Welcome – and Introducing the Jason Wiener|p.c. Blog

If the 18th century can be defined as the age of industrialization and competitive advantage of the nation state, the 19th century by the power of the corporation, and the 20th by corporate financialization, then, I believe, the 21st century will be defined by ownership. There is a movement afoot. We see the footprints and we hear the rallying cry.

Our firm is dedicated to democratizing access to the promise of ownership of businesses at all levels and in all of its complex dimensions. What are we really talking about?

I joined the movement in earnest when I left BigLaw in New York City and moved to Boulder, Colorado, to become the General Counsel and a Co-Owner of Namaste Solar. When I showed up in 2009, the company had been in business for more than four years and had grown to more than 40 owners from its three initial co-founders. Namaste Solar felt like the best illustration of an intentional community. Everyone literally and metaphorically showed up with passion, commitment, shared purpose and mutual respect. Co-Owners invested their hard-earned savings, sometimes asking friends and family for a loan to buy-in. Namaste Solar offered ownership and professional development opportunities to people with specialized professional training like me, as well as to people looking for a toe-hold in the “new energy economy.” I sat in monthly big picture meetings where the CEO had the same say as someone who spent their days climbing and descending ladders affixed to homeowners’ roofs.  

Everyone showed up. I don’t just mean they plopped down and listened half-heartedly to esoteric reports. I mean people SHOWED UP. Owners engaged and prodded the CFO for more detail into monthly profit and loss statements. Installers debated (respectfully, of course) the finer points of the business strategy and volatile policy landscape with senior leadership.

This is what economic democracy should look like. We all owned the company; its reputation, integrity, confidence in its service, its people, and its success. Co-ownership didn’t just give me the personal experience with which to launch Jason Wiener|p.c., it gave ordinary people a chance to be involved in and OWN something bigger than themselves. It gave a chance to find purpose in work. I believe this is what we all strive for as human beings.

Why do I, and a growing movement of people around the world, work hard to support employee ownership? I believe in a different and better world, where economic opportunity is more equitable and available. This belief is my motivation. What follows is my vision for the world I am working to create, and how I put that vision into practice at Jason Wiener | p.c.

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We design and architect thoughtful ownership structures for organizations that have a purpose to improve social or environmental well-being, opportunity, sustainability, and equity.  We believe that ownership design optimizes the organization to address the root cause – rather than mere symptoms – of social and environmental ills, by aligning incentives, promulgating shared values, increasing transparency, inviting access to those innovators closest to the need or the problem, and therefore also solutions.

Ownership…it’s a pretty fundamental notion, however, it’s underlying attributes are often under-scrutinized and under-appreciated.

Why:

Ownership matters. There’s a movement afoot. From craft beer to taxicab transportation. From solar energy to farmland. From housing to technology. From data to golf balls. Entrepreneurs, investors and ordinary people are rediscovering an age-old business model that is conducive to people-centricity. We are learning that by bringing business and enterprise to a more human scale we can reduce dependency on governmental largesse, improve community and civic engagement, enhance durability and sustainability, and manifest economic democracy and sovereignty.

Who:

Ownership benefits those who possess it. That’s a fairly obvious statement. Ownership confers exclusive rights. For too long, ownership has been the domain of those in positions of power, those of great wealth, those with privilege, and, occasionally, and sometimes incidentally, those with unique talent. I’m not intentionally trying to be political. The current economy is not working for most people. The concentration of wealth is at the highest point it’s been since the robber barons helped to precipitate the Great Depression. Income inequality, and the consequent concentration of wealth are also accelerating. At the same time, we are living through the greatest wealth transfer in human history. Until recently, only approximately 2% of Americans were legally permitted to invest directly in private companies.

We believe in and work hard every day to construct a more positive, equitable, resilient and inclusive economy. One in which the chief contributors of value are conferred the rights to ownership. One in which ordinary people can invest in and support local business. One in which those who patronize and care about a local business can be engaged in the critical issues and decisions that it faces.

We work with all types of legal entity types to advance this mission.  We have a particular passion for cooperatives, limited cooperative associations and public benefit corporations. We do the deep thinking to thoughtfully design ownership models where those who own the business differentiate it as much as the quality of its product or service.

We work with all types of business models to expand access to mission-aligned capital, allowing anyone who cares about the business to have an opportunity to support it financially. We also work with non-profit organizations to invest their endowment in ways that support their charitable mission, as well as non-profit organizations seeking to expand economic inclusivity.

We believe ownership will become as much a business’ product as the good or service it sells.

What:

Ownership is a bundle or rights. Ownership confers the right to control, exclude, transfer, to give access. To restrict, condition or rescind access. To bequeath. To monetize, securitize, collateralize, and to liquidate. Ownership can be exercised offensively or defensively. Ownership can catalyze or support social or environmental equity, or it can erode it.

Our mission is to democratize ownership. We believe workers, producers, farmers, entrepreneurs, creators, freelancers, crafts people, professionals ought to be in control of the means of production. We believe employee/worker owned firms are more resilient, profitable, sustainable, and durable. We believe community owned land leads to better stewardship, environmentally sustainable practices, more realistic and sustainable pricing, and healthier communities. We believe democratized capital leads to more sustainable business models, less volatility and risk, more engagement, better transparency and healthier social and financial returns.

