Photo: Vyld

Radical products need radical business structures

Ines Schiller founded VYLD with the goal of producing reliable, healthy, and sustainable period products that contribute to ocean conservation and with the vision to build an “Algaeverse” – a universe of sustainable and healthy absorbent algae products (from pads, liners and even period panties over baby diapers to adult incontinence care) that helps establish a regenerative economy within the boundaries and cycles of the living world. At the same time, VYLD wants to reduce the stigma around menstruation and contribute to period health and empowerment for all menstruators.

Besides the environmental benefits, using seaweed also offers health and performance benefits. Research indicates that VYLD’s tampon fibers, derived from marine algae, preserve the vaginal microbiome, and outperform conventional tampons in testing. [40]

Looking for a way to set up a company structure aligned with their values, vision and their concept of entrepreneurship, Ines and Melanie Schichan of VYLD discovered the concept of steward-ownership. They didn’t want to build up VYLD and then make an exit, but focus on their business model and mission in the long run. The questions of ownership, power distribution and a fitting financing structure were central for Ines and Melanie. To them, steward-ownership was a way to legally enshrine their company's vision – and also to credibly communicate it to potential investors.

From the start, they strategically built their financing structure to facilitate a transition into steward-ownership, integrating a group of investors as well as a crowdfunding campaign in their financing model. In their second financing round, VYLD collaborated closely with its investors to successfully convert the financing instrument into one that better suited their needs: from subordinated loans into a “Future Profit Partnership Agreement” (FPPA) based on profit participation certificates. With the implementation of this new financial instrument, although not selling shares, the investments are still categorized as equity, allowing VYLD to qualify for subsidies and bank loans.

Photo: Vyld

Designing an aligned financing structure

Ines and Melanie understood that they needed significant financial support for product development and couldn't rely on bootstrapping. However, they were also mindful of not raising more money than necessary, maintaining a frugal approach to resource management. 

Ines and Melanie put a great deal of thought into the choice of financing instruments and their potential impact, particularly in terms of the resulting incentive structures. From the very beginning, Ines and Melanie were determined not to build VYLD only to sell it for a quick profit. They rather envisioned a company with a purpose that would create a lasting impact. As a result, traditional venture capital as a treadmill to hyper growth and exiting the company wasn’t a path they were interested in. Instead, they were seeking investors who believed in their idea and were willing to take risks for the long haul.

In between their two financing rounds, VYLD converted to a steward-ownership structure. They implemented the veto-share model, where the Purpose Foundation holds 1% of the company shares, ensuring that VYLD will always operate in alignment with the steward-ownership principles, safeguarding the freedom for mission-driven decisions and the company’s interest over time.

They initiated a first financing round in June 2021 (pre-seed) with the objective to build a commercial prototype of the Kelpon. They were able to find a group of investors ranging from (impact) investing funds to business angels and private investors who understood and supported their mission and their journey to steward-ownership. VYLD opted for subordinated loans as their financing instrument. They developed their first own non-exploitative financing contract with which investors will receive a capped but risk-adequate return if the company is successful. However, Ines and Melanie encountered a hurdle with subordinated loans. The characteristics of this financing instrument – even when structured in an equity-like manner – resulted in depiction of debt on their balance sheet. This could potentially deter funding agencies, state funding and banks from providing grants or additional loans due to the perceived over-indebtedness, even though it did not reflect the real situation of VYLD.

Together with their lawyers, they managed to create a contractual financing structure that was recognized as equity in their balance sheet, presenting a more favorable financial picture. They designed this instrument based on profit participation certificates and named it the Future Profit Partnership Agreement (FPPA). They converted the subordinated loans from the first financing round into these FPPAs to reclassify the received capital as equity rather than debt.

The FPPAs answered another important challenge for VYLD: FPPAs can continuously be used to get additional investors on board if needed. VYLD's initial financing structure demanded negotiating the relative amount of co-determination rights given to investors per round. In the FPPA, the amount of those rights per investor is coupled to the amount invested in relation to the overall invested capital. This provides VYLD with the liberty and flexibility to raise additional capital independent of traditional funding rounds.

Non-equity crowdfunding campaign

In between the financing rounds VYLD successfully executed a non-equity crowdfunding campaign in September 2022. With the help of the community they were able to raise the funds for starting the production of the first Kelpons. They had two primary motivations for using crowdfunding in their second financing round. Firstly, they wanted to explore alternative forms of financing and see what else was available beyond the typical investor-startup relationships. Secondly, they aimed to involve the community in the development of their products, recognizing the importance of engaging consumers early on. Crowdfunding emerged as an ideal means to achieve both objectives.

They decided on reward-based crowdfunding instead of crowdinvesting (or equity-based crowdfunding), meaning that instead of receiving financial return on the capital put in, the crowd receives products or other rewards like posters or workshops.

Founder compensation

Ines and Melanie decided to approach founder compensation similar to the way they treated financial investments. Their founders' principal (1) represents one year of universal basic income. They then asked themselves the questions which multiple/ cap felt good and is enough (2) for a return for this founder’s investment in relation to what they put in the company. They calculated their founder compensation to provide a basic income for the “rest of their lives” (a predefined amount of years), aiming to free themselves from dependence on wage labor. Any surplus financial value generated by VYLD beyond the capped compensation will not benefit the founders or their families. In contrast to voting rights, until the cap on founder compensation is reached, claims from the founder compensation are treated as an investment in the company, and will be inheritable to take care of families for whom otherwise security would have not been built up during the founder’s time at VYLD.

Source:

[40] Koch, C. Die Kraft des Ozeans. Bethmann Bank. (2023)

A windy yet clear path

With a firm commitment to steward-ownership from the very beginning and their non-exit-oriented financing structure in place, VYLD was able to transition into steward-ownership in late 2022 using a veto-share model. VYLD is a unique case showing the potential in asking difficult questions around ownership, power and financing before going into the first financing round – and the relevance of legally enshrining steward-ownership even when founders are completely aligned. It is also a case showing the potential of steward-ownership for collaboration, stakeholder engagement, social entrepreneurship and investor relations.