Hunting Stag with Fly Paper: A Hybrid Financial Instrument for Social Enterprise

IntroductionWhen Google issued shares to the public for the first time, the entrepreneurs at its helm had more than immediate self-gratification in mind.1 They recognized that the transaction others disdained as a nec- essary evil-a dark brew of lawyers and bankers stirred by greed-could be far more.2 The unconventional auction structure they employed leftno room for doubt that Google's "don't be evil" mantra guided its leaders' actions even when billions of dollars hung in the balance.3 Flexible Low-Yield ("FLY") Paper, the hybrid financial instrument this Article describes, offers social entrepreneurs the same opportunity to remake a symbol of greed into proof of their commitment to leaven capitalism with idealism.It is conventional wisdom that when social entrepreneurs4 accept capital from investors they take the first step down a slippery slope toward wholeheartedly embracing a profit motive.5 By contrast, when a charity raises capital from donors, its commitment to exclusively pursue social good is permanent.6 A charity's assets possess complete legacy protection, guaranteeing their perpetual dedication to charitable purposes. Until now, outside that charitable context, investments seem invariably to undermine an enterprise's commitment to the pursuit of its social objectives.7FLY Paper succeeds where prior efforts have failed primarily because it reflects the insight-new to the literature-that the problem social entrepreneurs and investors face can be described as a stag hunt or assurance game.8 Just as the figurative hunters long to return home with a shared stag, investors and entrepreneurs prefer cooperation and a double bottom line.9 Although they would both benefit by balancing an enterprise's social mission alongside their own financial interests, doing so asks each to take a leap of faith.10 Low-profit Limited Liability Companies ("L3Cs"), benefit corporations, and flexible purpose corporations ("FPC")-although specifically designed for social enterprise- fail to give investors and entrepreneurs the confidence needed to make that leap.11 They may provide one or the other with a means of making a credible commitment to the enterprise's social mission, but never both.FLY Paper fills that gap by providing both entrepreneurs and investors with confidence that their commitment to the enterprise's mis- sion will be reciprocated.12 FLY Paper is a hybrid debt instrument that entitles investors to a modest, below-market return payable on a flexible schedule. This investment will provide entrepreneurs with capital, but will also test their resolve. If an entrepreneur agrees to sell her own shares, FLY Paper holders will have the option to convert their debt to equity on favorable terms, thereby capturing much of the gains that the entrepreneur would otherwise earn from "selling out." Accordingly, FLY Paper creates a window of time during which social entrepreneurs can pursue their social missions without turning to the permanent legacy protection of a charitable organization. Rather than representing a threat to its social mission, the investment makes the mission "sticky" during the FLY Paper's term.13 When social enterprises issue FLY Paper to investors, neither entrepreneurs nor investors need to worry that the other will "defect" by unilaterally pursuing their own self-interest.In one sense, FLY Paper falls well short of the solution offered by entities such as the L3C, the benefit corporation, and the FPC. Those entities promise to strike a permanent, comprehensive balance between profit and mission. Although such a broad resolution would be ideal, none of those hybrid entities has achieved it.14 FLY Paper makes a more modest pledge: to give both investors and entrepreneurs a means of making credible commitments to the enterprise's mission over a specified term.This Article argues that FLY Paper, an incremental departure from existing legal technologies, will go further than hybrid organizations to secure an enterprise's social mission. …