Where:

Too often, ownership discussions happen episodically and intensively; among co-founders, with prospective investors, and when considering a liquidity event, such as a merger or acquisition. While better late than never, ownership is constant responsibility and privilege. It involves so many dimensions, all happening in a highly dynamic and unpredictable reality. We believe ownership ought to be elevated to the same attention as a company’s brand, its product design, and its business strategy.

Ownership ought to be intentional, considering at the outset the many possible trajectories the company can take. If little about a company’s logo, name, or product is left to chance, why then would ownership? That’s often what entrepreneurs do when going after venture capital or thinking about their exit.

We believe a well-architected ownership blueprint not only avoids the many problems inherent in the dominant forms of venture finance, it also clearly aligns the interests of every material stakeholder to the firm’s success. Workers’ contributions are valued with both a voice and an economic stake in the firm’s success. Early product adopters are remunerated and recognized for the risk involved in purchasing a nascent technology. Founders are sufficiently incented but have the opportunity to build high-talent, mission-aligned teams.

Involving the key stakeholders in the ownership design of the company  yields better companies, better products and better outcomes. Even better to bake stakeholder ownership into the firm’s DNA at inception. Lest it sounds like conventional ownership is ill-considered, shared stakeholder ownership is as much a destination as it a starting point. Plenty of businesses are looking to convert to employee and stakeholder ownership models.

When:

The conventional wisdom is to keep a start-up’s capitalization table simple, uncluttered and short. In other words, vacant for investor-ownership. Many firms utilize what are known as “incentive stock option” plans to incentive employee recruitment, retention and performance. An option generally involves a contractual right to exercise the option to purchase the firm’s stock or equity at a pre-defined price. These stock option plans have certain tax benefits under the Internal Revenue Code. What makes a stock option so appealing for the firm is that it does not need to account for the option as issued equity on its capitalization table until the option is exercised. Also, most conventionally structured cap tables cap the option pool at 10-15% of total common stock. Employees like options because they offer the promise of a windfall if the positive difference between the fair market value of the stock and the “strike price” is large. Many stock option plans, however, restrict the right to exercise an option to certain liquidity events or the company undergoing an initial public offering. Unfortunately, IPO (or initial public offering) activity is drying up at the moment. So, the practical likelihood that an employee can exercise a stock option for a windfall is dwindling.

We believe in a more authentic and transparent approach. When suitable, and in consideration of the many factors involved, actual and direct ownership can be a powerful and straight forward approach. Many options confer actual and direct ownership to a firm’s employees, producers, consumers or other stakeholders.  We are not daunted by the complexity. We have the experience to nestle meaningful ownership structures into many business models and entity types.

We believe there is no better time than now for a firm to consider stakeholder ownership.

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Join us on this journey. Check back regularly for updates.

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In cooperation,

Jason

Our Practice with Democratic Control: Developing a Style Guide and File Management System

I wrote last week about how I advised a friend how to experiment with and develop democratic processes without (yet) operating within a cooperative structure.  This week, we took our own medicine and experimented ourselves. Now, many readers will think the canvas for this experimentation is so “lawyerly” or trivial, but many others will immediately understand how meaningful and sometimes emotionally charged the subject can be.  Wait for it…we discussed and democratically determined our drafting style guide and file management system.

We have been working as a team on a uniform document drafting style guide and file management system for the last six months.  When the practice was just me, it was not as important to hold to standard practice because I, and I alone, had to work with whatever style de jure I chose to use.  With a team of five and a more established practice, it has become critical to adopt uniform practices regarding file management, file titling and document drafting.  Why, you ask?

 

  1. Quality. It is core to our values to strive to produce work of the highest quality.  Integral to high quality work product is a readable, consistent and polished format. Standardizing this across five team members for several dozen clients becomes a challenge without some proactive effort.
  2. Accessibility. Further to our core values is producing client-centered, people-oriented documents that are both accessible, professional, and cost effective.  This means foregoing Latin terms of art for more plain language terminology, simplifying organizational structure to make a document more easily navigable, drafting in a voice and style that reflects and enhances the client’s values as a reliable trustworthy party to another, de-cluttering documents by removing superfluous verbiage and definition, using clearly and consistently defined terms of art, and focusing on the ultimate users of the contract – the client and counter-party – but keeping an eye on the potential for a third-party interpreter (e.g.  a court).
  3. Uniformity. We are in the document game and file management is a real logistical challenge.  Version control, document collaboration, remote access, cloud storage; we are a contemporary firm dealing with many of the same challenges as our clients and any other organization for that matter.  For a variety of reasons that we’ll address in a separate blog post, we use a Microsoft Office365 SharePoint server for our file management.  It has become important for us to adopt a uniform file folder architecture and file management structure.  Debating the finer points of this structure has revealed that attorneys, and most people for that matter, have deeply held opinions about how to file, search for and retrieve files.  Surfacing these opinions and achieving consensus is important if we are to expect consistency and develop a streamlined and reliable system for file management.
  4. File naming. I’m sure readers from all backgrounds and in all professions can appreciate the deeply held opinions about how best to name files.  We are no different.  We are debating where and in what format to put the date in the file name.  How do we title a document?  Do we use version markers, or just rely on meta-data?
  5. Continuity. As our law firm grows, it becomes more difficult to keep up with the daily matters that our colleagues are handling. If we need help from a colleague (or if a new colleague joins the team), a strong document management system diminishes the need to explain the matter in detail and enables a smooth transition. Uniform file management can tell a story of the matter, creates continuity and, even though it takes a while to get used to, it can greatly improve efficiency in the long run.
  6. Security.  We take data security and client confidentiality very seriously.  We stay up to date with best practices and technological hygiene.  We have team members working in at least three time-zones and from places ranging from Nairobi, Kenya to Western Massachusetts.  It is crucial that our team members employ best practices to ensure end-to-end data security measures.  We openly discuss what measures are prudent to both comply with our professional responsibility and to go further to help preserve the balance of remote work with client confidentiality.

