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CouchSurfing Moves from NGO to B-Corps: Bona fide or Bogus?

3p Contributor | Wednesday September 28th, 2011 | 22 Comments

By: Margaret Wohler

CouchSurfing International has been riding a wave of success since its August 2011 restructuring which turned the group from a non-profit public charity to a for-profit C-Corporation with a B-Corp certification and $7.6 million in funding from Omidyar and Benchmark. The web-based homestay organization has had more than 3 million profiles created since 2003: pop the beverages and get the beach party going!

…or, not so fast: CouchSurfing (CS) has been hit with a tsunami of protest from its own membership over the reorganization. To date, more than 2,500 CS members have joined an online forum, and a Facebook group, entitled “We don’t want CouchSurfing to be a corporation.” The protesters seek to limit investor profit, increase control of their uploaded data, and gain legal guarantees of organizational transparency.

Why are they so angry?

Members are forbidden to use the CS network for profitable gain so they question why founders and investors, who are also members, now have the opportunity to benefit commercially from the community.

The CouchSurfing network was built on volunteer labor and donations from passionate members who valued the company’s nonprofit status. Members were also told that the organization’s database would never be sold.

While B-Lab’s certification offers certain protections that the company will act in an ethical manner, the company only audits 10% of randomly chosen B-corporations annually to make sure they’re holding the line. The CS protesters fear that the newly-minted for-profit corporation will escape proper scrutiny.

Is further scrutiny of a dissolved non-profit entity appropriate?

The protest provides an early test case of B-Lab’s certification process, as members wonder if a failed non-profit can become a for-profit company and still be worthily characterized as “socially responsible.”

CouchSurfing managers are working hard to calm the revolt and repair their image. Founder and Chief Inspirational Officer Casey Fenton is currently on a world speaking tour of the most active CS cities. He’s visiting members, fielding questions, and Skype conferencing to communicate about the transition with one message in mind: CS is justified in having the B-corporation label. I had a 2 ½ hour Skype call with Casey; his enthusiasm for the CS mission, “to create inspiring experiences” is apparent and convincing.

Fenton has always used creative methods to solve problems and spread CS ideals. He promoted the exploration of new thinking through social structures and alternative lifestyle experiments. CS early-adopters lived the vision: bunking and working in communal ‘collectives’ around the world and at the San Francisco “Base Camp,” organizing ‘free hugs’ events, having pillow fights at staff meetings, eschewing high salaries for perks of free food, rent, fun excursions and paid airfare around the world. In 2009, nearly 10% of CS’ total income was spent on travel unrelated to website function, yet, no charitable programs were funded. Life devoted to “inspiring experiences” was exhilarating, but costly. By 2011, CouchSurfing was headed for a wipe-out.

After four years and significant legal costs, CouchSurfing International was denied the 501(c)(3) tax exempt status this past August. The IRS defined the CS mission as social, rather than charitable, and the CS non-profit entity was dissolved. Appraised at $1 million, all assets were put into a cultural scholarship fund, now managed by the New Hampshire Charitable Foundation. To remain viable, CS reincorporated and landed venture capitalist funding.

CouchSurfing’s corporate future seems assured. Its current CEO, CS co-founder Dan Hoffer has solid business chops and promises accountability and organizational integrity. CouchSurfing will continue to offer its cost-free homestay service, social events, and database for scholarly research. CouchSurfing now has the financial backing to hire top-notch programmers to create premium, creative applications that members will want to buy. If it can resolve questions about its non-profit past, CS has a sunny, for-profit future.

Margaret Wohler has been a a CouchSurfing member since 2007.

[Image credit: aphasiafilms, Flickr]


▼▼▼      22 Comments     ▼▼▼

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  • Sergio Almeida

    I had not realized the non-profit status was so fragile. If a non-profit organization which has operated for years under the assumption and assurances that it would always remain non-profit can be legally looted and turned into a for-profit with all of its assets this is a very sad day for non-profit organizations and their trusting donors. If this withstands legal challenge, who would want to give time and money to such an organization when it means that the more successful you make it the more you increase the risk that someone would simply change its status for his own personal benefit? Aren’t there laws against this in the United States?

  • Margaret Wohler

    thanks Sergio,

    I think CS would argue that they had no choice but to become a C-Corporation. They were denied the federal 501c3 tax exemption, and the state-level public charity status in New Hampshire, where they had originally incorporated. They needed to be some kind of legal entity to exist. They felt, I’m assuming, that the B-corps certification meshed well with their former non-profit existence.

