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Despite Legal Troubles, This Startup Is Trying To Do Right By Workers

Just like other on-demand startups, Josephine is fighting regulators for its right to do business. But unlike most other on-demand startups, it’s trying to fight them while providing workers with a stake in the company’s success.

Posted on November 24, 2016, at 3:55 p.m. ET

Every other week, dozens of Bay Area families sit down to dinner that is prepared, packaged, and partially grown by seventh- and eighth-graders at Willard Middle School in Berkeley and ordered through the website Josephine.com. The younger students are in charge of the cooking, and the older students are in charge of the business end. The profits are reinvested in the school’s gardening and cooking program, which lost its federal funding in 2014. So far, they’ve raised over $100,000.

This is more than your average potluck fundraiser, though. Josephine is a venture-backed startup that has raised over $2.5 million from investors including Kapor Capital and SV Angel. It’s a member of the white-hot dinner-on-demand sector: The company wasn’t started to host middle school fundraisers, but to sell home-cooked meals to busy Bay Area families (it intends to expand to Portland and Seattle soon). But at the moment, home-economics-on-Silicon-Valley-steroids is one of the only ways Josephine can legally operate. Like so many on-demand startups, it’s facing regulations it must change or eliminate if it hopes to survive.

Members of Willard Middle School's "Growing Leaders" program.
Eugene Chen / Flickr

Members of Willard Middle School's "Growing Leaders" program.

Josephine was intended to be different from other gig-economy companies, by partnering with individual, mostly home, cooks — not restaurants — and sharing the value of the company with them equitably. But it’s hard enough to operate a successful startup if the regulators are against you; it’s even harder if you’re trying to be a nice guy in the process. Many who enjoy the convenience, flexibility, and opportunity on-demand economy platforms offer wish those companies would operate in a more compassionate and equitable way. Whether or not that hope can be a reality could hang on the success or failure of Josephine.

Josephine works like a lot of other delivery startups: Rather than picking up takeout or going out, Josephine customers can order dishes like Hadell's Al Kabsa for $13, or Lisa's "Favorite Dishes of the Americas" for $8. Hadell and Lisa are home cooks who use Josephine to make a little extra money on the side, with Josephine taking a 10% cut of the profits.

But last spring, Josephine’s cooks received cease and desist orders from local health regulators who said that selling prepared food made in a facility that hasn’t been inspected by health regulators is illegal, and that by advertising on the site, they were committing misdemeanors. In May, Josephine paused operations in Oakland as a result; the Willard kids, who operate out of a commercial kitchen, are among the only cooks allowed to operate on the platform now.

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Josephine co-founder and CEO Charley Wang.
Dijon Bowden / Flickr

Josephine co-founder and CEO Charley Wang.

This regulatory debacle has turned Josephine co-CEO Charley Wang from the co-founder of a food startup into something of a local food policy wonk. He’s co-authored a bill with the California Conference of Directors of Environmental Health that, if it passes, could legitimize Josephine’s food operations by early 2018. Meanwhile, he’s been working to expand into Seattle and Portland. Selling meals cooked at home isn’t technically legal there either, but he’s hoping to work around that by taking meetings with local officials and forging partnerships with grassroots groups.

“We don’t want to go anywhere we have to actively spend money fighting the government. That’s a poor use of private money,” he said. “Think about how much money Airbnb and Uber have spent, but also how many civic tax dollars have been spent to battle those organizations.” Wang’s hope is that, by being proactive with regulators, Josephine can avoid the problems the company ran into in California in new markets.

Other gig-economy companies have placed increasing pressure on workers in the rush to scale despite regulation. But in an August blog post, Wang's co-founder Matt Jorgensen announced that, starting in January 2017, Josephine cooks will receive equity, with the entire network sharing in 20% of the company. “The long-term interests of our cooks are the long-term interests of Josephine,” Jorgensen wrote at the time. He also announced the introduction of a Cook Council — an advisory team made up of cooks, one of whom will have a seat on the board — and a transparent, open-source company guidebook.

