R004: Exit to Community

1. Overview

Exit to Community (E2C) represents a fundamental shift in the traditional startup lifecycle, offering an alternative to the standard venture capital-driven path of acquisition by a larger company or an Initial Public Offering (IPO). At its core, E2C is a strategic process for transitioning a company’s ownership and governance to its community, which can include employees, users, customers, and other key stakeholders. This model directly addresses the problem of value extraction, where the financial gains of a successful enterprise flow primarily to a small group of founders and investors, often at the expense of the very community that co-created the value. By transferring ownership, E2C aims to create more equitable, democratic, and resilient organizations where value is shared more broadly among those who contribute to its creation and success.

The concept of Exit to Community has emerged from a growing dissatisfaction with the prevailing startup culture, which prioritizes rapid growth and high-multiple returns over long-term sustainability and stakeholder well-being. Its intellectual roots can be traced to various movements, including the platform cooperativism movement, the open-source software community, and long-standing traditions of cooperative and mutual ownership. The term was popularized by the Media Enterprise Design Lab at the University of Colorado Boulder and the organization Zebras Unite, who have been instrumental in developing the frameworks and promoting the narrative around this alternative exit strategy. E2C is particularly relevant in the digital age, where network effects and user-generated content are critical to the success of many platforms, yet the value generated is rarely shared with the users who create it.

For organizations and the commons, the E2C model is significant because it provides a practical pathway to operationalize values of equity, democracy, and stewardship. It challenges the notion that the only way to build a successful company is to follow the venture capital playbook. Instead, it offers a vision of a more regenerative and distributed economy where companies are accountable to their communities and are designed to serve their long-term interests. By aligning the incentives of the company with those of its community, E2C can foster a stronger sense of loyalty, engagement, and collective ownership, ultimately leading to more sustainable and impactful organizations. This approach is not just about a one-time transfer of ownership; it’s about fundamentally re-imagining the relationship between a company and its community, moving from an extractive model to a generative one.

2. Core Principles

1. Community Ownership as the End Goal: The fundamental principle of E2C is the intentional transfer of a company’s ownership from a small group of founders and investors to the broader community that sustains it. This is not simply about profit-sharing but about the transfer of actual equity and the legal rights that come with it, ensuring that the community has a tangible stake in the organization’s future.

2. Democratic Governance and Participation: E2C is not just an economic transition but also a political one. It involves creating governance structures that are democratic and participatory, giving community members a meaningful voice in the decisions that affect them. This can take various forms, from cooperative-style one-member-one-vote systems to more complex multi-stakeholder governance models.

3. Equitable Value Distribution: A core tenet of E2C is that the value created by the community should be distributed equitably among its members. This principle challenges the traditional model where value is extracted and concentrated in the hands of a few. In an E2C context, this can manifest as profit-sharing, dividends, or reinvestment in the community’s well-being.

4. Long-Term Stewardship and Sustainability: Unlike traditional exits that prioritize short-term financial gains, E2C is focused on the long-term stewardship and sustainability of the organization and its mission. The goal is to create a resilient organization that can continue to serve its community for generations to come, rather than being sold off to the highest bidder.

5. Transparency and Accountability: For an E2C to be successful, there must be a high degree of transparency in the organization’s operations, finances, and decision-making processes. This transparency builds trust and enables the community to hold the organization accountable to its mission and values. It is a prerequisite for meaningful community participation and governance.

6. Financing for the Common Good: E2C often requires innovative financing models that are aligned with its community-centric mission. This can involve raising capital from community members themselves, or from impact investors who are willing to accept a different kind of return on their investment. The goal is to avoid the pressures of traditional venture capital, which can often be at odds with the long-term interests of the community.

3. Key Practices

1. Community Mapping and Engagement: The first step in any E2C process is to identify and engage the relevant community. This involves mapping the various stakeholder groups, understanding their needs and motivations, and building relationships based on trust and mutual respect. This is a crucial foundation for any subsequent steps in the E2C process.

2. Legal and Financial Structuring: A key practice in E2C is the careful selection and implementation of appropriate legal and financial structures. This can involve converting to a cooperative, establishing a perpetual purpose trust, or creating a multi-stakeholder ownership model. The choice of structure will depend on the specific context and goals of the organization.

3. Phased Transition of Ownership and Governance: An E2C is rarely a one-time event but rather a gradual process of transitioning ownership and governance to the community. This can involve a phased buy-out of existing investors, the gradual transfer of voting rights, and the progressive decentralization of decision-making power. A phased approach allows the organization and the community to adapt and learn as they go.

4. Capacity Building and Education: For a community to effectively own and govern an organization, its members need to have the necessary skills and knowledge. This requires a commitment to capacity building and education, which can include training in financial literacy, cooperative governance, and participatory decision-making. This is an ongoing process that is essential for the long-term success of the E2C.

5. Developing a Community-Centric Business Model: An E2C often requires a fundamental rethinking of the organization’s business model to align it with the interests of the community. This can involve developing new revenue streams that are not extractive, or creating products and services that are designed to meet the community’s needs. The goal is to create a business model that is both financially sustainable and socially beneficial.

6. Cultivating a Culture of Participation and Co-creation: A successful E2C is not just about changing structures and processes; it’s also about cultivating a culture of participation and co-creation. This involves creating spaces for dialogue and deliberation, fostering a sense of shared ownership, and empowering community members to take an active role in shaping the organization’s future. This cultural shift is often the most challenging but also the most rewarding part of the E2C process.

7. Measuring and Reporting on Community Value: To ensure that an E2C is achieving its goals, it is important to develop metrics for measuring and reporting on the value that is being created for the community. This can include both financial and non-financial metrics, such as the number of community owners, the level of community engagement, and the organization’s social and environmental impact. This data can be used to hold the organization accountable and to inform future decision-making.

