The parts of the RCO and how they fit together (part 1)
This is a more technical part. More descriptive. The ambition is not to exhaust the entire model but to sketch it on a high level so that you can grasp which parts of this model do roughly what and why they exist. We’ve done quite a bit of thinking ourselves but have also borrowed from Graham Boyd and some of his concepts in Re:Build, Hans Hassle and his concept the Companization, The DISCO movement as well as a number of other existing initiatives with similar purposes.
The Regenerative Community Organism (RCO) is a purpose driven organism. We have in our design process focused and drawn inspiration from living systems and thought of what it would look like to take seriously the idea that a ‘conscious agregor’ - a hive of people moving towards a common purpose - would function like an organism. Therefore we are pulling on principles that seem to underlie living systems like autopoiesis, redundancy, evolution etc. Probably more so than many of the other organizational innovations I’ve encountered.
On the highest level we have 3 parts in this organism: The source code, the two legal entities and the life cycle. This article will review those three.
The source code:
Or the constitution. This is supposed to be a minimal document that outlines very clearly the different principles by which this entity will operate. We recommend that the documents contain the purpose, the principles, basic outline of the structure i.e. what are the riverbeds we have dug and the key processes. Not controlling as much as directing and providing starting points for self-organization to spur from.
The purpose: clearly formulated and written so it can be mirrored in the bylaws of the company and the association. Preferably also with a clear calling question - i.e. what is the question that would call the right person into this entity?
The principles: Preferably not more than 5. Initially this will be a statement of intention. We recommend strongly that you follow how your organism evolves and contrast and compare the stated and evolving principles.
Principles should be actionable - when we are in doubt or have conflict the principles should be able to guide us out of the predicament. The principles need to live on Rumi’s field ‘beyond good and bad’ and rather provide a heuristic for how to make decisions. Innerworks principles are Curiosity, Exploration and Care for the Self, Other and Whole. All of which will be considered at any time of doubt.
The structures. This outlines the relationship between the entities and especially the movements of the association. There are members in the association, a board of the association, owners of the limited company and a board of the limited company - what are the flow channels between these and how do they regulate one another?
The processes: This outlines the key processes. For instance in Innerworks we’ve stayed with 3 paragraphs: Operational design, Memberships, Decision making at the annual general meeting of the Association and Evolution of the Source code. Most other things are up to the people in the organization to figure out.
Two legal entities:
We are working with two types of legal entities in the RCO. A limited liability company and an association. These are put in relationship to one another so that the association owns 10% (preference shares) of the limited company. This gives transparency and a form of veto rights for certain decisions in the limited company in order to be able to safeguard its purpose. It does not give the association control over the company.
This is based on the belief that the limited liability company is a really good way of organizing and running focused projects in the economic reality we are currently living in. The limited liability company is also a great vehicle for being able to generate investment and channel external resources. There is nothing that says that you could not connect other entities to the association if those fit what you are trying to do better but for our purposes we’ve looked at the limited liability company.
The job of the company is to take care of the commercial part of the purpose. It should have a business idea, aim to be profitable, grow to some degree so that it generates resources that can sustain itself and later be an investor into the purpose (as the company progresses through the life cycle). A side note is to build the company ‘Dunbar-aware’ i.e. to aim for sizes of autonomous companies that are ca 150 people. Research has shown that it is the most resource effective size for a company where the organization is spending most of its resources to fulfill the purpose vs for larger organisms that spend a majority (60%) of its resources maintaining its management structures. The RCO is an excellent vehicle for coordinating such ‘smaller’ fractal units with related but separate purposes.
The job of the association is to take care of the whole. I.e. to look at the purpose and see what will serve it. The association will do the non-profit work, it will build interest for the topic of the RCO in the public, it might search for and find research grants that it can support, it might run events, debate and care for the community that cares for the purpose. The association is a proper non-profit that invites people to participate after their passion. The non-profit status of the organization is important because members cannot get economic gain as a result of their membership (the association can however have employees as non-profits do), but members participate because they want to be part of something bigger.
It is important that the association is able to generate enough financial resources through its activities and memberships so that it can sustain itself. It is not the job of the company to fund the association. Such funding would put into question the balancing function of the association.
Finally the association is hired by the company, which is why they are getting the 10% shares in the first place, to hold them accountable to their stated purpose. The association elects 50% of the board of the company and it has the exclusive veto right when it comes to new investors in the company as well as any shift in the company’s purpose for being. These are important aspects in the connection between these two entities and is a ‘service’ the company gets from the association.
If the company is focused on exploiting a niche the association is focused on growing the cake and holding the company accountable for how it's eating it’s part of the cake as well as making sure it does not start other things that are not supporting the initial cake.
The life cycle:
Finally we have the life cycle as an integral part. As organisms develop and mature their needs develop and mature, so does their purpose and their main actions in life. We believe that companies follow a similar trajectory. But instead of artificially evolving and working in structures that might or might not be well adapted to fit the evolving purpose we invite a mechanism for actual unfolding through life cycle explicitly. The life cycle will also at some point end in death, decay and the creation of conditions for new life.
