Freestanding

Measuring Impact

If entrepreneurs and investors choose to measure and report on impact metrics specific to the company, they need to consider whether to develop completely customized metrics or to use standardized frameworks including IRIS and Toniic SDG Impact Theme Framework. The parties may also want to think about whether an independent audit of impact performance would be desirable. In addition to, or in lieu of, measuring and reporting on company-specific impact metrics, the parties may choose to evaluate and/or certify general social and environmental performance against third party standards.

Parties will need to agree on the set of metrics to measure the company’s impact performance, and a schedule for reporting actual results. Measuring impact can be difficult, so the parties should be careful to ensure that the metrics they choose to track accurately reflect the outcomes they’re seeking to achieve.

Metrics may be completely customized or based on publicly available frameworks. The most widely used public framework is IRIS, an online catalog of social, environmental, and financial performance metrics managed by the Global Impact Investing Network (GIIN). 

Sample language: The Company and the Investors have defined a set of metrics to assess the Company’s performance in [describe impact goals], which metrics are described in [Exhibit X]. [As long as the Investors hold at least X percent of the Shares purchased] OR [During the term of the Loan], the Company shall deliver to the Investors, within X days following the end of each [reporting period], a report setting forth [the metrics] OR [the Company’s progress toward each impact milestone] described in Exhibit X.

AUDITING IMPACT REPORTS

Similar to a financial audit, an impact audit uses a third party to verify a company’s reported performance against its agreed-upon impact metrics. This sample language assumes that impact metrics and reporting requirements are defined elsewhere in the term sheet.

Mandatory audit

Sample language: [As long as the Investors hold at least X percent of the Shares purchased] OR [During the term of the Loan], each Impact Report described in the preceding paragraph shall be audited by a third party organization with relevant expertise, [selected by the Investors and reasonably acceptable to the Company] OR [agreed upon by the Investors and the Company]. Costs of the audit shall be borne by the Company. If mutually agreed, the findings of the audit may be publicized by the Investors and the Company.

Optional audit language

Sample language: [As long as the Investors hold at least X percent of the Shares purchased] OR [During the term of the Loan], the Investors may require that the Impact Report described in the preceding paragraph be audited by a third party organization with relevant expertise, [selected by the Investors and reasonably acceptable to the Company] OR [agreed upon by the Investors and the Company]. If an audit is requested more frequently than once every [three] years, then the investors shall pay for the audit, unless the audit reveals substantial reporting errors. If mutually agreed, the findings of the audit may be publicized by the Investors and the Company.

MEASURING GENERAL SOCIAL AND ENVIRONMENTAL PERFORMANCE

In addition to or in lieu of company-specific impact metrics, the parties may agree to assess social and environmental performance against standards set by a third party organization such as GIIRS (Global Impact Investing Rating Service), a ratings tool that assesses overall social and environmental performance. Other standards for overall social and environmental performance include the Ceres Roadmap to Sustainability and the Global Reporting Initiative

Sample language: [As long as the Investors hold at least X percent of the Shares purchased] OR [During the term of the Loan], the Company shall [annually complete the GIIRS Ratings Process] OR [describe the time period and define the standard for overall social and environmental performance measurement].

CERTIFICATION BASED ON GENERAL SOCIAL AND ENVIRONMENTAL PERFORMANCE

Entrepreneurs and investors may agree that a Company’s overall social and environmental performance be assessed and certified according to a recognized third-party standard. Companies with a B Corp certification, for example, must measure their performance against a set of standards set by the nonprofit B Lab.

If the company has not yet been certified by a third-party at the time of investment, investors and entrepreneurs may agree that the company will certify within a certain period of time after investment. If the company is certified at the time of investment, the founders may ask that investors commit to supporting the certification over time.

Certification after deal closing

Sample language: The Company shall seek to achieve certified B Corporation status within [time period] after the Closing, and shall maintain that status for as long as the Investors hold at least X percent of the Shares purchased during the term of the Loan.

Maintaining Certification

Sample language: The Investors acknowledge that the Company is a certified B Corporation, and to the extent possible under law, shall act in conformity with the Term Sheet for Certified B Corporations that the Company has entered into with B Lab. The Investors shall agree to take any actions reasonably proposed by the Board in order to meet the requirements of and to continue to operate as a B Corporation.

Term Sheets & Case Studies

Term Sheets

Notice – We are currently revising the content and layout of this section – it will be updated soon

These term sheets, like other impactterms.org content, are intended to help inform investors and entrepreneurs. It is not legal advice, and none of the content should be used verbatim or in any way without help from a lawyer. Our goal is to be comprehensive, so not all of the innovations we document are useful, and no innovation is always appropriate. You assume responsibility for the consequences of using documents or information found on our website.

