GOOD Questions About the Jumo Acquisition
In the wake of the announcement of the intent to GOOD to absorb Jumo, questions arise about form, functions, policy, and societal value.
There is certain to be plenty of discussion over the lessons of Jumo’s launch, short independent life, and prospective absorption into GOOD announced this week. While reflection is always useful, I think most of the lessons of Jumo were evident when it launched—though at that time, they were positioned as questions: How is Jumo different? How will it attract an audience? What problem is it solving? Why should anyone participate, given there are quite similar alternatives?
In the wake of the announcement of the intent to “combine forces,” I think the most interesting thing to consider, yet again, are questions. The questions are not about strategy but about forms, functions, policy, and societal value.
While the transaction has raised eyebrows because it involves a firm that was organized as a for-profit “acquiring” a firm that was organized as a nonprofit, the actual nature of the two organizations is far more complex. First, while GOOD is organized as a for-profit, reasonably informed sources I’ve spoken to indicate that it has never been profitable, though it apparently is getting close to breaking even (note: I do not have direct evidence of this, and this information could be wrong). If that’s true, then GOOD is a subsidized organization, just like Jumo. While Jumo is organized as a nonprofit, the funds that have subsidized it have presumably primarily gone to pay for the salaries of developers, designers, and coders, and for the promotion of the platform. Given that Jumo didn’t have much success attracting an audience or raising funds for nonprofits, you have to ask what societal value was delivered. It’s not clear to me how Jumo is different than a for-profit start-up that received venture capital but never reached profitability (other than that the venture capital was tax-free). For that matter, it’s worth asking which of the two organizations has received a greater amount of subsidy over its lifetime. I would guess that it’s GOOD, not Jumo.
So ask yourself this: What’s the difference between an unprofitable, subsidized for-profit with a social good mission and a nonprofit that hasn’t delivered much social good? The only answer that I can come up with is the US Tax Code and state corporation laws. That points to the increasingly urgent issue of addressing this country’s outdated legal structures. For more thoughts on this issue, I recommend taking a look at Rob Reich’s recent lecture, “The Promise and Peril of the New Social Economy,” for the graduating class at Stanford.
Those out-dated legal structures may throw a wrench in all the plans announced—and make it very strange that the announcement was made in such definitive language. As Stephanie Strom points out in her New York Times article on the announcement, “Two Groups That Help Nonprofits in a Merger,” according to the laws of the State of New York, where Jumo is incorporated, the state Attorney General must determine what the fair market value of Jumo is—and the acquisition is conditional on the price agreed exceeding that amount. Now, I have to admit I’m quite curious as to how one negotiates an acquisition when a third party gets to determine the price at a later date.
How the Attorney General will make that determination is of course very unclear. I doubt that AG’s office has much experience in determining fair market value of nonprofit organizations, especially those that have no physical assets. In fact, it’s a bit more complicated than that. Jumo has also made its IP open source, and its audience is quite small and falling, meaning it has questionable intangible assets. Again, given that there isn’t a “market” for Jumo—meaning it’s unlikely that there are other potential “buyers”—how exactly will the AG set a fair market value for an organization with no assets and a falling audience? A clear-eyed look at Jumo suggests that the rumored acquisition price of $0 isn’t particularly far-fetched. I find it hard to believe though, that the Attorney General’s office is going to be comfortable declaring Jumo—the result of millions of dollars of charitable contributions—to be $0, whether it’s accurate or not. So presumably the acquisition is not nearly as certain as the announcements have made it sound.
Which brings us yet again to the issue of our outdated legal structures. This certainly won’t be the last “acquisition” of a nonprofit by a for-profit, socially conscious organization (provided that the whole thing doesn’t blow up so badly everyone is scared off), and it shouldn’t be.
It really is time to get serious about how our policy environment affects—for good and ill—how social value is delivered.
Tim Ogden is Executive Partner at Sona Partners, a thought leadership communications firm. He has edited 4 books on the intersection of business strategy and technology published by Harvard Business School Press and co-authored or ghostwritten several articles for Harvard Business Review. He is frequently quoted in the Wall Street Journal, New York Times, and Financial Times. You can follow him on Twitter: @philaction or @timothyogden.
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COMMENTS
BY Bradford Smith, Foundation Center
ON August 19, 2011 01:51 PM
Great piece Tim, very thoughtful. We pulled some of your GOOD questions off Twitter and added those from other Tweets over here http://pndblog.typepad.com/pndblog/2011/08/jumo-and-some-good-unanswered-questions.html
BY Allen Bromberger, Partner, Perlman & Perlman,
ON August 19, 2011 04:41 PM
Great article. As the space between nonprofit and for-profit ventures gets smaller and smaller, these issues will keep coming up, and traditional legal doctrines often don’t deal with them very well.
As to your point concerning valuation of the nonprofit—or more accurately, it’s assets, which are what will be sold—there is a long history of such transactions, and the process is not as mysterious as your article suggests. The Attorney General’s office generally does not determine the value of assets being sold—rather, the charity’s board determines fair value using one of several well-established methodologies familiar to any experienced business lawyer or accountant. The charity then seeks approval from the Attorney General for the transaction. The transaction is “on hold” until approval is received, either as proposed, or with modifications agreed upon by the parties. This is not so different from any other transaction that needs a regulatory approval before it can close.
While the AG has the right to reject a valuation it feels is unfair, in practice, this does not usually happen unless there is problem with the valuation process itself. This can occur, for example, when the appraisal is done by an insider or someone unqualified, the valuation is not properly documented, or there is some other conflict of interest or factor that suggests the board is not acting in good faith or in the best interests of the charity, or tha the charity is not receiving fair value for its assets. But absent something like that - and assuming the charity can provide whatever background information and documentation the AG requests—the transaction should go through without much difficulty other than delay.