    I think many people share your frustration, however: CS was a mismanaged non-profit, no question. Yet, its past mistakes have served to make its founders and investors potentially very wealthy…how is that fair to CS members who donated time and money to build the organization as a non-profit?

    • BREIZH ATAO

      That is shocking is not the transition from a nonprofit to a for-profit corporation, but the diversion of money that members have voluntarily given to CS International, or through donations or by the time spent to develop the concept (moderators, organizers, translators, computer specialists, etc.)..
      It would be moral in this story that everyone involved in the development of the concept and success receive, enhance the fruits of their labor.
      Instead, it is those who pay wages that are in addition to stock options.
      At home, this is called a misuse of corporate assets and illegal diversion of funds.

      breizh atao!

      • Margaret Wohler

        thanks B.A.,

        The donated money (CS included verification payments as ‘donations’) was designated as an unrestricted asset; CS lists no temporarily or permanently restricted assets in its 2010 independent audit:

        (please excuse the circuitousness of the link; pages 7-8:

        http://www.couchsurfing.org/group_read.html?gid=7621&post=9830240)

        After losses, CS was professionally appraised at $1 million; this money was not put into the for-profit entity, but put into the CS Cultural Scholarship fund, a 501c3 which is independently administered. The funds were not transferred to the CS C-corps.

        I’m assuming that the donated time and talent, which helped build the value of the database, was included in this appraisal.

  • Margaret Wohler

    thanks Casey,

    yeah i think it is important to be legally compliant, for the long term viability of the org…but I understand your point: there’s a lag-time legislatively for creative business options, as you’ve certainly pioneered. Thankfully, the Benefit Corporation is now legal (Gov Brown signed it, yes?) in California

  • acidrongeur

    sure, ethics and integrity are so “as been”!

  • Murdoch

    CouchSurfing just offers the classic “There Is No Alternative” approach, despite the fact they intentionally put themselves in this position by mismanaging the organisation for years.

    Such a sad time for people who thought that the internet might have a positive social end. I’ve already switched to bewelcome.org and am directing anyone who contacts me through CouchSurfing to do the same.

    • Amelia

      I agree with Murdoch. I have heard some not so great stories about CouchSurfing int he past but it is important to remember the ideals that help found which were really great. I just think there are other sites that are taking what CouchSurfing did to the next level. Such as the one you mentioned as well Tripping.com which is more of a social network site for travelers to meet hosts and has some safety nets involved to verify hosts.

      With all this said, I truly think the internet will have a positive social end!

  • BREIZH ATAO

    Casey FENTON wrote:
    “Is it reasonable to ask people with new ideas to play by old laws?”

    What new ideas?

    What old laws?

    I think, the true is:
    New laws and old ideas.

    You have changed objectives when your first idea has been blocked by the law of the state of New Ampshire.

    You have found the new law which can accepted your old idea.

    Can you say that Couchsurfing did not contributed to your new fortune?

  • Margaret Wohler

    thanks for the feedback everyone,

    I’m very curious to know your opinions on larger-picture questions, such as this one:

    How relevant is CS’ non-profit past to its for-profit B-Corps certification?

    Obviously, CS had to apply for the B-Corps certification within its new, for-profit, incarnation…but had to use the data, from its former non-profit self, to answer the questions about operations and membership. Perhaps CS’ answers on the survey reflected the structure, and hoped-for improved financial controls, of the for-profit…combined with the successfully vibrant community building of the non-profit.

    How reflective is that of the current operational reality? Was B-Lab given an accurate picture of how a new, for-profit, CS operates (I can’t imagine how CS scored so high on accountability since it was the least-accountable non-profit I’ve ever encountered)? Is B-Lab obligated to vet the non-profit CS (since it was undeniably mismanaged) or the for-profit CS, or both?

    I’m curious to know your thoughts on this because I think it speaks to how easily B-Lab can be potentially gamed…and perhaps trusted with certifying an organization as ‘socially responsible’.
    http://www.bcorporation.net/couchsurfing

    • BREIZH ATAO

      Couchsurfing is profit or not profit, it’s not very important!

      But, if couchsurfing wants being a B-Corp, Mr Fenton must be respect the Declaration of Interdependence of B-Corporation; where we can read:
      “businesses should aspire to do no harm and benefit all”.

