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“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.

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.

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.