Our team has gone back and forth through multiple iterations of a written style guide.  We have spent valuable time, collectively, discussing the finer points of these matters on a Zoom meeting.  I was impressed, but not surprised by our team’s respectful discussion, openness to new ideas and the variety of opinions held.  It was so cool to see how one topic was of significance to one person and not another.  This created a quasi-negotiation format to the discussion, as we each implicitly yielded on less important matters for the sake of seeking adoption of more strongly held opinions.

 

Yes, as the principal of the firm, I can technically fiat the rules by edict and expect all team members to comply.  Such command and control styles of management often require more investment in oversight and enforcement. Fending off work-arounds and pushing consistent adoption become the conventional role for the manager.  The more contemporary (and dare I call it humane, effective, responsive and humble) style of leadership involves seeking input widely and developing consensus-based processes to widen the aperture on issues of broad applicability.  The role of this style of leaders is then to facilitate consensus and welcome input.  Once a decision is reached (and yes, this takes longer on the front end), the result is little to no time spent on adoption or enforcement.  The rules we have set for ourselves are self-enforcing; they are the product of our collective input and negotiation.  We all feel bought in. Today felt that way.

 

The most meaningful part of this exercise is not the end product or the ultimate decisions we reach on the finer points of file naming. Rather, it is that, in spite of our firm not (yet) being cooperatively owned, we embrace and practice democratic control and collaboration.  We expose the many mundane features of our work to daylight and discussion and we adopt practices with intention and an openness to constant improvement and adaptation.  We do this to ensure all voices are heard, all opinions registered and, most importantly, to maximize the opportunity for the best ideas to be adopted.

 

I’m sure we’ll re-visit many of our collective decisions and practices. As long as we do so openly, transparently, and collaboratively, the end product will be suited to our highest ideal and core value — democratization.

“I want to run my business as a cooperative, but…”

I received a familiar email from a long-time friend and start-up founder.  She has founded a unique brand and business model that has created a market where one had not previously existed; the dream of most entrepreneurs.  The start-up has grown rapidly and has received international acclaim in mainstream press.  A great position for any growing start-up to be in, right?  Like many start-ups, however, cash is scarce and “sweat equity” is abundant.  She said: “I’m not ready to invest in turning my business into a full-fledged cooperative, but I’d like to start down the path. What can I start doing now?”

I hear this question a lot. I hear variations of it is as well. They go something like “I want to run my business as a cooperative, but:”

  • “I have heard that cooperatives are run as not-for profits.” Or
  • “I am afraid of sharing ownership and diluting what I’ve built.” Or
  • “I don’t know if I’m ready.” Or
  • “I don’t fully understand what it means to operate as a cooperative or with shared ownership.” Or
  • “I don’t know if my team of employees wants to co-own this business.” Or…

You get the picture.  Decisions about ownership are the most intimate and consequential decisions a founder makes.  Hesitation is natural, if not expected.
Here is more or less what I told my friend:

Under the cooperative laws in many states, you cannot technically call a business a “cooperative” unless you form under that state’s cooperative laws, or you operate on a cooperative basis.  Additionally, there are significant tax, securities, contractual and other legal considerations involved in operating on a cooperative basis and sharing ownership, and so you should consult an attorney.

You can, however, start by adopting cooperative practices and principles:

  1. You could start practicing open book management and collaboration. You could schedule regular conference calls to discuss the business’ finances with team members and employees.
  2. Ask team members and employees to vote on things. Start small; have folks vote on the type of coffee to buy.  Progress at a natural pace to more consequential decisions.
  3. You could do one or all of the four things Jennifer Briggs, former co-owner and VP of HR and Organizational Development at New Belgium Brewing recommends.
  4. You could start offering financial incentives to employees and team members, tying revenues and/or profit to compensation.
  5. You could operate as a benevolent dictator and open up decision-making to a consensus or democratic process. You would of course retain the final and definitive vote as the business owner.
  6. You could create committees to focus team members and employees on various aspects of the business, giving official responsibility and even equity compensation for participation.
  7. You could create and offer phantom equity or equity appreciation rights by way of contract so as not to complicate your capital structure.  I disfavor phantom stock and stock appreciation rights as a definitive ownership sharing technique, but they can be an effective and efficient bridge to meaningful shared ownership.
  8. Consider whether to you want to grant ownership rights or sell them in exchange for capital contributions.
  9. Consider whether to allocate ownership based on a retrospective or prospective measurements of “sweat equity.” Equity ownership can be allocated both statically and dynamically. For example, check out the encode.org “for purpose entity” structure, and “Slicing the Pie“.

