# Why we need Retro Profit Organizations

[Matt Stephenson](https://twitter.com/stephensonhmatt), [Lavande](https://twitter.com/lalalavendr), [Scott Moore](https://twitter.com/notscottmoore)

*Thanks to Ben Jones, Maxwell Canter, RZ, Jonas, Dani Osorio, Simona Pop, and Lauren Stephanian for valuable comments and feedback*

There's been a lot of controversy about VC-backed organizations receiving Retroactive Public Goods Funding (RetroPGF). A full summary of the conversation around Optimism's latest RetroPGF round can be found [here](https://gov.optimism.io/t/the-role-of-vc-funding-in-retropgf/7342), but smaller pockets of discussion played out across X and Farcaster:


**There are some genuinely strong reasons why we might not want to fund VC-backed orgs via RetroPGF:**
1. We want to avoid the adverse selection of rewarding bad businesses that intended to be private goods but failed, and are now positioning themselves as candidates for RetroPGF. This is a free option for a business and a burden on an RPGF system.
2. VC-backed orgs might have a larger capital base for marketing that allows them to disporportionately promote their own impact, unfairly swaying RetroPGF voters (h/t Lefteris)
3. It’s not clear whether it’s a priority (or even a desirable outcome) to rebate **all** positive externalities from the operation of profitable companies, since RetroPGF is most impactful if it's rewarding things that wouldn't have been created otherwise.

**On the other hand, we need public goods to be investable!** The core idea behind Retro Public Goods is that "[it’s easier to agree on what was useful than what will be useful](https://medium.com/ethereum-optimism/retroactive-public-goods-funding-33c9b7d00f0c)." In a nascent stage of creating a retro public good, maybe only the builder and a few specialists are confident in its usefulness. Only once it's fully built does everyone see the value. But moving projects from the "not obviously useful" to the "obviously useful" stage often requires capital.

So mny RPGF organizations will require up-front funding, including grants and even investment, that can help bridge them to the "obviously useful" stage. This presents a problem though:**it's unlikely that Retro Public Goods can rely on broad-based upfront fundraising because, by definition, they are things that aren't obviously useful to everyone at first.**

As a result, the most viable source of upfront capital will be the specialists who can be confident in the good's usefulness before it's built. But since these specialists typically seek compensation for their services in equity or debt, the question becomes: how can we maximize the probability of high-impact organizations creating public goods while minimizing the risks associated with their taking outside capital? The solution may lie in the creation of Retro Profit Organizations.

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*"Warm-glow" charitable giving can only support so much, and Retro Public Goods are further disadvantaged because of their uncertain usefulness*

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## Retro Profit Organizations
Retro Profit Organizations (RPOs) are organizations that commit to only taking retroactive profit, such as rewards from a RetroPGF round. An RPO pledges to redistribute and/or reinvest all revenue that is not RetroPGF back into its ecosystem.

Contrast this with a *non-profit* organization, which makes a legal commitment to reinvest all profit or revenue back into the mission-driven operations of the organization, not distributing *any* profit to shareholders. **The difference for a retro-profit organization is that RPOs can distribute *retro* profit to shareholders.**

A benefit of this model is that it would enable RPOs to pay back investors, shareholders, and equity-compensated employees according to the retrospectively observable value they created. This makes public goods investable, with some expected return, while helping ensure that those involved in the funding and building the good were committed upfront to the creation of a public good.

This structure manages to avoid, or at least mitigate, some important pitfalls:
- Organizations that have pledged to only take RetroPGF profit are **less likely to be failed private enterprises**. This is because, in becoming an RPO, they had to commit to the RPO organizational form which curbs their normal profits. And though organizational forms can change, the drama around OpenAI's non-profit status (or lack thereof) demonstrates how costly and difficult it can be to change a commitment like this.
- RPOs can seek outside capital without fear of being shunned by groups such as RetroPGF voters. If popularized, this can open up the possibility for typically "uninvestable" libraries and dependencies to raise external capital.
- The existence of RPOs can reduce the burden on RPGF voters by creating a "brightline" which helps distinguish one organization from another according to a credible commitment. By distinguishing an RPO from a for-profit organization, RetroPGF rewards flow to organizations that are committed to the approach, since becoming an RPO involves an opportunity cost of not being a traditional for-profit!

If this model were to gain traction, a commitment to be an RPO could create a credible signal of an organization's intention to build public goods and use its impact to support its operations. This by itself could accelerate the development of a more investable market for public goods.

## Future Areas for Research:
- What might the first RPO funding round look like?
- Could Retro Profit ever be substantial enough to generate "unicorn style" returns? In theory yes--the value has been created so it's a question of distribution. But that is by no means a small question.
- Where should an RPO send its non-retro profits?
- Is it incentive-compatible if some portion of all profits were pledged back (perhaps after vesting) to a RetroPGF allocation?
- What further research, theorizing, or modeling is needed to make sense of RPOs?
- Sometimes [monetary incentives can crowd out intrinsic motivations](https://web.archive.org/web/20161015051945/http://harvardecon.org/?p=3283). Would this be the case for RPOs as well? Or might the retro-profit commitment mitigate this effect?
- How might RPOs relate to cooperatives or existing / adjacent models? Will similar structures help inform the development of RPOs?
- What would it look like for a (Network?) state to create a legal RPO entity?