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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.

***

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.

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.