Angel investors. Seed rounds. Employee equity plans. Venture capital. These can be powerful tools to grow your business capacity, but they can also come with new limitations on your ability to control your business, which can in turn impact your WBENC certification.

Congrats on taking a big step in scaling up your business!

In this article we’re going to discuss:

What counts as ownership?
How do you tally up women ownership to evaluate WBENC eligibility?
How do you determine if you still have legal control after taking on investors?
What special considerations are there if an investor is another company or a trust?
What are your next steps for recertification? What documents should you submit?
What other resources are out there for capital growth?

First, let’s define ownership:

WBENC determines ownership as (1) who exerts control of the business through voting rights, and (2) who participates in the financial profits and risks of the venture.

This includes all of the following ownership vehicles:

• Issued stock- both voting and non-voting
• Membership interest
• Investment equity
• Employer-sponsored equity plan shares
• Partners’ capital and profit shares
• Seed funding through stock issuance
• Convertible notes that have matured into equity

Eligible ownership can be demonstrated in the following ways:

• Corporation – Stock certificates, ledger, cap table, and/or other applicable ownership documentation must show that women hold at least 51% of ALL outstanding stock combined (not just voting stock). Tax return K1s should support the ledger and cap table.

• LLCs and Partnerships – Member list, operating agreement, cap table, and/or other applicable ownership documentation must show that women exercise at least 51% of voting control, AND receive at least 51% of interests, including profits, risks, equity, distributions, etc. commensurate with their membership. Tax returns should support the member list and cap table.

• Sole proprietor – Tax returns file the company as a sole proprietor on the Schedule C

Let’s look at two examples of cap tables that meet WBENC eligibility:

Example 1:

An LLC has brought on two silent investors. Neither have voting authority, however their shares still count towards the overall outstanding ownership. When all shares are taken into account, women own 80% of voting shares, and 66.67% of the company’s overall ownership interests.

Example 2:

A corporation has implemented an employee stock option plan, and two participating employees each hold non-voting equity. When all shares are taken into account, women own 66.66% of voting shares, and 64.71% of the company’s overall outstanding ownership interests.

Pause to consider: While the ownership breakdown currently meets the 51% WBENC minimum, if all remaining 80 shares are issued to male employees in the future, women ownership has the potential to be diluted down to 44%, which would make the company ineligible.

Before submitting: Do your governing docs still give women legal control?

Once women no longer hold 100% of shares in a company, you need to figure out what control and decision making power you’ve given up, if any.

Bylaws (for corporations) and operating agreements (for LLCs) often have very specific clauses about how shareholders vote on business decisions and how directors and officers are appointed.

Women owners must have legal control to be WBENC eligible.

So what should you be on the lookout for?

Specifically, watch for “unanimous consent” or “supermajority consent” clauses in which investors and co-owners can veto you on specific decisions or actions. If there are, you need to amend that clause to specify that voting and decision making is done by majority vote (since women hold the majority 51%).

While WBENC makes allowance for a handful of protective unanimous consent clauses, this can still be a tricky conversation to have, since investors often seek some degree of control in return for their investment. Making these changes to maintain the WBENC certification is a decision you’ll have to make with your current business goals in mind.

The exception to this is if all of the owners are women. Unanimous consent clauses ARE acceptable if it means one woman can overrule another woman.

However if you have an employee equity plan, upcoming seed rounds, convertible notes, or other ownership structure where your percentages can quickly change, you will want to address these concerns ahead of time.

Don’t forget the Board of Directors

Pause to consider: Does your company have a Board of Directors? Investor agreements often allow the individual investor, or a representative of the investment firm, a seat on your Board. This Board is a separate body from the shareholders, and has separate responsibilities and voting procedures.

As you evaluate whether women have control over the shareholder decisions, also look closely to ensure that your Board is currently comprised of a majority of women, and look to see that they have control at this level of decision-making too.

What protective clauses are allowed under WBENC eligibility?

