Etsy's IPO Is a Direct Challenge to Wall Street's Beliefs

Will investors embrace a company that says it cares about more than the bottom line?

Chad Dickerson, CEO of Etsy Inc., right, at a House Energy and Commerce Subcommittee hearing in Washington, D.C., on Jan. 21, 2015.

Chad Dickerson, CEO of Etsy Inc., right, at a House Energy and Commerce Subcommittee hearing in Washington, D.C., on Jan. 21, 2015.

Photographer: Andrew Harrer/Bloomberg

Etsy's initial public offering is about to question Wall Street's conscience: Will investors embrace a company that wants to do good while it does well?

For three years, Etsy has been what's called a certified B Corporation—a distinction given to companies that pass demanding standards of benefiting the community, environment, employees, consumers, and suppliers. At the Brooklyn-based artist's marketplace, this includes giving all employees 40 hours of paid volunteer time every year, paying employees more than 40 percent above the local living wage, and covering 80 percent of workers' health insurance premiums, according to the company's 2013 Values & Impact Annual Report.

In Etsy’s pursuit of investors—and a $1.8 billion valuation— the company's values are central to the pitch. It is asking future stockholders to be OK with a management team that refuses to squeeze every penny of profit out of its 1.4 million active sellers or sacrifices community benefits to slash costs. 

Wall Street isn’t used to that, and as of now, the law has been on the side of investors. When Etsy goes public, it will add to its list of legal responsibilities the promise of “maximizing shareholder value.” And that's where the tension comes in.

"It’s like a beautiful test in a way to see if it's possible to have a mission beyond money," said Rett Wallace, chief executive officer of Triton Research. "You see these situations all the time where even when management is doing their best to take every penny off the table—regardless of what it does to the widows and orphans—you often see fund managers saying, 'You're not doing enough to make money.'" 

Etsy has made it clear to its prospective shareholders that it considers its connections with the community paramount to its success. The company lists an inability to maintain its B-corporation certification as a potential risk factor to the business.

"Our reputation could be harmed if we lose our status as a Certified B Corporation, whether by our choice or by our failure to meet B Lab’s certification requirements, if that change in status were to create a perception that we are more focused on financial performance and are no longer as committed to the values shared by Certified B Corporations," Tuesday's filing said.  

That’s a very real possibility once the company goes public, says William Clark, a lawyer at Drinker Biddle & Reath, who helped write state-enacted legislation authorizing the use of benefit corporations. The company's certification will eventually run out, and then Etsy has two choices: It can let it expire, or it would have to change to what's considered a legally recognized public benefit corporation—a move that would codify its responsibility to “stakeholders” (employees, community members, and other noninvestors) alongside its fiduciary responsibility to shareholders.  

No publicly traded company has done that yet, and the barrier is high. It would require approval of the board as well as an "extraordinarily high vote" of 90 percent of the shareholders. "The Etsy IPO is forcing people to think about this whole question between the financial profitability of the business for its owners," Clark says, "and everything else that makes the business possible."

Chief Executive Officer Chad Dickerson is still going to have to justify Etsy's money-making prospects. Sales last year surged 56 percent, to $195.6 million, but losses widened to $15.2 million. Meanwhile, some investors are sure to be asking about another number: If $1.93 billion exchanged hands between buyers and sellers on the site, why aren't profits higher?

Meanwhile, some merchants are up in arms, too, concerned that Etsy will in fact move to maximize profits—specifically, raising what it currently charges sellers: 20¢ per listing and a 3.5 percent commission on sales. 

In the best-case scenario, says Andrew Kassoy, a co-founder of B Lab, the not-for-profit that created the B-corporation designation, Etsy could end up attracting a cohort of investors that value the transparency and standards required of B corporations. “There is an increasing recognition that businesses can do more than create value for shareholders," he said. "The whole value of the company is the trust that their stakeholders put in them."

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