You may be familiar with stock options plans.  While widely used, I tend to disfavor them as a device to confer meaningful and direct shared ownership. Stock option really only make sense when a business is cash strapped, but growing quickly and anticipates significant future profitability or a liquidity event (company sale, IPO). Stock options offer a tax-advantaged mechanism to pay service provides/contractors/advisers/employees with equity rights that are not taxed until the option is exercised. Stock options plans are somewhat expensive to set up and administer and annual valuations are required. Stock options rarely come with voting rights and the the options holder often cannot exercise ownership over the underlying equity until the options have vested, and the options are exercised.

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Divying up ownership is one of the most consequential decisions an owner will make. Start with democratic management practices first, and then consider economic democratization with hybrid structures like phantom equity or equity appreciation.  Once you have a clearer picture of the scale potential of the business and your desired ownership design, it makes more sense to formalize a shared ownership structure.

A cooperative structure need not be the only way to share ownership. There are numerous structures to consider and each offers a unique blend of pros and cons.

Lastly, talk about your journey and tell your story! It is important for other business owners to hear that they are not alone.  Check out the 4-part series of our client dojo4’s journey to become a worker-cooperative.

V-Blog: Colorado Public Benefit Corporations 101

I had the pleasure yesterday of co-presenting with Blue Dot Advocate’s Seth Henry, and B-Lab’s Holly Ensign-Barstow on the Colorado Public Benefit Corporation legal entity form and conversion process.  We recorded the webinar and are posting it here for public consumption.  We raise important issues that should be discussed with counsel

 

 

A View from an Outside General Counsel’s Perch

I was an in-house general counsel for more than 5 years at Namaste Solar. While in the role, I learned that rendering traditional legal advice was, as they say, necessary but totally insufficient to being successful or adding value. My colleagues consistently pushed me to add value by offering what I now call “legally informed strategic advice,” by which I gave actionable advice to make a decision in light of real world constraints and risk. No path was totally free of risk and no decision could be completely optimized for one variable at the expense of all others.  Law school, for better or worse, teaches lawyers to analyze a case with 20-20 hindsight and to evaluate the facts in light of black letter law. I was rarely pushed, or even inspired to go further and analyze what should have been the decision in light of broader circumstances.

So, when I became an in house counsel, I had to play a critical team role and advise a $20+M company through volatile and risky waters. We navigated a recapitalization, a turbulent and unpredictable policy landscape, layoffs, litigation, growth, scaling production capacity and massive industry consolidation. We had to act with poise, a watchful eye, but always with the clarity of knowing that unknowns lay just around the corner.

This experience has informed how we now offer general outside counsel to our clients today. We do this for more than 25 clients each year, and the number continues to grow. Increasing demand for our outside general counsel services tells us that (a) values and vision aligned legal counsel is rare and hard to find, (b) counsel willing to advise at the intersection of legal and business risk/opportunity is even rarer and harder to find, (c) adding value in multiple practice areas and legal topics involves constant adaptation and knowledge sharpening, and (d) offering “legally informed strategic advice” leads to better decisions.

Below are a few questions we ask ourselves and our clients to tune us for the task at hand:

  1. What is the context surrounding the issue we’re discussing?  Risk and opportunity do not present in a vacuum. Broader issues are at play. Are you facing a business cliff, or massive strategic opportunity? Is your back against a wall and you need this deal to go through? Are key relationships at stake and worth compromising to preserve? How is the business doing, overall?
  2. From what position are we starting?  Are we being asked to create a template that will scale up with a new offering? Are comparable transactional templates available? Are we able to red-line a draft from the counter-party? Different starting points present different cost structures and timelines.
  3. What are your high level concerns and objectives? This may seem obvious, however, I’m still surprised how seldom counsel checks in with the client to understand key concerns. Clients are most knowledgeable of the broader context, their own business and the dynamics of the negotiation. Without this information, the attorney is flying without instruments.
  4. Where are we in the negotiation timeline?  I like to ask this question as follows: “Are you asking me for an 11th hour review?” In other words, are we pulling up to the closing table and just looking out for major deal-breakers or red flags? Are we trying to raise awareness but we understand we’ll have little opportunity to request changes…at least not without jeopardizing the deal? This question fundamentally helps the attorney understand what, if any, bargaining leverage we have in requesting changes in a red-line. It’s a pet peeve of mine when an attorney red-lines each and every section of an agreement as if on a quest for technical and substantive perfection…one-party optimization.  This just does not reflect a balanced or real-world understanding of business negotiation. Parties interested in consummating a deal both give and take. It is the balance of compromise between the parties that determines how healthy a deal is and how likely both sides are to remain committed to it. I’ve seen time and again when a document replete with red-line edits grinds a negotiation to a halt, often over details that are esoteric and even academic to the parties business interests.
  5. Similar to the last question, are we “papering” an agreement already reached, or are we carving a statue from raw stone? In other words, have all material terms been discussed and negotiated by the parties or are we proposing terms for the negotiation that follows? The answer to this question fundamentally and significantly impacts how the attorney approaches her task and her perspective. Attempting to propose new terms in a negotiation that simply needs to be documented can lead to the breakdown of a negotiation. I’ve seen parties allege bad faith when the attorney for one party unwittingly raised new concerns and terms when the parties thought they had negotiated the 4 corners of the deal.