Giving away one-fifth of your business to independent contractors, all of whom have other sources of income, seems remarkably generous — but of course, if the business is worth nothing, so are the cooks’ stock options. “Equity,” said Wang, “is a long-term symbolic metric.”

“Equity is a long-term symbolic metric.”

This is something of an emerging trend in on-demand startups. Juno, an Uber and Lyft competitor in New York, is offering equity to its drivers. Honor, which employs caregivers who can be deployed on-demand, offers universal equity to its employees. Managed by Q, similarly, offers stock options to its on-demand office managers. None of those options are worth any money to those workers until the companies go public. But Managed by Q CEO Dan Teran said, while the options may not be worth anything, for the more than 100 hourly employees who qualify for the program, they still mean something.

“It’s not like this has impact on anyone’s life, but it has the potential to,” Teran said. “You hear people talking about it and, whether or not they fully grasp what it means, they do feel like owners, which allows us to ask people to act like owners in a way that's sincere.”

While it’s atypical for companies to give hourly workers any kind of equity, as Honor and Managed by Q are doing, there is a system in place for sharing stock options with employees. But what Josephine is trying to do — offer stock options to independent contractors, who by definition don’t work for the company — is more complicated. So far, Juno, the equitable ride-hail startup, is the only company that’s tried to do it, and CEO Talmon Marco said designing the legal structure has been difficult. “If I look at our legal fees to date,” he said, “most of them went towards this.”

One particularly tough question Josephine will have to answer is how to divvy up the shares. As independent contractors, the cooks don’t work regular hours, so the company will have to find a different metric for measuring their individual contributions. “Our cooks live in different places, and come from different socioeconomic strata. Revenue isn’t the best impact indicator,” Wang said. “So we’re looking for other proxies for engagement, like how many customers they have or what their reviews are like.”

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Robert Scoble / Flickr

Mitch Kapor is the man behind Kapor Capital, the social impact fund that invested in Josephine a few months before the regulatory crackdown last spring. In the '70s, Kapor said, Silicon Valley popularized the idea that all full-time employees should own a stake in the companies they worked for; before that, the idea of anyone besides executives receiving equity would have been weird. Kapor said companies like Josephine and Managed by Q, both of which he’s an investor in, are simply extending that trend to hourly and contract workers. “If you are creating value in the ecosystem — which I would argue everyone is in these marketplaces — you ought to have some share of what's created,” he said. “It's the same principle, somewhat differently applied.”

But just because it’s the right thing to do doesn’t mean it will be easy. For example, Kapor pointed out that contractors can stop working on a platform or leave a company whenever they want, which could make it hard to come up with workable vesting schedules. “With these marketplaces, I don’t think there’s going to be some simple, ‘Okay, here’s how to do it.’ It’s going to have to be figured out, and no doubt some people will try things and do it not in the best way, and there will be adverse consequences,” he said.

"I see this as a grand experiment that could either be totally unworkable, or maybe lead to a paradigm shift in how businesses are organized."

Kapor said, as an early-stage seed investor, he’s not particularly worried about the delays Josephine’s growth has experienced as a result of it being an illegal operation. Of course, Josephine’s goal was never to achieve massive scale, but rather to help connect individuals with new revenue streams. In some ways, forging an alliance with local community groups and pushing a policy agenda is all in keeping with Josephine’s stated mission. In the meantime, Wang said Josephine has turned to foundations and individual investors as sources of capital, though he’s still open to meeting with venture funds.

Seth Bannon is the founder of a venture capital fund called Fifty Years, which is dedicated to proving through strategic investment that social good is good for the bottom line. Bannon is not an investor in Josephine, but is intrigued by Wang’s belief that there’s “a better way to organize a tech company.”

“As an investor, I see this as a grand experiment that could either be totally unworkable, or maybe lead to a paradigm shift in how businesses are organized,” he said. “Often, as an investor, that’s exactly where you want to be. High risk, high reward.”

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