Contingent Payment Instruments

Other Term Sheets

Terms

Case Studies

Low Profit Limited Liability Companies (L3Cs)

The Low-Profit Limited Liability Company, or L3C, is an alternative form of LLC that builds key program-related investment (PRI) requirements into the form’s charter documents. L3C statutes require, for example, that it must be organized to further a charitable or educational purpose articulated in its operating agreement. Financial returns cannot be a significant purpose of L3Cs, and they are prohibited from pursuing political or legislative purposes.

Given these restrictions, the promoters of the form hoped that investments in L3Cs would automatically qualify as PRIs, but the IRS has not issued any guidance to that effect. But even without automatic qualification, users of the form argue that it makes it easier for private foundations to conduct the due diligence necessary to complete PRIs and to comply with expenditure responsibility rules.

Term sheet language specific to L3Cs may be useful in the following situations:

  • the L3C will be formed at the time of the investment, and so the charitable or educational purpose has not yet been defined;
  • the investors want to modify the charitable or educational purpose in connection with the investment; or
  • the investors want a voice in any future changes to the charitable or educational purpose.
  • Identifying purpose with a L3C

Sample language: The [L3C state formation document] of the Company shall identify the Company’s purpose as [charitable or educational purpose definition].

  • Changing purpose with a L3C

Sample language: As long as the Investors hold at least X percent of the outstanding membership interests of the Company, [the vote of at least X percent of the preferred membership interests, voting as a separate class] OR [the approval of the Board, including the approval of the Series X Manager(s)], shall be required to change the Company’s [educational or charitable] purpose(s).

Alternative Entities

Investments in entities designed to protect mission may require different terms than investments in traditional entities. Entrepreneurs and investors may also want to establish a mechanism to convert a traditional entity into one of these alternative entities in the future. Once such mechanism is so-called “drag along rights.”

Agreeing on company’s social purpose

The social purpose corporation is a new corporate form that requires directors to pursue a social purpose in addition to shareholder return. State statutes require or allow social purpose corporations to commit to one or more specific social or environmental purposes that fall within statutory guidelines, and obligate the company to publicly report on its performance relative to those purposes.

Types of Alternative Entities

Term sheet language specific to social purpose corporations may be useful in the following situations:

  • the corporation will be formed at the time of the investment, and so the social purpose has not yet been defined;
  • the investors want to modify the definition of social purpose in connection with the investment;
  • the investors or entrepreneurs want to require the enterprise to benchmark its performance with respect to its specified social purpose against independent third parties; or
  • the investors want a voice in any future changes to the social purpose and related concepts.

For our sample language, we’ve used language designed for California social purpose corporations because California was the first and most populated state to adopt the social purpose corporation. Adjustments may be required to this language for social purpose corporations formed in other states.

  • Agreeing on a company’s social purpose:

Sample language: The Articles of Incorporation of the Company shall identify the Company’s special purpose as [special purpose definition].

  • Third party reference for assessment of social performance:

Sample language: The Company’s annual [social purpose report] OR [special purpose MD&A and any special purpose current reports] shall include an assessment of the overall social and environmental performance of the Company against a credible, independent third party standard.

  • Requirement of investor approval for change in social purpose and related items (equity):

Sample language: As long as the Investors hold at least X percent of the Shares purchased, [the vote of at least X percent of the Shares, voting as a separate class] OR [the approval of the Board, including the approval of the Series X Director(s)], shall be required to (1) change the Company’s special purpose(s), (2) adopt or change the overall objectives of the Company relating to its special purpose(s), or (3) adopt or change the financial, operating, and other measures used by the Company for evaluating its performance in achieving such special purpose(s).

  • Requirement of investor approval for change in social purpose and related items (debt):

Sample language: During the term of the Loan, the consent of the Investor shall be required to (1) change the Company’s special purpose(s), (2) adopt or change the overall objectives of the Company relating to its special purpose(s), or (3) adopt or change the financial, operating, and other measures used by the Company for evaluating its performance in achieving such special purpose(s).

Balancing Purpose and Profit

Is there some correlation between an entrepreneur’s purpose in starting a business, whether it is one created to have positive social and financial returns or simply to maximize profit, and access to mainstream investors? The answer to this question used to matter more than it does today particularly in the following G8 countries (Canada, France, Italy, UK and US) and will hopefully matter even less as legal forms of “profit with purpose businesses” gain traction and enable purpose minded entrepreneurs to access investment capital from mainstream investors.  The authors of the 2014 report titled Balancing Purpose and Profit highlighted the positive trends taking place in mainstreaming legal forms for profit-with-purpose business.  In their 2016 update to the 2014 report, they write the following:

“The development of legal and other structures that make profit-with-purpose businesses (“PPBs”) more attractive is a powerful confirmation of the reality in our civil society that not every investor or shareholder subscriber is motivated solely by profit. Millions of business owners around the world seek to do more than simply maximize financial return … primary purposes include improving the environment, eradicating poverty and developing communities. In the classic model, these social purposes had to be pursued as a charity or nonprofit corporation. This is no longer the case, and the G8 countries are continuing to develop legal regimes that allow businesses to have a primary mission of having a positive social and environmental impact while gaining access to investment capital that can deliver that impact in unprecedented scale and scope.”