As always, clear documents support productive relationships. Good documents require clear, consistent and engaged communication between client and attorney. Clear strategic advice requires consistent communication even more so . Both sides need to develop trust between one another.  It’s neither an efficient use of client dollars, nor a good use of an attorney’s time to fly blind in supporting a client transaction. Offering value-add legal services requires that the attorney be kept in the loop and privy to the direct and indirect factors that influence negotiations.

Leaving a Legacy: Creating a Social Enterprise that Outlives Its Founder

More and more, entrepreneurs and investors want more than just a buck:  they want to create a business with a social mission, then preserve that entity’s mission through time. This blog post briefly discusses three ways to keep a business entity on purpose long after the founders have left.

The first way is to borrow a page from much of the rest of the world and use “golden shares.” A golden share is a share with special voting powers greater than the other shares. To illustrate that power:  threatened with a takeover or acquisition that jeopardize the entity’s mission, one golden share could veto the transaction.

While we recognize that golden shares are hardly used in the U.S., we see potential. Our research indicates that the broad, powerful Delaware corporate law (the “gold standard” for U.S. corporations) has the flexibility and breadth to allow golden shares. Case law suggests that golden shares are permissible if they were created for an equity holder at the outset of the transaction.

 

second way to leave a legacy is through a Public Benefit Corporation. The very act of creating a public benefit corporation creates a high level of protection for the entity’s social mission; to delete or amend an entity’s public benefit statement or purpose would require approval of two-thirds of the outstanding stock of the corporation entitled to vote.

 

 

 

A third vehicle for preserving a company’s social mission is through a “perpetual purpose trust.” The Hershey Company, for example, has historically supported kids in financial need. Hershey does this through a purpose trust worth about $12 billion. The mechanism of the Trust’s control is fairly straightforward:  “The Trust owns about 8 percent of the chocolate company’s shares, but because of a dual class stock arrangement it controls about 81 percent of the votes.” This voting power allowed Hershey to reject a $23 billion takeover bid from rival candy maker, Mondelez.

Preservation of an entity’s long-term social agenda is a good thing. Jason Wiener|p.c. has partnered with other thought leaders on this topic (see, for example, Armin Steuernagel and his white paper on steward ownership). Our work-group plans to publish resources for the purpose-driven enterprise; sign up for our email alerts and we’ll let you know when it is available.

Employee Ownership of Craft Breweries: Great Beer That Benefits Those Who Produce It and Those Who Drink It

Craft breweries are growing in popularity nationwide—in 2016, small-scale breweries had over 20% of total market share in the United States. Breweries combine well-made beer and places to drink it that have broad appeal. What may not be obvious from the varieties of pints on offer is that craft breweries are also embracing employee ownership and membership, and innovative forms of financing to build, grow and sustain their businesses.

The dedication that brewers have to their craft as well as the dedication that they expect from their drinkers, allows for the creation of an uncharacteristically dedicated membership. Craft brewers know that they’re going up against a highly concentrated industry—the five beer firms dominate 90% of the national market.

Though breweries have much in common with their dedication to their craft and to shared ownership, those that pursue shared ownership use a variety of legal structures. Twenty-one out of the twenty-three breweries used a consumer membership drive to raise funds on the front end, relying on the fact that people are willing to invest in what can become their home-away-from-home—a great craft brewery. Some breweries are augmenting consumer membership with external financing from a variety of sources.

In this initial blog, we profile several breweries that are using a variety of ownership and financing models, all with the same goal: great beer that benefits those who produce it and those who enjoy it. In a subsequent piece we will discuss the specific financing mechanisms and their related securities law requirements.

 

ESOP Ownership at Craft Breweries

New Belgium Brewing, a company with over 770 employees, transitioned gradually to 100% employee-owned through an ESOP from 2000 to 2012, and brought attention within the craft brewing world to the benefits of shared ownership structures. The company awards ownership after one year of employment, and practices open-book management, in order to create a culture of openness and mutual responsibility. The company has seen continued success since its conversion—they recently opened a second production facility in Asheville, NC. RAM Restaurant and Brewery in the Pacific Northwest formed an ESOP in 2014, bringing 1,100 workers into a 30% share of the company.

In full disclosure, our firm represents the New Belgium Family Foundation, a separate but related foundation.

 

Craft Brewery Worker Cooperatives

Black Star Co-op Pub and Brewery, in Austin, Texas, is the self-described “world’s first cooperatively-owned and worker self-managed brewpub,” with consumer membership and a Workers’ Assembly that manages the day-to-day operations. The coop also instituted a no-tipping policy in tandem with higher across-the-board wages for all employees, along with paid benefits. And their model has provided inspiration for others: the founders of Fair State Coop in Minneapolis, MN, credit Black Star directly with creating “a gravitational pull that proved too strong for us to ever escape.” Consumers can purchase membership in the brewery directly, receive patronage refunds, and hold voting rights to elect the Fair State Board of Directors.

Democracy Brewing formed in Boston, MA, under the MA Employee Cooperative Corporation statute (Chapter 157A), with a dual mission: to “brew the best beer in Boston, and serve it in combination with two great American ideals: democracy, and owning your own business.” The cooperative launched a Direct Public Offering, which sells equity in the company to residents on a single state (in Democracy Brewing’s case, Massachusetts), with no limitation on the minimum wealth that an investor can have. The offering was made with a minimum investment of $2,000, and the company set a target annual dividend of 5%, with a public goal to buy back the shares within five years.

