s prominent investors include Accel Partners, Union Square Ventures, Index Ventures, and Tiger Global Management, notably none of which identify as “impact” investors. Venture capitalists Jim Breyer and Fred Wilson also own significant portions of the company.

“Investors are nervous about the private right of action in the public benefit corporation statute, but founders want to retain the B-Corporation certification,” says attorney Todd Johnson, who heads the Silicon Valley office of Jones Day. “This tension, and a general market lack of sophistication, creates some uncertainty around how the market will value B-Corporation certification.”

According to Etsy’s B-Corp profile, the company’s core services empower people to change the way the economy works so that ”very-very small businesses have much-much more sway in shaping the economy, local living economies are thriving everywhere, and people value authorship and provenance as much as price and convenience.” A 2013 study found that for 18 percent of Etsy entrepreneurs, selling on Etsy’s platform is a full-time occupation. But for most, their Etsy shops supplement their other income, to the tune of 8 percent. Seven out of eight Etsy sellers are women.

Additionally, Etsy pays its part-time workers 43 percent more than the local living wage, composts over 600 pounds of food waste each month at local community farms, and supports projects that train women and minorities in programming skills, according to the profile.

Etsy’s evolution as a publicly traded company will be watched closely as it seeks to generate profits while remaining committed to its mission. It has already faced criticism for its decision in 2013 to allow manufactured goods to be sold on the platform, along with handicrafts.

“People often ask me how I choose between the success of our community and the success of our business,” wrote Dickerson. “My answer is that I don’t have to choose; we have built a business that does well when our community is successful.”

Impact

Financial

Etsy’s sellers generated sales of $1.93 billion in 2014, up 43.3 percent from 2013. The company reported revenue of $195.6 million, up 56.4 percent% over 2013, and a net loss of $15.2 million, up from a net loss of $0.8 million in 2013.

Social

As of December, 2014,  Etsy had connected 54.0 million members, including 1.4 million active sellers and 19.8 million active buyers. A 2013 study found selling creative goods is the full-time occupation of 18 percent of Etsy entrepreneurs. Seven out of eight Etsy sellers are women.

Disclosure

One of a series of impact profiles produced in conjunction with the Case Foundation’s publication, “A Short Guide to Impact Investing.”

Todd Johnson serves as ImpactAlpha’s outside legal counsel.

Note: This article has been corrected to clarify the process by which Etsy may become a public benefit corporation under Delaware law.

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