Mainstream investors will mostly invest in businesses with well-developed and widely used legal structures/forms.  They want investments to be in legally registered entities with known governance parameters. Over the last few years there has been a flurry of legal activity around company formation targeted at locking-in mission for profit-with-purpose businesses.  This note highlights progress in the G8 countries from a report published first published in 2014 and then updated in 2016 by Orrick Herrington and Sutcliffe LLP, UnLtd, and Thomson Reuters Foundation

It is exciting to be a profit and purpose minded entrepreneur in any of Canada, France, Italy, UK and US, where PPB legal forms have been enacted and adopted relatively well.

A Canadian entrepreneur can register a PPB in British Columbia and have operations across the country under the Community Contribution Company (“C3”) Act of 2012.  In 2015, British Columbia strengthened market opportunities and the role of C3s in the economy by introducing Social Impact Purchasing Guidelines providing for the inclusion of social values in solicitation (request for proposal) documents for goods and services.

In France the government has shown support for social entrepreneurs and investors. PPBs are regulated under the Social and Solidarity Economy (“SSE”) Law.  A “Solidarity enterprise of social utility” designation allows PPBs access to government funding as well as procurement set asides. Investors in these businesses enjoy tax incentives 18% tax credit on income and 50% tax break on losses. The B-corp label was officially launched in 2015, allowing businesses to add purpose to their mission, committing to a set of impact best practices.

Italy is making progress. In 2015, the government enacted regulations governing “innovative start-up with a social purpose” which are granted tax incentives including an individual tax credit of 25% of the amount invested and a corporate tax credit of 27% of the amount invested. In 2016, the Italian government introduced the Benefit Corporation framework. In addition to benefits under the tax code failure to pursue impact goals as committed to can result in sanctions again the B-Corp entity.

In the UK the authorities have, via the Social Investment Tax Relief Act, provided for a 30% tax relief for investments in qualifying social enterprises and additional tax exemptions on capital gains from qualifying social investments.

If you are a mission-driven entrepreneur incorporating your business in the US, you can take advantage of registering as a Benefit Corporation or Low Profit Limited Liability Company. These models have become prevalent with the Benefit Corp structure as the most popular. State legislatures have enacted regulations favorable to entrepreneurs wanting to convert for profit businesses to PPBs. The market has also shown progress through IPOs demonstrating that PPBs can offer investors favorable returns.

The important question is how can the adoption of these legal forms be fast-tracked in countries that need the growth of social entrepreneurship to deliver benefits that cannot be fulfilled by government investment in areas that include protecting the environment, eradicating poverty and generally developing stronger communities?

About Impact Terms

Goals

The immediate goal of Impact Terms is to provide practical guidance on protecting the mission of social enterprises and on structuring transactions. The long-term goal is to significantly increase financial capital for the social sector.

By publishing successful and innovative impact deal terms, entrepreneurs and investors can more easily access previously-developed deal terms, lowering the cost of deal negotiation and documentation, speeding the conclusion of transactions, and increasing the velocity of capital deployment.

Furthermore, providing sound practices for impact investing and guidance on alternative investment structures for entrepreneurs, investors, and intermediaries will lead to better investment outcomes and solidify the impact thesis of transactions.

History of Impact Terms

When Bruce Campbell and Diana Propper De Callejon launched ITP in 2015 they had the idea that ITP would facilitate increased social and environmental impact through increased deal flow. ITP would provide accessible and actionable content on emerging impact investing trends and innovations.

They visioned impact investing becoming more mainstream when impact entrepreneurs, investors, and service providers could have a place to share term sheets, case studies; to converse about innovative structures (ownership and investment structures), terms (investment, impact measurement and exits) and impact outcomes; as well as connect as providers and consumers of impact services.

In 2018, Toniic Institute assumed leadership of ITP with a mandate to power it into a free and publicly accessible resource that lowers barriers to entry into impact investing while empowering impact entrepreneurs.


With the support of our funders, we are happy that we have initiated a rebuild of the ITP site to ensure that it can host an easily navigable library of best practice terms, innovations and case studies, be a platform for robust conversation as well as a marketplace for connecting with impact practitioners.
We are happy you are here, we hope ITP inspires you to amplify your impact!