 

Single Hill Brewing Co. is forming a brewery and social space in Yakima, WA, to generate sustainable community wealth that is rooted in a rural community known for its hops. Washington State does not have a cooperative statute that allows for new-generation Limited Cooperative Associations, so founders Zach Turner and Ty Paxton chose a Washington profit corporation structure, incorporating its multi-stakeholder model with employee owners purchasing an equal number of shares of common stock with voting rights, while outside investors purchase non-voting preferred stock shares. This model allowed them to resemble a Limited Cooperative Association even though the entity form is not available in Washington State. The Board of Directors is made up of elected worker and investor directors, where worker owners vote on a one-member, one-vote basis.”

As craft breweries continue to grow, ownership structures provide an opportunity for founders to build a dedicated membership base that is invested for the long-term. Communities with craft breweries that embrace ownership will benefit from brewers’ dual dedication to worker ownership and excellent beer.

 

Disclaimer: Case Studies provided for illustrative purposes but do not constitute legal advice. Democracy Brewing’s offering is limited to residents of Massachusetts. This is not a solicitation or advertisement of a securities offering.

 

Cooperatives and Founder Incentives

Hi there. Today we’ll be discussing the ways in which contemporary cooperatives incentivize founders to take entrepreneurial risk and reward their visionary zeal within the cooperative structure. This question regularly arises in our work.

Let’s start by unpacking what founder equity is really all about.  When an entrepreneur starts up a new business, they’re taking a huge risk. Putting it all on the line for an idea they believe in.  Many times, founders toil away on nights and weekends to get the idea off the ground until the business has gained enough validation to leave one’s place of steady employment.  Founding a company puts a HUGE toll on a founder, her or his family, finances and friendships.  Founding a company is an act of courage and bravery. It’s not for the faint of heart.

So, to ensure that a founder stands to benefit from the fruits of her or his efforts, founders are often allocated a substantial, if not controlling, interest in the company. This ensures the founder can exercise control over the vision, key strategic direction and major decisions the company will face. Particularly when it comes to bringing on new capital and potentially diluting the founder with equity awards to other key stakeholders, carving out a majority interest is important to ensure the founder has control.  Control in the sense of governance – running the Board and even controlling the company’s shares.

Also, allocating a majority of stock for the founder also ensures the founder reaps a commensurate reward for the company’s success when it comes to dividends and the proceeds of a profitable liquidity event.  Founders often hold tightly their coveted controlling interest for fear that investors will oust them if times get tough, if investor returns are subordinated for a social purpose, or if the founder’s vision for operating the company diverges from that of the investors.

Enlightened founders realize they what they really need to be successful is a talented team, aligned by a shared purpose.  Shared purpose and values creates more incentive and motivation than any rising star shares ever could.  After all, I have never heard of a founder who felt proud about the windfall they received when their company was forcibly sold at the peak of its economic value if the founder believed its social purpose had not fully been fulfilled.

Not all founders want to build a company to sell to the highest bidder.  Many founders are looking to build generative companies that seek to contribute durable value to customers, communities, the environment and shareholders (see Zebra companies, B-Corps, Cooperatives).  To found a company like this, many founders realize they need to build a stakeholder community with shared purpose and values.

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Cooperatives, by design, dilute each and every member in terms of control and economic upside. Why?  Members typically vote democratically, one-member, one-vote. Also, profits and liquidity proceeds are divided according to patronage.

Wait, what’s patronage again, you ask. A brief refresher. Patronage refers to the core business value a member contributes or consumes in relation to the total value of business the cooperative does with its members.

Traditionally, “pure form” or single class cooperatives organized themselves as either worker (W2 or contractor labor), producer (independent business producer), purchasing (independent business purchasing), or consumer (individual consumer for personal use) cooperatives. Not until the development the Uniform Limited Cooperative Association Act (“ULCAA”), and its adoption in 6 states around 2011 did the multi-stakeholder cooperative model take root. Today, most of our cooperative start-ups rely on the ULCAA statute in Colorado to structure multi-stakeholder cooperatives, known as limited cooperative associations (“LCA”). The emergence of the multi-stakeholder LCA will be relevant to the question at hand.

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Back to the topic at hand. So, if “economic incentive” is shared not on the basis of stock ownership, like a traditional corporation, but rather on the basis of patronage, then what incentive does a founder have to sweat for their equity?  Also, if a founder has the same voting rights (remember, one-member, one-vote) as all other members, why would a founder want to give up that much control before the start-up is even off the ground?

For the sake of this blog, we’ll assume that the cooperative model and business structure makes sense to you as a democratically controlled, responsibly capitalized and equitably incentivized form of business. Also, we’ll assume that you’re moved by adopting a business structure that subscribes to and incorporates into its DNA the 6 cooperative principles.

There are 7 primary complementary mechanisms that contemporary cooperatives use to provide the expectant incentive for a founder to apply the same energy to a start-up cooperative as they would to a traditional corporation. These are listed in no particular order of prevalence or effectiveness.

