Most people implicitly or explicitly believe that legal structures are akin to “syntactic sugar” in programming: a surface-level feature that ultimately has little effect on organizational outcomes. I want to argue that instead, legal structures are intimately tied to organizational capacity.
The primary reason that legal structures matter is that Legal structures are intimately tied to the question of how money works in an organization.
“How money works in an organization” spills over into organizational incentives in too many subtle ways to list. <Incentives are the fundamental forces of peopleland> For example, creating equity enables you to raise money that doesn’t need to be returned on a finite timescale (which can incentivize longer term thinking) but puts ownership of a fraction of the organization in the hands of outside shareholders (who can push for decisions that wouldn’t happen otherwise.^1) If you want to avoid someone else owning your organization but still want to raise money from outside investors, you could organize as a closed-end fund but then you start a ticking clock to return that money with interest. Nonprofit status enables you to raise money that people can write off their taxes and don’t expect a return on, but comes along with a host of requirements on what you can and must spend money on.
These examples are only meant to illustratively scratch the surface - someone should really write ‘the big book of organizational incentives.’
Entrepreneur First(EF) is a great example of using unconventional structures to enable unconventional actions and outcomes. They are in part an investment firms, but their cohorts require much more operating capital (ie. More employees) than the the traditional VC firm structure provides. So, in addition to the normal-for-VCs closed end funds with LPs, EF also has a C-corp that issues equity and has its own investors that both employs most of the people at EF and “co-invests” with the closed end fund. This unconventional structure allows EF to be more operationally intensive than a normal VC fund and has the added side effect that if their investments are successful enough, it’s conceivable that they could choose to stop needing LPs at all. Eventually the organization could become a self-catalyzing cycle where operations are funding solely off of liquidated investments held by the C-Corp. Y Combinator has a similar structure and uses this additional flexibility to do experiments like the now-defunct YC Research. This additional long-term operating flexibility wouldn’t be possible with a normal VC fund structure because most VC firms fund operations off of their management fees and return all their profits to LPs. I want to make it clear that there are tradeoffs so this is not a strictly-better structure for all tech investors. But it is a better structure for EF and YC to the extent that they conceivably could not do what they do without it.
Historically, new legal structures have enabled new classes of activity. The creation of joint stock companies in the 1600’s ^2 enabled larger and riskier private ventures like the East India Company and arguably enabled a lot of English settlement in North America.^3 Arguably, the creation of limited liability corporations in the mid 19th century helped enable the railroad boom first in Britain and then in the US.^4 And in 2020 SPACs made going public a reasonable move for several non-software technology companies that may not have happened otherwise.
So if new legal structures have a large impact on organizational capabilities both theoretically and historically, why shouldn’t organizations trying to do qualitatively different things take legal structures seriously? Clearly there are many organizations that have accomplished great new things without innovating on legal structures. This is yet another place where Counterfactuals are hard. It’s basically impossible argue what has been constrained out of existed or forced into more main-stream behavior. However, the historical precedent and surprising number of ways you can be creative with legal structures <There are no first principles for legal structures> suggests that at least on the margin, there is a lot of room for new legal structures to enable new organizational capacities.
^1: Note that this isn’t a good or a bad thing - while the default reaction at least in SV circles is that it is.
^2: A Brief History of the Corporate Form and Why it Matters
^3: Regardless of what you think of these historical incidents, they certainly were something the like of which had not existed before.
^4: The Modern Corporation and Private Property