      Actually, Mr Fenton do contrary!

  • kari

    I’ve had this conversation, both online and off, with my couch surfing friends. Some seem non pulsed and others are vehemently pulling away from couch surfing. I fall a bit in the middle. I’ve always loved the idea of couch surfing but I feel as if there is something very stagnant there lately (and perhaps this change was seen as an answer to that, I don’t know). I do still use couch surfing at times, simply because right now there’s still a huge network of people, but I’m starting to ween myself off of it. I’ve become fond of the newer alternatives to cs, like tripping etc, because there’s such a great energy and personal interaction coming from even the very top echelons of the site that make it more and more evident to me that cs isn’t the only option.

    Now am I saying the new cs corporation will be evil and not to be trusted? Not at all. Maybe surfers will finally get the improved user interface they have been clamoring for now that cs actually has investors to fund it. As even cs has said, they don’t quite fit the mold of a non profit. I’d rather cs get investors and leave donations from everyday users to go to other deserving causes world wide.

    • Margaret Wohler

      good point Kari; thanks

      I think you also bring up an interesting view worth exploring: CS is both a website facilitating travel…and a community promoting a set of values: generosity, global hospitality, tolerance of cultural differences, trust. Are these 2 functions both equally scalable?

      Some travelers just use the website to reduce travel costs for hotels and hostels…and they will be very happy with the VC funding and new features it will provide, as long as the site itself remains cost-free to use. CS does offer a huge network of hosts around the world….and these cost-conscious travelers will be in favor of the for-profit switch.

      Other CS members, however, have worked to promote the values CS used to build the community; they are less concerned with slick new technical upgrades…and more concerned with CS’ operational alignment with these community values; integrity before technology. They tend to be unhappy with the for-profit re-org.

      Both images are true…but CS needs to decide which to promote, since they can be construed to be mutually exclusive.

      It’s an interesting situation because CS’ mission is inherently individualistic and non-corporate (“creating inspiring experiences”)…yet Casey is working toward building a huge membership base of between 100-200 million profiles (private communication as per our skype call). The promotion of shared community values initially attracted the alternative-living folk who are distrustful, and perhaps naive of, large corporations…which is what CS now seeks to become.

      CS’ rapid growth set up a culture clash between the idealistic, early-CS members, (who wanted to change the world via global diplomacy through travel) and the latest sign-ons (who want to easily access cost-free accommodation from a large network of hosts worldwide).

      Should be fascinating to see what happens next!

  • Eder Beaved

    “After losses, CS was professionally appraised at $1 million; this money was not put into the for-profit entity, but put into the CS Cultural Scholarship fund, a 501c3 which is independently administered. The funds were not transferred to the CS C-corps.

    I’m assuming that the donated time and talent, which helped build the value of the database, was included in this appraisal.”

    By losses, do you mean debts accumulated directly to alleged mismanagement by the non profit, or from back taxes and penalties to the IRS which may then have ensued?

    I can’t recall where I saw the copy, but in perusing the public domain IRS rejection letter linked in one of the forums on CS, the alleged mismanagement issues become very clear to an objective reader. Do you have a copy or a link to that letter?

    Quite frankly I wonder how management even arrived at an agreement with the IRS to just walk away from that train wreck. And now after reading just the two paragraphs you posted above, next to each other, a chill ran up my spine.

    Is it possible that the alleged mismanagement and consequent debts might have actually served a purpose to the “failed non profit” management? This is the same management after all, who with the help of venture capitalists, acquired those same assets at firesale prices with a compensating payment mandated by the charity regulator.

    By investing $7.6 million, if it was a minority stake, then the new CS Inc can be valued at upwards of $15 million? Based on assets acquired with a $1 million payment mandated by the charities regulator.

    And this new C-Corp has managed to receive a B Corp certification? Based on what quality of information and assessment?

    This is B Corp’s business model after all as I understand it, something along the lines of an S&P or Moody’s fee based financial ratings. Am I right? If I am, then I’m tempted to make some parallels here considerably more rude and less innocent than a financial market ratings agency.

    • Margaret Wohler

      thanks Eder,

      If you read the next-to-last paragraph in the article above, you’ll find the IRS letter linked (starting with “After four years and significant legal costs, CouchSurfing International was denied the 501(c)(3) tax exempt status this past August.”)

      It’s redacted but, indeed, I think you can extract worthy information.