1. Ownership: Founder Patron-Member Class.

Among the most exciting and interesting developments in the cooperative sector is the increasing use of the “multi-stakeholder” cooperative, that is a cooperative with multiple classes of ownership.

Founders can be recognized and conferred a bundle of ownership rights in their own class.  Founders “patronage” can be recognized from the time of conception.  The Founder class can be allocated an identifiable percentage of net profit as part of the cooperative’s patronage dividend allocation.

Individual Founder-member patronage can be difficult to measure. A few recent ideas have been gaining traction. Since Founders are often giving most of their time and energy to the enterprise before it can reasonably be expected to generate a profit, the “patronage dividend” may be a misaligned tool to incent or reward “sweat equity.”  A founder’s hardest work would be rewarded by the expect early losses that most start-ups experience. That’s certainly not the fair result we’re after.

So, to “save up” that sweat equity and apply it to periods when the cooperative is or should be profitable, the Founder-member class can adopt a patronage allocation formula that takes a weighted average of the past X years, such that the early years of heavy sweat equity investment are weighted higher than later years.

The purpose of adopting a weighted-average formula is to recognize the early years when allocating the Founder-member patronage dividend.  Perhaps once the cooperative is up and running, the weighted-average formula can be modified to just a straight-line average of X years.

2. Governance: Class based director seats with class-based director elections.

It is common for the Board of Directors of a multi-stakeholder cooperative to allocate Board seats among the various ownership classes.  Since most Boards must have a majority of seats filled by “patron-members,” bylaws could certainly provide for board seats to be filled by a certain number of founders.

In fact, whether or not the cooperative has created a distinct Founder-member class, the bylaws could either:

  1. Maintain a qualification requirement that a certain number of directors be among the founders; or
  2. Designate a share of Board seats to be filled by Founder-members.  In this case, the number of Founder-member designated board seats could even represent a disproportionate share of the board in relation to Founder-members proportionate share of the membership writ large.  As long as Founder-members constitute patron-members, there should be no problem creating a board with disproportionate Founder-member directors.  Of course, the composition of the Board can be recalibrated over time either prescriptively in the bylaws or in an organic fashion by amending the bylaws (whether through a Board or member vote).
  3. Of course, the bylaws could also require that a certain number of the Founder-member directors need to be present to constitute a quorum of the Board. This ensures that no Board business can take place without Founder-member directors present.

While not necessary, it is becoming customary for class-based board seats to be elected on a “district” or class basis. That is, Founder-members would elect the Founder-member board seats separately from Class X members electing those certain Class X board seats.

3. Governance: Founder as initial director with reasonable runway prior to first director election.

Many cooperatives are formed with initial directors who serve until either a date certain or a member election to elect directors.  Many times, founders or Founding-members serve as the initial directors of a cooperative. Depending on the applicable cooperative statute, the Cooperative may be permitted in its bylaws to defer a member election for a reasonable period of time to provide a runway for the initial directors.  Initial directors are subject to the same pressures and forces that face traditional start-up founders.  There is the pressure to develop an initial product or service, to achieve product-market fit, to finance early operations, and to recruit a top-notch team.

These challenges are compounded by the need of a cooperative to attract members, raise member capital contributions, and to develop and practice economic democracy.

Giving initial directors a reasonable runway before they’re subjected to the whims of a democratic election protects the early risk and effort required to get a start-up off the ground.  It also sets expectations among members that outcomes and profitability are to be judged over the long-term, not based on quarterly results.

If initial directors were to have a few insulated years in leadership positions, it is more likely the first election will product elected directors on merit, and not based on restlessness.

4. Governance: Founder-Member quorum and member voting.

If the Cooperative maintains a Founder-member class, the bylaws could require a certain minimum number of Founder-members to be present at a member meeting to constitute quorum for the conduct of member business.

Taking this concept further, the bylaws could also require that if a vote is to be taken by Patron-members voting together on a one-member one-vote basis, that Founder-member approval as a separate class is also required.  This could look like:

Quorum

  • Lesser of 50 or 10% of All Patron-Members (Workers, Users, Founders) PLUS
  • 2 Founder-Members

THEN

Voting

  • Majority of Patron-Members voting together as a single class (Workers, Users, Founders) PLUS
  • Super-majority of Founder-Members, voting separately as a class. Note: Does not include investor-member

5. Economics: Multiplier on Founder patronage vis-à-vis other patron-member classes.

If creating a Founder-member class does not make sense for one reason or another, an alternative approach could be to apply a multiplier to Founder’s time/contribution vis-à-vis other worker-members.  This would weight Founder contributions when calculating patronage.

Given the problem identified earlier, this approach may only compound the inequity of applying a disproportionate share of early losses to the Founders.  What we are trying to achieve is a financial interest in profit years after Founders took early risk and invested tremendous early energy (presumably with little or no guaranteed compensation).

6. Economics: Award preferred investor-membership interest/stock (either same or separate class as investor-members).

If a cooperative has created a class of stock to be sold to investors, the Cooperative could reserve a certain number of those shares to be awarded or sold at a discount to Founders.  The Cooperative could either create a separate class or series of investor-shares to award to Founder-members, or it could award its single class of investor-shares to Founder-members.

Utilizing whatever economic rights to which the investor shares are entitled, awarding investor shares to Founders may offer a mechanism to offer modest economic upside.