Investors are taking a risk in your company, and they will generally want some degree of security. For this reason, WBENC’s guidelines allow a small handful of unanimous consent clauses that protect investors’ stake. These include decisions relating to selling or closing the company, changing the bylaws, mergers and acquisitions, and similar.

However, while investor interests are protected, WBENC’s guidelines specifically call for the woman owner(s) to have full agency to control the company’s operations and strategy, and to have unimpeded ability to sell her own shares. Therefore there should be no unanimous consent clauses relating to business operations, services, personnel, management, finances, contracts, or other commercial activities.

If you have questions about your specific governing documents, you are welcome to reach out to our staff of certification officers, and we’ll be happy to walk through your unique situation.

Note that this information specifically relates to WBENC WBE certification. Unanimous consent clause eligibility may vary between different certification programs (WOSB, 8a, MBE, DBE, etc.)

Special Considerations: When an investor is another company or a trust

Is there an investment firm involved?

To count any ownership held by another company, we must essentially look at whether the holding company also meets the WBENC criteria of being owned and controlled by a woman or women.

• Do women own at least 51% of the investment company outright?
• Do the governing documents give her total voting power over the investment company?
• Is a woman the highest titled officer?

For these reasons, business owners generally do not seek to count investment firms towards the 51% ownership, unless it has a simple women-owned structure.

Important to consider: Is the investment firm entitled to a seat on your Board of Directors? Don’t forget that, whether or not you count the investment firm towards the 51% ownership, their representative will still impact the voting composition of your Board. (See the section above on Boards)

Is there a trust involved?

Ownership held in a trust has some very specific requirements in order to be counted as eligible.

Irrevocable trusts:

• Trustee(s) must be a woman OR a financial institution. Male co-trustees are not eligible.
• The woman beneficiary must not be a minor
• The woman beneficiary must have a present interest – current ability to receive distributions, income, or principal

Revocable trusts:

• Trustee(s) must be a woman OR a financial institution. Male co-trustees are not eligible.
• The grantor(s) must be a woman
• The woman beneficiary must not be a minor
• The woman beneficiary must have a present interest – current ability to receive distributions, income, or principal

Now let’s talk about recertification:

Any time your company has a change in equity, shares, stock, or membership interest, it is considered a change in ownership percentage.

So what supporting documents do you need to submit for your recertification?

• Any signed agreements documenting the sale/investment (purchase agreement, shareholder agreement, equity agreement, etc.)
• Most recent updated ledger or cap table
• Governing documents, if recently updated (bylaws, operating agreement, or partnership agreement). Make sure to include any amendments that have been executed.
• Newly issued and/or canceled stock certificates (for corporations)
• For any new women owners/investors counting towards the majority 51%- resume and passport (or other government-issued proof of citizenship and gender)

Check out the recertification guide for tips on a smooth renewal

What if my new voting or ownership structure doesn’t meet WBENC criteria?

Reach out to your friendly WBEC-East certification officer. We will be happy to talk you through your unique situation.

If you submit your recertification and your governing documents do not meet WBENC eligibility, we have a process called “preliminary denial.” This isn’t a denial, per se, but is a measure to let you know what we found so that you can avoid denial. If a preliminary denial is issued, you will have 60 days to issue an amendment to your bylaws or operating agreement, if you so choose.

Keep in mind that it is never our intention to tell you how to run your business.

As impartial certification officers, we cannot coach you, beyond letting you know what does and does not meet WBENC criteria.

Your certification officer is simply letting you know what needs to change in order to maintain your WBENC certification. If you feel the changes aren’t right for your business goals, that is 100% your call. Just know that your recertification will likely not be approved.

Scaling with and beyond certification:

We’re commited to helping women break down the barriers that still prevent access to capital.

There are plenty of ways to raise capital without dropping your WBENC certification. Capital and capacity growth can look different for every business. It’s important to find the right pathway for YOU, whether that’s an investor, micro-lender, traditional bank loan, line of credit, or other capital growth strategy.

But remember, WBEC-East serves all small businesses, whether or not you’re certified. Stay connected, stay engaged, stay supported.

And congratulations on scaling up!