      In the CS independent audit from 2010, the auditors report “The Corporation has federal and state net operating loss carryforwards totaling approximately $3,900,000 available to offset future taxable income through 2030″. (page 11)

      Lots ‘o loss: I think it resulted from overspending on unneeded ephemeral things, such as travel for CS staff (>$90,000 in 2010; page 4 indept audit), zero spending on either charitable or educational programming, then the subsequent denial of the 501c3. CS finally then needed to refile form 1120’s, as a C-Corps, for all their years of operation, and the back-tax payments this incurred were presumably significant.

      Non-profit CS’ poor management resulted in rejection of the 501c3 application. This resulted in the loss-fallout that the back taxes then generated. Sorry to be so unclear, but I’m not a tax lawyer or accountant so I don’t know the proper language.

      I’m assuming that these details were withheld from B-Lab since they were pertinent to the non-profit CS entity, and not the for-profit CS entity. I’m guessing that CS got the B-Corps cert after it had secured the VC funding and therefore appeared fiscally well managed in the B-Lab assessment. I don’t know, however, and would need to hear from whomever completed the survey.

      I asked Casey for a good chronology of the events but many of these things were happening nearly simultaneously: the for-profit CS was created on July 6, 2011 (probate court in NH), Casey told me that B-Corps cert came over “the summer”, and the non-profit will be formally dissolved by the “end of 2011″ (according to my notes of our skype call).

      I would be curious to know what combination of information was presented to B-Lab on the assessment: the good parts from the non-profit’s history of operations, parts from the new for-profit’s business plan; I’m not sure. I’m guessing that CS picked and chose selective information to present to offer a best-case scenario to B-Lab.

  • http://roymarvelous.com Roy Marvelous

    I attended the CouchSurfing Conference in Istanbul, which discussed these changes and am satisfied with the answers. Here is my report on it!

    http://www.hejorama.com/articles/casey-fenton%E2%80%99s-couchsurfing-conference-6445/

    If you have concerns and live near London, Paris, Berlin – I think you should go to the upcoming conferences!

    • Margaret Wohler

      thanks Roy,

      ” Basically, it started out as a site designed for 1-to-1 hosting and surfing but was largely undefined because no one was sure what CouchSurfing actually represented. For some it was unconditional hospitality, for others it was a paradigm shift from capitalism, some felt it was a social movement and some were just cheap bastards looking for free accommodation.”

      exactly…this is the culture clash I was clunkily describing above. Thanks for presenting it more clearly.

  • Eder Beaved

    Ok Margaret, it’s worse than I thought. The purported founders Dan Hoffer and Casey Fenton, responsable for the scathing IRS rejection and the audit. claim to be in charge and to have majority stakes.

    And the assessment is SELF DECLARED by these same men? I feel like the IRS must have when they rejected ‘501c3′ status, that someone’s trying to pull the wool over my eyes.

    If the B Labs folks don’t want to appear to be selling little more than a fig leaf certification, they’ve got some explaining to do.

    • del blanchard

      I notice that B-Lab asks corporations to be established at least 6 months before requesting certification. Why did they allow a new corporation to apply? Did B-Lab take into consideration the scathing indictment by the IRS of CouchSurfing management? Does B-Lab’s obviously inadequate evaluation of the CouchSurfing application not tarnish B-Lab itself, now that it can see it was lie to?

      • Margaret Wohler

        thanks Del,

        yeah we’d like to know these answers, also, but don’t have access to the actual survey…just the results.

  • Sergio Almeida

    Casey Fenton, co-founder and chairman of CouchSurfing International, asked:

    “Is it reasonable to ask people with new ideas to play by old laws?”

    Wow! I don’t know if this is mostly ignorance or arrogance, but yes, the laws apply to Casey Fenton and CouchSurfing, too. You tried to play the IRS and lost (perhaps on purpose). You just played the New Hampshire Attorney General and a county judge, and apparently won that round (until they realize you cheated them out of at least $ 14 million), and you also played two reputable investors who probably weren’t fully aware what they got themselves into. You then played B-Lab with a very creative self-assessment of the dissolved non-profit which was then applied to the freshly created C-corporation with no track record. If B-Lab is smart they do a little checking and remove that certification real quick before your dishonesty rubs off on them.

  • Jen Boynton

    Many of you are responding to a comment from Casey Fenton. Unfortunately, it wasn’t written by the real founder of CouchSurfing, but someone pretending to be him. I’ve removed that comment.