Commonly, cooperative investor shares pay a target dividend, or make distributions up to an aggregate cap tied to the original purchase price.  In both cases, the return on investment would provide some “equity-like” return for a Founder’s “sweat equity.”

Note that awarding stock that has a face value or fair market value higher than the award or purchase price may trigger an adverse tax consequence.

Subject to the requirements of the applicable cooperative statute and subject to the requirements of Internal Revenue Code sub-chapter T or sub-chapter K, respectively, the investor-shares awarded or sold at a discount to a Founder-member could be subject to appreciation.  While it is most common for shares of a cooperative’s stock to be redeemable at the original purchase price, it is possible, with exceptions, to structure the investor stock so that the redemption price is higher than the original issue price.  Of course, the mechanism by which the investor-shares are priced should be clearly expressed in the investment or award documents and approved by the Board.  The Articles and/or Bylaws may also need to be amended to reflect the terms.

7. Founder as CEO with employment agreement approved by disinterested directors.

Most founders serve as their start-up’s first CEO.  Among the connotations of the CEO title is the technical executive officer function to be played. That is, the CEO is often a functional management position appointed by and serving at the pleasure of the Board.  Most boards don’t “do” the day-to-day work of the business; they hire and supervise a CEO.

Just like conventional start-ups, cooperative Boards can and often should appoint the founder to serve as the CEO.  In fact, I often urge CEO appointments to be formalized with a written employment or services agreement that sets forth expectations, compensation (deferred, equity or otherwise), benefits, authority and termination.  This is also the device by which the entity acquires right to the CEO’s intellectual property and business opportunities.

The written agreement is less about placing restrictions on the CEO, and more about establishing a framework for expectation setting and for delivering on an equitable exchange of value.  Part of this exchange should involve a negotiation regarding compensation.  Compensation can include salary, stock, deferred compensation, benefits, and even performance based pay. Note that there can be significant tax consequences to certain types of compensation and readers should always consult counsel and a tax advisor.

It is almost always advisable for these types of arrangements to be memorialized in writing.  The cooperative should ensure that a sufficient number of independent directors ratify the agreement to avoid perceptions of impropriety or allegations of self-dealing.

Did this strike up any creative ideas for you? Share them in the comments below.

The Best Way to Fight Uber? Own It.

Originally published at the Roosevelt Institute

Progressives should embrace employee ownership as one of the best ways to challenge corporate power from the bottom up and put supporting the growth of worker-owned firms in the center of our strategy. As the economy becomes Uber-ized and dominant firms in all sectors take up more and more market share, structural reforms like better antitrust regulation and portable benefits are absolutely necessary, but not sufficient, to reversing inequality.

What’s needed is a massive wave of support for shared ownership and community capital. The difference in an employee-owned business from another type of business is simply where the profit goes: Does it flow up to an executive suite and a small set of investors? Or, is it shared by the members of the enterprise, who put in the time and effort to make it successful? The product may be nearly the same from the perspective of the consumer, but the change inside the firm itself is durable, because it’s not subject to the shifting winds of legislators. Community capital allows those of us with the ability to invest to put our wealth into local businesses, rather than exclusively into Wall Street funds.

These models that were once seen as “niche” and hippie-like may be our best shot at centering working families as both value creators and value receivers in the American economy to come. For example, shared ownership of platforms—the rising business model that Uber embodies, where workers aren’t employees but instead “gig” workers, or independent contractors—can turn a platform into a way for its owners to best employ their skills in a just-in-time economy, as nurses in California have identified. And if the “gig” or “platform” business model is here to stay—and its embrace by millennials demonstrates that it is—there’s a real opportunity to move from the sharing” economy to the shared ownership economy.

In a way, shared ownership is simple: Through a variety of legal structures like a Limited Cooperative Association or partnerships with multiple partners, worker-owners have rights to the value created by the firm just as investors do, and they often have decision-making power over major corporate decisions, as well. Worker ownership of a firm does not mean that everyone sits around in a drum circle to decide what type of pens to purchase—firms owned by employees may look and feel just like a regular firm, where members-owners have the right to vote on the major issues that face the firm. In fact, employee ownership is much more common than people think, in the form of Employee Stock Ownership Plans (ESOPs)—over 10.5 million workers partially or wholly own their employers this way. A recent studyby the National Center on Employee Ownership found some striking statistics about the benefits of ownership: For employee owners aged 28-34, such workers had 92% higher median household wealth, 33% higher income from wages, and 53% longer median job tenure, when controlling for demographic factors.

What employee-owned firms have lacked for a long time is capital: New firms require investors willing to take risks on entrepreneurs with a vision, and investors have long been skeptical of founders who planned to share the value of the firm with employees. But the rise of social capital and impact investing, alongside new opportunities for community capital-raising after the implementation of the JOBS Act and investment crowdfunding regulations, means that capital is starting to unlock for such firms.

Policies to encourage worker ownership have slowly been getting more attention from lawmakers—several Democratic senators have introduced legislation this year to fund employee ownership centers in the states and to create a fund of public capital to support conversion to worker ownership. And prominent progressive voices like Roosevelt Chief Economist Joseph Stiglitz are speaking out in favor of the model. It’s crucial that spreading worker ownership becomes as central to the progressive economic narrative as raising the minimum wage and supporting financial reform.

The best way to fight Uber? Own it.