The NYS Attorney General’s office has a lot of experience with these kinds of transactions, up to and including the “sale” of the New York Stock Exchange to Archipelago several years ago (yes, the stock exchange is a nonprofit). They are usually very professional in their review. That’s the good news. The bad news is that the office is perennially short-staffed and these transactions can sometimes take some time to get approval. That’s especially true in times like this when state budgets are under so much pressure.
By the way, although specific procedures vary from state to state, the same is more or less true in all states that require such approvals. Not all of them do. In some cases, where a transaction like this is foreseeable, it may be preferable to organize the charity in a jurisdiction like Delaware that doesn’t require any of this.
BY Lucy Bernholz
ON August 19, 2011 07:00 PM
Tim
Good piece. Makes me realize that it’s actually easier to “follow the money” in our new social economy than it is to “follow the social good.” This example, like many others, reveals how we are now OK with, in fact encouraging of, both nonprofit and for profit purveyors of social good. While the enterprise structures differ and they operate within different legal mechanisms and with different oversight/expectations of transparency - we assume that both can produce social good. It’s one more reason we need to reconsider how it is we are going to define those social goods, know them when we see them, and, yes, measure them.
Lucy
BY Bradford Smith
ON August 21, 2011 02:37 PM
Very informative response Allen from someone who knows the law. Maybe you are not an expert on the actual valuation methods used in such cases. For example, how might the value of code that will be open source be determined (I know of at least one methodology SLOC)? How would the value of the email lists, profiles, click-through data, etc. that Jumo has on all its users be determined,? And how would one place a value on the nonproift profiles that organizations have uploaded into Jumo’s databases?
Last question: The deal was announced but the parties are saying the actual terms cannot be disclosed. Is there any requirment to disclose the terms of the deal once it is approved when the the party being acquired is a tax-subsidized non-profit?
thanks!
BY Timothy Ogden
ON August 21, 2011 07:32 PM
Allen—thanks for the insight into the charitable valuation process. I really am curious as to how these methodologies work when they apply to intangible assets, open-source IP, and “assets” that are tied up in privacy policies, regulation and unclear copyright ownership—all things that Brad points our are a big part of what Jumo has.
I’m even more curious and frightened to discover that Delaware allows for-profits to acquire non-profits without any review process.
Tim
BY Bradford Smith
ON August 22, 2011 04:55 AM
Alan, in my comment asking about how such a deal might actually be valued in practice, I didn’t mean to imply that you were not an expert in doing so! just curious to learn how the assets involved might be assessed and imagining that this might be a specialized type of accounting….or maybe it is much simpler than it looks. Whatever the case, we undoubtedly be seeing more cases like this.
Brad
BY Lauren Burnhill, One Planet Investments
ON August 25, 2011 02:37 PM
Tim, your article was quite thought provoking, as I’ve not wrestled with the corporate structure/hybrid issue from this angle. The cynic in me wonders if the founders of the non-profit are perhaps smarter than the founders of an unprofitable for-profit, because the former are exposed to less personal risk. My practical side concurs wholeheartedly that we need to pay closer attention to our policy environment. Today’s sustainable non-profit is generating revenue streams and social impact for-profits (whether hybrids or otherwise) are generating social goods as well as financial returns (or at least, that’s the idea). One person’s synergy is another’s private inurement, making it tricky at times to perceive who benefits from what and why. Much as corporate structure is a critical element for multiple bottom line (MBLs) businesses, the money trying to reach those MBLs is getting quite snarled in Dodd Frank. Honestly, given budget cuts at the SEC and the state of global financial markets, is pushing social impact intermediaries into the regulated zone from day one logical or reasonable? I’d love to see and be part of a dialogue around creating a policy environment that encourages social good across a range of structures and instruments!
One question for Alan, when a non-profit is acquired for a non-zero sum, where does the money go? Is it returned to the original donors?
BY Timothy Ogden
ON August 25, 2011 03:30 PM
Lauren,
thanks for the comments. It’s true that a big part of the question about how to remake policies has to be considering the capabilities of the regulatory agencies involved. One of the reasons that the non-profit sector is such a mess is that the agencies charged with regulating it usually put it at the bottom of the list.
As the boundaries blur, that creates ever greater possibilities of abuse of the public trust, even if unintentional.
In terms of your last question, the money is supposed to go to the public good that the non-profit was pursuing. In some cases that means creating a new non-profit or foundation to spend the funds. In others, it would take the form of a donation to a non-profit engaged in the cause. As far as I know, there is no public information on what form that will take in relation to Jumo. It’s hard to believe the sums will be large enough to justify creating a trust or foundation. But since the organization nominally covered every cause its not clear what type of non-profit would be appropriate.
BY Lauren Burnhill, One Planet Investments
ON August 31, 2011 05:36 PM
Thanks, Tim! Interesting how squishy “public good” can be. To the extent that today we are creating different kinds of non-profits and hybrids, perhaps we can define what we want that to mean up front, in the by-laws or something. “In the event of an acquisition or transformation, surplus capital will be used to ...” I’ll be curious to learn how Jumo/GOOD address the public good issue. Are there activities of the combined entity (employee training, research, impact measurement systems) that could fall into the public good category? Or is the public good always in the hands of non-profits? Happily my mental map isn’t visible as I suspect I’m straying into areas of philosophy beyond my ken…
Yes, I am @LaurenOPV - the tweet letting me know you’d responded to my comment was appreciated.