Social Enterprise Legal Toolkit Case Study: Chuffed
Chuffed.org is a global crowdfunding platform that connects a good-willed community of everyday people who want to donate to social causes in their own way.
So – how does it work?
Chuffed does not charge campaign fees, and instead allows campaigners to keep the total amount raised, even if they fail to meet their target.
Chuffed goes above and beyond just crowdfunding. They educate charities on how they can challenge the “traditional” model of fundraising and also donors on understanding the impact of their contributions.
Their story began in 2013. They were a social enterprise set up as a ‘Company Limited by Guarantee’ (CLG). They were able to obtain an exemption from paying income tax, but at the time, they could not obtain Deductible Gift Recipient (DGR) status, which meant they couldn’t receive tax-deductible gifts and/or contributions.
Soon enough, Chuffed secured an initial grant of $460,000 from the Telstra Foundation, and within two years of its launch, Chuffed managed to raise $5.1 million in donations for around 1,800 projects across 19 countries.
They were growing at a rapid pace and, in order to expand market share in both Australian and international markets, they needed additional investment to scale. Why? Their traditional sources of funding (including grants and donations) could not keep up with their growth.
“Philanthropy is great at funding shiny things to get from $0 to $5m. It's not great in helping a successful venture get from $5m to $50m and pretty much non-existent in helping you get from $50m to $500m. And so, we knew we had to change the type of capital we were raising - in order to grow, we would need to raise equity”.
What were their options?
First, they considered debt. But, taking on debt so early in their growth journey without any collateral to secure debt funding could have left them drowning in debt repayments.
“You don’t really want debt now… it would add to your burn rate and you want to grow your business”.
It was clear they needed equity investment. However, the CLG model did not allow for equity raising. It was clear to Chuffed that, in order to scale, they needed to change their legal structure to be able to attract alternative sources of capital.
This is why Chuffed shifted their legal structure to a Proprietary Limited Company.
But, the road wasn’t easy.
Moving to a Pty Ltd company structure was difficult. There were many different internal stakeholders they needed to accommodate – employees, volunteer directors and incoming shareholders. The move to a new legal structure also required the process of transferring assets, which could involve significant tax implications, and so this could not have been achieved without careful consultation with experienced tax advisors.
Perhaps the biggest challenge for Chuffed’s new structure was to preserve its purpose. In Australia, the traditional purpose of business is to maximise shareholder profits. While the US has ‘Benefit Corporation’ structures and the UK has ‘Community Interest Company’ structures, there was no specific structure for social enterprises in Australia.
After consulting with lawyers about creating a new structure that suited the company’s vision, and also taking inspiration from overseas, Chuffed then created a model they called a “social benefit company”, based on US models. Put simply, this meant modifying a Pty Ltd company structure through adopting 3 core features:
A statement of purpose which is incorporated in the constitution;
A requirement that directors must deliver the purpose as part of their directors’ duties;
A requirement that any changes to the above need a unanimous shareholder vote (mission lock).
This is what we refer to as the “for-purpose-for-profit” model (insert link to other webpage when finalised).
Embedding the mission lock in their Company Constitution worked well for Chuffed: they could attract equity capital while still upholding their original social purpose.
Suddenly, investors became a lot more interested. Chuffed became the first social enterprise to attract venture capital investment, eventually securing a seed round of $1.1 million from Telstra Foundation (Telstra’s philanthropic foundation), Bevan Clark (an early-stage investor), and Blackbird Ventures (a venture capital fund). Blackbird Ventures viewed their investment in Chuffed as a “left-field investment” in that Chuffed was “social purpose”. Particularly, the use of a mission-lock in their legal documents impressed investors for “innovating their legal structure, product and business”. Niki Scevak, Co-founder of Blackbird Ventures, sits on the board of Chuffed as part of the funding agreement.
What’s next for Chuffed?
Currently, Chuffed has three main sources of funding:
optional donations
investment; and
philanthropic and government grants.
While Chuffed’s current priorities are expanding with the aid of investment and grants from government and philanthropy, Prashan maintains that the ideal future for Chuffed is one that can sustain itself on optional donations only.
To learn more, visit the link here.