5.2 SOAF 101

An introduction to steward-ownership aligned financing

 

The definition of steward-ownership-aligned financing applies the core principles of steward-ownership – self-determination and purpose-orientation – to the financing side of things, thereby forming the foundation for how investments can be designed.

In order to put this definition to life and create the investment quality that aligns with its definition, adjustments, alignments and twists are carried out in three key areas of investments: 1) governance, 2) returns and 3) liquidity; to turn conventional investment structures into steward-ownership-aligned financing.

 

Governance: Who has entrepreneurial control over the company?

Following the principle of self-determination, in steward-ownership-aligned financing, entrepreneurial power (control) over the company is not an asset one can buy. It is not distributed proportionally to capital put into the company – money does not equal power.

Guided by the question “What form of stewardship will help this company thrive?”, control is being allocated based on the question “Who is best suited to steer the company?”, not based on the automatism of “Who is the highest bidder?."

This means that while investments in steward-ownership-aligned financing don’t automatically come with voting rights, investors play the role of key partners for the company, with specific rights tied to that role. They are viewed as enablers and can be involved in the governance in ways that extend beyond overtaking the control.

Investor involvement can be designed in various ways: through information rights, consultancy, co-determination and veto rights on specific aspects, investor provision rights giving them a say in situations connected to the performance of their investment, or – depending on your steward-ownership model – even a minority of voting rights. The suitability of these rights depends on the role and involvement that the company and the investors envision and the relationship they want to build.

 

Return for investors: How much is enough?

Of course, investors expect to receive their initial investment back, along with a suitable return – provided the company is successful. This also holds true in steward-ownership-aligned financing, with one key difference: the principle of purpose-orientation reshapes how returns are structured, demanding limits on economic claims in terms of duration, amount, or influence.

This principle ensures that the company’s value primarily serves its mission, rather than being maximized for external financial gain – whether it be for personal gain, on behalf of investors or other financially participating parties. At the same time, it allows for fair compensation to all stakeholders for their contributions, including investors. Whereas in conventional (equity) investment structures returns are typically uncapped, steward-ownership imposes some form of limitation on returns, thus counteracting the maxim of making as much profit as possible by optimizing the company towards that goal. The discussion therefore evolves from “How much can we make?” to “What is enough? What is a risk-adequate return for the investment? What is a fair compensation for the investor’s contribution?."

 

Liquidity for investors? Structured exits!

In steward-ownership, there are many ways for investors to access the liquidity they seek. However, because control remains with the company and not with capital – following the principle of self-determination –, investors cannot steer the company based on their individual liquidity needs. That’s why, in most cases, steward-ownership calls for a structured exit: a predefined and agreed-upon path to liquidity that respects both the integrity of the company and the needs of its investors.

As in other financing models, liquidity in steward-owned companies can come from a variety of sources: the company’s own cash flow, new investments or refinancing (equity or debt), the secondary market, or, in some cases, even an IPO – though in this case with limited or no voting rights. A sale to another steward-owned company is also a possible scenario.

One welcomed side effect of focusing on these kinds of liquidity options – especially those that don't involve an IPO or sale – is that companies tend to stay more closely aligned with their mission, their long-term vision, and the next meaningful steps in their journey. Rather than chasing rapid increases in valuation, these businesses prioritize corporate health and purpose. And in the long run, this orientation pays off: steward-owned companies show significantly higher survival rates compared to those with conventional ownership structures.

 

Financing instruments: How do things change on the technical side?

So having laid out the underlying essence of steward-ownership-aligned financing, let’s have a look at the technical side of things – financing contracts and cap tables. Steward-ownership-aligned financing usually means using nontraditional and innovative financing structures. There is a spectrum of ways and instruments to implement steward-ownership-aligned financing, with a lot of space to fit the individual needs and situations of companies and investors.

Of course bootstrapping and normal debt work just fine, but what if you have capital needs and the investment is too high, risky or early-stage to be fully covered by loans?

While we will dive deeper into the specific ways to structure steward-ownership-aligned financing later, it’s important to note that this approach typically involves structures that extend beyond traditional equity. There are a variety of instruments available, ranging from normal loans, mezzanine instruments to non-voting (redeemable) equity instruments, all of which can be creatively shaped to fit the needs of the company and its investors. The range of what can be used is wide, but the terms need to be adapted to make the different instruments compatible with steward-ownership-aligned financing. While this may sound complex, it is absolutely possible, has been successfully implemented before, and we will share concrete examples later on to illustrate how these structures can work in practice.

 

A different quality of capital and investor-company dynamic

The characteristics of steward-ownership-aligned financing – following the principles of steward-ownership – fundamentally challenge core mechanisms of the current investment world. This presents a different quality of capital, paving the way for a larger plurality of company models and investor relationships.

In steward-ownership-aligned financing, investors, founders and other stakeholders are aligning and structuring their interests and needs around the purpose and the development of the company. Ensuring the company develops in a way that fulfils its purpose and achieves success is just as important to investors as it is to entrepreneurs. Profitability and operating as a financially healthy business is absolutely crucial – but not as an end in itself or mainly for higher shareholder value but to work sustainably towards the company’s purpose in the long run, while also covering capital costs and providing adequate pay for the work put into the company. This stands in contrast to conventional equity investments, where the company’s orientation towards creating shareholder value is often – at least in the long run – dominating the purpose of the company.

As a result, steward-ownership-aligned financing allows for another quality of (risk) capital, relationships and roles that cater to a diverse range of companies. This includes startups like VYLD and Haferkater, which prioritize entrepreneurial independence and purpose over quick exit strategies, as well as companies like Patagonia, Bosch or Organically Grown Company seeking succession solutions aligned with their values – and thereby becomes part of the global growing movement and ecosystem of alternative and non-exit-oriented financing models.