Legal structures are intimately tied to the question of how money works in an organization

It is hard to talk about new funding mechanisms without talking about new legal structures and vice versa. Legal structures affect where you can get money and what you can do with it. Even the words we use have both a funding and an organizational meaning. “Nonprofit” both implies that funding is from people who don’t expect a return on profit and is a specific designation in the law. Similarly “equity” implies a specific legal structure and also that funding will come with a certain set of expectations.

The tight coupling between legal structures and how money works is because when you boil it down, legal structures are contracts that establish how money and explicit power flow in an organization. The government tightens the relationship because it uses those contracts to assess taxes on that money and ‘formalizes’ how we think about an organization. A good example of this thought formalization is the cognitive dissonance a lot of people get from the existence of legitimate for-profits that don’t maximize profit and non-profits that do. In turn, taxes have a shockingly large effect on funding - people either want a return or a write-off.

As an example of the coupling, let’s think through funding an ARPA-riff. It is hard to capture value from research so the initial thought is to look to philanthropic funding. Philanthropic funding pushes an organization to legally be a non-profit because people are much more hesitant to give away money if they don’t get a tax break. That’s not the end of the story though, because PARPA will eventually spin out companies and it would be extremely helpful to use those companies both to fund further work at PARPA and to tap into for-profit investment because people are willing to fund at much higher levels if they think they’ll get a return on it. However, the standard non-profit structure puts many constraints on your ability to issue equity (which would be the normal structural way to channel for-profit investment) ….


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