Jim Fruchterman likes lawyers. So much that he has two of them on Benetech’s seven-member board of directors. But what’s not to like? After all, it was thanks to his lawyer that he started the now 24-year-old social enterprise Benetech.
Benetech is born
Before starting Benetech, Fruchterman went to Stanford in 1980 for a PhD in engineering, thinking that he would become a professor to teach and do research. During his time at Stanford he met a guy who was starting a rocket company to compete with NASA. Feeling intrigued, he took a leave from his PhD program to join the company. The journey lasted only several months, however, because their rocket blew up on the launch pad.
Despite the disappointment, Fruchterman realized that he never really wanted to teach. Instead he wanted to become an entrepreneur. While Fruchterman juggled with his path, he, who at one point wanted to become an astronaut, was attracted to and craved to work on big, important ideas – like changing the world.
After a failed attempt at launching another rocket company, his focus shifted to optical character recognition technology. During his college days at Caltech, he learned about optical pattern recognition and toyed with the idea that instead of using it on missiles to identify and blow up targets – this being the 1970s most engineers worked for the military – it could be used to recognize text.
Using this technology, he co-founded a venture capitalist-backed company. The company would sell the technology to people processing application forms, mail, contracts, and any sort of machine-printed font. What naturally followed was the idea for a reading machine for the blind that used the technology. The machine would scan the text and have a voice synthesizer to read the text aloud. “This was going to be a new product in addition to our core product,” said Fruchterman.
Only, investors of the company said that this wasn’t going to make them money. “And they were right,” he said. There was only an estimated $1 million market for the product and it wasn’t going to get the returns on their $25 million investment into the company.
In deciding what to do with another potentially-dropped idea, Fruchterman consulted with his lawyer who suggested that he start a nonprofit tech company and run it as a business of making reading machines for blind people – their customers.
“That was amusing because our company was supposed to be making money and it wasn’t making money yet, so it was actually a nonprofit,” said Fruchterman recalling the irony.
His lawyer offered to help start the nonprofit as a pro bono project. So Fruchterman left the company and founded Benetech, previously Arkenstone, in 1989.
Early legal issues
“We always try to work by analogy, so what’s the closest legal problem that someone else has already solved that we can borrow their solution.”
Some of the initial legal challenges for Benetech in creating a scanning system are similar to that of a copier manufacturer and software company, says Fruchterman. “I mean a copier is great for a lot of things, it’s also really great for creating valuable copies of books, say, or other copyrighted works,” he said.
“We had to say kind of like the copier manufacturers, ‘Don’t use this to make illegal copies, you should be operating within legal parameters.’ ‘Scan this book for personal use, but don’t send it to 100 of your closest friends.’ ”
In the early years, Benetech’s competitors made reading machines costing $10,000. Benetech’s system – built on a personal computer platform – would cost $5,000 instead, and eventually $1,200. Because their product was priced significantly lower, they were able to reach a larger market and generate $5 million in annual sales.
For the first ten years, Benetech sold reading machines. While revenues remained steady it was not enough to invest in new projects. When an offer came from Freedom Scientific to buy Arkenstone and the reading machine business, Fruchterman jumped on the offer. Selling a nonprofit as opposed to a for-profit was more difficult but not impossible since the funds were kept in the nonprofit and the result of this deal was two additional nonprofits created.
With $5 million from the sale, Fruchterman changed his nonprofit to Benetech and started a new initiative called Bookshare.
New legal challenges
Bookshare is a membership-only online library for the blind. Fruchterman’s nonprofit now went from selling a product to let users scan books themselves to becoming an online provider of scanned books. This pushed Benetech into a whole new legal zone.
Under an exception in US copyright law implemented in 1996, Benetech is legally eligible to set up an online, crowdsourced library for people with disabilities and distribute the books without infringing on copyright. But they faced some backlash because people thought they weren’t eligible for that exception.
“We had a lot of issues talking to the copyright office, talking to the publishing industry, talking to the authors, and that was a huge saga.”
They had a great deal of demand from users outside the US too. But the copyright exception is a national affair, and the books they were scanning in the US weren’t available outside the country. Certain publishers and authors granted them permission to distribute outside the US, yet there remains a difference in the size of the collections.
Forging legal framework
Until about six years ago, there were people who were interested in passing a more consumer-friendly global intellectual property treaty. So working with a group that included intellectual property advocates and librarians, they were able to get the World Intellectual Property Organization to adopt the “Marrakesh Treaty to Facilitate Access to Published Works for Persons Who Are Blind, Visually Impaired, or Otherwise Print Disabled” last June.
For this treaty to become international law, 20 countries will now have to ratify it. It will essentially make the copyright exception in the US a global norm, and allow Benetech to open up their collection to users.
While Fruchterman doesn’t believe that social entrepreneurs need a legal counsel, they can be a valuable resource since social entrepreneurs may not always be working on “cookie-cutter” projects.
Since its early days, Benetech has relied solely upon two attorneys on their board for pro bono legal help. The legal profession has a pro bono tradition that matches well with social entrepreneurs who may have unconventional projects but not the means to hire a legal counsel.
Picking a legal structure
As a social entrepreneur working in the field for over 20 years, one of the questions Fruchterman gets asked the most is what legal structure a social enterprise should adopt. Under the US legal system, the options have never been more extensive. They include for-profit structures (C Corporation and LLC), nonprofit structures, and something in between a for-profit and nonprofit (benefit corporation and L3C), to name but a few.
Yet legal structure should be one of the last questions answered, not the first. “Legal form follows function in my mind,” said Fruchterman. The question is given more attention than should be allocated. What’s more important, explains Fruchterman, is to think about the value proposition, beneficiaries, capital requirement, idea, personal motivations, market failure, as well as revenue model.
“By the time you thought through all of those things, choosing a legal form is going to become a pretty straightforward exercise,” he said. “Choosing corporate form is not a religious choice. It’s not a moral choice. It’s not ‘If I care I should be a nonprofit.’ I think you should choose the corporate form that leads to the biggest impact on society. And if you can make a big, positive impact on society and make a lot of money, be a for-profit.”
“Now, the other thing that goes on in our field is that there are some people who will sell you the fantasy that everything can be solved by the market,” added Fruchterman about the lack of enthusiasm for nonprofits in the social enterprise sector.
“If you went into the business of making money off of grassroots human rights groups, I think you’d probably be both morally wrong and impractical.”
Unsurprisingly, Benetech, having also created the technology for human rights groups to securely gather and organize information, is structured as a 501(c)(3) nonprofit, and not unlike other legal structures there are certain strengths and limitations. Seeing new opportunities to capture funding and innovation grants, Fruchterman reveals he is looking into establishing a benefit corporation in hopes of tapping into sources of capital for research and development on new ideas.
And that’s not the only change. After 24 years, Benetech is finally adding a legal counsel to its team as it prepares to work on a multitude of other legal challenges.
Photo from Benetech.
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