4. Implementation

Implementing an Exit to Community (E2C) is a complex and multifaceted process that requires careful planning and execution. A typical implementation journey begins with a deep and honest assessment of the organization’s readiness for such a transition. This involves evaluating the existing ownership structure, the level of community engagement, and the alignment of the company’s mission and values with the principles of E2C. Once the decision to pursue an E2C has been made, the next step is to develop a comprehensive transition plan. This plan should outline the key milestones, timelines, and resources required for the transition, as well as a clear strategy for communicating with and engaging the community throughout the process. A critical part of this planning phase is the selection of the appropriate legal and financial structures to facilitate the transfer of ownership and governance. This may involve consulting with legal and financial experts who have experience with cooperative conversions, steward-ownership models, or other forms of community-centric ownership.

The execution of the E2C plan is typically a phased process that unfolds over several months or even years. The initial phase often involves a period of intensive community organizing and education to build awareness and buy-in for the transition. This is also the time to establish the governance structures that will enable the community to participate in the decision-making process. As the transition progresses, the focus shifts to the legal and financial mechanics of transferring ownership. This can involve a variety of mechanisms, such as a community-led fundraising campaign to buy out existing investors, the issuance of new classes of shares to community members, or the creation of a perpetual purpose trust to hold the company’s assets in stewardship for the community. Throughout this process, it is essential to maintain open and transparent communication with all stakeholders to manage expectations and address any concerns that may arise.

Several tools and frameworks can support the implementation of an E2C. The Exit to Community website, developed by the Media Enterprise Design Lab and Zebras Unite, provides a wealth of resources, including case studies, legal templates, and a community of practice. The Platform Cooperativism Consortium is another valuable resource, offering expertise and support for companies that are looking to transition to a cooperative model. In terms of success metrics, an E2C can be evaluated on a number of fronts. Financially, success can be measured by the company’s ability to achieve long-term financial sustainability without relying on extractive forms of capital. Socially, success can be measured by the level of community ownership and engagement, as well as the company’s impact on the well-being of its community. Ultimately, the success of an E2C is not just about the numbers; it’s about creating a more equitable, democratic, and resilient organization that is truly accountable to its community.

5. 7 Pillars Assessment

6. When to Use

• For mission-driven startups: When a startup is founded with a strong social or environmental mission, an E2C can be a powerful way to lock in that mission and ensure that it is not compromised by the pressures of traditional venture capital.
• For companies with strong community engagement: When a company has a highly engaged and supportive community, an E2C can be a natural next step to formalize that relationship and give the community a real stake in the company’s future.
• As an alternative to acquisition: When a company is facing the prospect of being acquired by a larger corporation, an E2C can be an attractive alternative that allows the company to maintain its independence and stay true to its values.
• For succession planning: When a founder is looking to retire or step back from the company, an E2C can be a way to ensure that the company is passed on to the community that helped to build it, rather than being sold to the highest bidder.
• To resolve internal conflicts: In cases where there is a significant misalignment of interests between a company’s leadership and its community, an E2C can be a way to reset the relationship and create a more collaborative and harmonious organization.
• For platform-based businesses: For businesses that rely on user-generated content or network effects, an E2C can be a way to reward the users who create the value and to create a more sustainable and equitable platform.

7. Anti-Patterns & Gotchas

• Lack of genuine community engagement: A common pitfall is to treat the E2C as a top-down process that is imposed on the community, rather than a bottom-up process that is co-created with them. This can lead to a lack of buy-in and a failed transition.
• Ignoring the legal and financial complexities: The legal and financial aspects of an E2C can be complex and require specialized expertise. Failing to properly address these issues can lead to legal challenges, financial instability, and a failed transition.
• Underestimating the cultural shift: An E2C is not just a technical process; it is also a cultural one. It requires a significant shift in mindset from all stakeholders, and failing to invest in this cultural shift can lead to a failed transition.
• Lack of a clear and compelling vision: For an E2C to be successful, there must be a clear and compelling vision for the future of the organization that is shared by all stakeholders. Without this vision, it can be difficult to motivate people to participate in the transition.
• Failing to manage expectations: An E2C is a long and challenging process, and it is important to manage the expectations of all stakeholders. Over-promising and under-delivering can lead to disillusionment and a failed transition.
• Not planning for the post-exit phase: The E2C is not the end of the journey; it is the beginning of a new one. It is important to have a clear plan for how the organization will be governed and managed in the post-exit phase to ensure its long-term success.

8. References

1. Mannan, M., & Schneider, N. (2021). Exit to Community: Strategies for Multi-Stakeholder Ownership in the Platform Economy. Georgetown Law Technology Review, 5(1), 1-38. https://georgetownlawtechreview.org/wp-content/uploads/2021/05/Mannan-Schneider-Exit-to-Community-5-GEO.-L.-TECH.-REV.-1-2021.pdf
2. Berman, N. (2022, March 8). Exit to Community: A New Model for Organizations. Fractured Atlas. https://blog.fracturedatlas.org/exit-to-community
3. P2P Foundation. (n.d.). Exit to Community. P2P Foundation Wiki. https://wiki.p2pfoundation.net/Exit_to_Community
4. Scholz, T. (2016). Platform Cooperativism: Challenging the Corporate Sharing Economy. Rosa Luxemburg Stiftung. https://rosalux.nyc/platform-cooperativism-challenging-the-corporate-sharing-economy/
5. Schneider, N. (2020, August 31). Exit to Community. Noema Magazine. https://www.noemamag.com/exit-to-community/