Reference no: EM132334652

Question:

Ross Lohr and Nathan Rothstein have built a thriving small business from the idea of giving old T-shirts new life by having them cut into squares and sewn into comfortable fleece- backed quilts. The Boston-based company is named Project Repat because it is dedicated to repatriating textile-industry jobs and helping U.S. workers earn a living wage by sewing T-shirt quilts made to order.

To start, customers visit the Project Repat Web site (www.projectrepat.com) and select the size of their quilt, based on the number of T-shirts they want sewn together. Then they choose the color of fleece for the backing, enter their payment information, and place the order. Project Repat responds with detailed instructions for preparing the T-shirts and shipping them to one of its two contract manufacturing centers, the one in Fall River, Massachusetts, or the one in Valdeze, North Carolina. Once the T-shirts arrive, the company confirms the receipt of the T-shirts by sending an email to the customer. Within about a month, the new quilt made of old T-shirts is on its way back to the customer, ready to be enjoyed for the warmth and the memories.

The original business plan was to make good use of T-shirts that had been discarded by U.S. consumers and wound up in Kenya. The cofounders raised money via crowdfunding to pay for designing fashion accessories including tote bags and scarves made from old T-shirts. Once designs were completed, local Kenyan artisans were then employed to turn the designs into finished products that were then shipped to America for sale. However, feedback from U.S. customers quickly led the company to refocus on creating something new from customers' own T-shirts that had nostalgic value. So Project Repat switched from production of fashion accessories in Kenya to production of T-shirt quilts in America through contract manufacturers that paid and treated their workers well. The new business plan reflects this change in direction. Simply put, Project Repat gets the old tees from customers, cuts the T-shirts into squares, sews them together with fleece backing, and ships out a highly personal finished quilt-a collage of their own T-shirts.

Project Repat was set up as a regular corporation because it was seeking funding from venture capitalists and angel investors. One of the original cofounders and a designer received some shares in the corporation. However, the current management team of CEO Ross Lohr and President Nathan Rothstein-who together are the primary shareholders-would have preferred to establish Project Repat as an S corporation or an LLC, in part because the tax bill would be a little lower. Lohr and Rothstein have also taken Project Repat through the process of qualifying as a B corporation, which signals their commitment to pursuing social responsibility goals as well as financial goals.

Now Project Repat is reaching out to potential customers via social media sites like Facebook, Twitter, YouTube, Pinterest, and Instagram. The business is growing and the number of T-shirt quilts it produces has grown each year since the company started back in 2012. The best part of the business is that it is a way for customers to use their beloved T-shirts in a new form and relive happy memories every time they use the quilt. With over $4 million in annual revenue, the company has been responsible for recycling over a million T-shirts that might otherwise have been relegated to landfills. Just as important, Project Repat's rapid growth has resulted in the creation of dozens of jobs for U.S. workers, an economic benefit to the local communities where they live and work.

Critical thinking questions:

1. Considering the tax benefits, why would investors not want Project Repat to be an S corporation?

2. One of the co-founders of Project Repat is no longer with the company, although he retains a small ownership stake. What complications might this change have caused if Project Repat was set up as a partnership rather than a corporation?

3. Imagine you're an angel investor looking to invest in young companies. What questions would you ask the management team at Project Repat before making a final decision about investing in it?