Before we enter into the life cycle’s first phase: the sprouting phase, there is a period of time when the two entities are pledged to each other but not formally connected. This period is to be used to set the bearings and make sure that the association will be able to fulfill its duties and that the company’s business model is sound. This is called the interim phase. After this we enter into the lifecycle.
The different phases are:
Sprouting phase. At this point the whole RCO and the company particularly needs to grow. We need to find our place in the meadow, root and start spreading our seeds so that we have a place going forward. In this phase we see founders and financial investors as crucial which is also why most of the current business logic remains intact. I.e. financial investors and founders are the ones in focus and also reap most of the rewards for the hard work it is to build a company. In parallel with the company building the association needs to gain its first members, seed its culture and start working to further the purpose in the world.
The association owns 10% preference shares at the outset of the sprouting phase. The shares give it the right to 10% of dividend and liquidation rights of the company. It has to approve of some (in Innerworks case the first 2) decisions in the decision catalog listed in the company’s bylaws and it has the exclusive right to appoint 50% of the board seats in the company.
This phase could be anything from 1-15 years (or more) depending on the speed of the evolution of the company.
Maturing phase. The teenage years of the company. More independent, less reliant on the founders and the financial investors. It has fulfilled its initial commitments to investors that have received their 5-15x return (seems like reasonable multiple in early 2023) on investment in terms of value increase and the company is in a more steady state. Therefore the best use of resources to create maximum value in the ecosystem is no longer to keep investing in the company but to start investing in other aligned incentives.
We have been exploring different ways of doing this. It could happen through a constant dilution of the current owners based on the value increase of the company. It could also happen through a conditioned shareholder contribution to an investment company controlled by the association. This would be the base for the association to launch an investment company that starts investments into the ecosystem. Investors that have been providing value into the Company may graduate to become shareholders of the investment company, or investors in their first funds. Note that the investment company is a discrete entity owned by the association, not run by the association. The purpose and ethical principles remain through the entire organism but the actual running of operations in the company and the investment company follow business logic given the constraints imposed by the board of the association at the time.
Succession phase: There comes a time in an organization's life when it’s time for succession. There are several opportunities here. The association might take over the control of the company - an exit to purpose. The company may be sold to another company, go public or go on in some other way. The technicalities of this will have to be explored. However there are several mechanisms, that I will not explore in depth here, which can be utilized to facilitate succession.
Dying and Fertilisation phase: This is when there is a lack of energy in the system. Members of the association are dropping off. The founders of the company want to get out. The purpose as defined is no longer relevant for the times we live in. That is when the dying phase starts. Resources are liquidated and if there are enough resources in the company they may be turned into a foundation. The sole job of the foundation is to distribute the resources over a set period of time. This can be done as stipends, grants, gifts to entities, individuals and companies that are at that time carrying on the spirit of the purpose of the RCO. This is done until there is nothing left and people, resources and knowhow that the RCO may have generated has been put in as fertilizer into the ground to support the next evolution of the ecosystem as a whole.
Additional possibilities of the RCO
There are three possibilities of the RCO that I would like to highlight.
As mentioned above the association of the RCO can become the center point for several companies, creating something that looks like a flower with different petals. This way several companies can contribute to the same purpose through their unique expression of it. In times of uncertainty and transformation, experimentation is needed and diversity is one key principle that life has preserved throughout its evolution. This is an opportunity to do the same. Create a larger whole from several parts that are in service of their purpose. Grow through replication and scaling out rather than scaling up.
Second the association should and can hold assets that benefit the entire ecosystem. For instance a currency for the ecosystem that is minted through the successful delivery of product by the companies in the RCO. This could be an income generating activity for the association and it makes sense that it should be run on non-profit terms to mitigate the risk of perverse incentive and exploitation that is often so common currently.
Thirdly the RCO is highly compatible with different aspects that are occurring in DAO’s and the flora of new on-chain types of entities. We strongly believe, influenced by the DISCO movement, that humans are layer zero and that technology should be used to augment and amplify where it is needed. The RCO will, when the time is right and the scale requires it, move relevant parts on-chain.
The RCO consists of 3 parts at the very core of it. The source code, the backbone of the organism preferably following the liberating structures principle. Direct and control only that which is needed. It contains Purpose, Principles, Structures and Processes.
There are the two legal entities, a limited company and a non-profit association that are put into relationship with one another. The company is the profit making, directed, growth oriented entity and the association focuses on the stuff of purpose and community, holding the company accountable so that it honors its undertakings through this lens.
Finally there is the life cycle. Basically a design acknowledging that organizations as organisms mature and will have different needs in their maturation. The life cycle puts a few initial discussions around needs of the investors and founders up front and puts some safeguards in place against capture of the economic systems logic by introducing a reference target for ‘enough’. Once we’ve reached the reference point there is opportunity to reassess and graduate the organism into the next stage. The life cycle allows companies to cultivate eco systems rather than aiming to capture all the possible economic value in one entity - this would enable fractal growth, replication and more agility in the organism as a whole.
There are possibilities in the RCO to work on- or off-chain i.e. DAO-ify the structure, there are possibilities for working with multiple companies in connection to one association and there is possibility for the association to hold ecosystem wide infrastructure and keep that from being subject to profit maximization or capture.