by Jason Wiener and Jenny Kassan

The Core Problems

Founders of cooperatives run into a few tough questions: “How do we fairly recognize the people who took the biggest risks to start this, without breaking our commitment to being a real coop?” A second, different but related problem that dynamic equity is designed to solve, which is that if you set ownership/financial rights in stone at the beginning you run the risk of it being unfair down the road – it is better to set those rights AFTER people make their contributions of time, IP, etc.

Coop founders work long unpaid hours, put in their own cash, and carry the emotional and financial risk. They deserve a structure that acknowledges that. But most startup advice assumes you’re building a C-corp to sell someday—the opposite of what many coops are trying to do.

What Is Dynamic Equity?

Dynamic equity is a way to earn a share of the upside based on what you actually contribute over time, rather than locking in ownership percentages on day one.

You track contributions like cash (money you put in when no one else would), unpaid or underpaid work, and other key contributions (e.g. IP, personal guarantees, key relationships), and assign points or “slices” that represent the relative value of those contributions  At some point later (a triggering event you choose which is referred to as the pie being “baked”), those who made those contributions receive a share of the equity based on the relative value of what they contributed (their slices).

Why Coops Need a Different Approach

Under the typical slicing pie scenario, the pie is considered baked when there is an equity financing on VC style terms or when the company is sold at a high valuation. That is when the equity that was issued in proportion to the slices becomes valuable. In a cooperative, there may not be any equity financing and the goal is often long-term service to members and community, not an exit.

Thus, coops need a more nuanced model when instituting a dynamic split of the financial rewards.

Two Coop-Friendly Approaches

Option 1: Patronage Multipliers

Give founders “extra credit” when profits are shared through patronage dividends. This is a way to ensure dynamic compensation based on relative contributions without having to use the dynamic equity split model.

For example: Everyone’s regular hours count 1:1 for allocating surplus. But for those who contribute extra resources like underpaid work, key relationships, etc., there could be a predetermined bump in allocation. For example, if I work 10 hours in a week at my regular salary but work an additional 10 hours at half my salary, my allocation could be two times what my regularly paid coworkers receive.

Good for: Coops that want to keep things simple and familiar.

Watch out for: You still need to pay all employees legally required wages—minimum wage and overtime apply even to founders unless they meet specific exemptions.

Option 2: Founder Series Interests

This option involves actual issuance of equity based on relative contributions of early stage workers.

Create a separate pool of founder rights we’ll call Risk Units. This is a pool of placeholder units that track everyone’s relative contributions but are not actual equity. Equity interests (we’ll call Founder Series Equity) will be issued based on the number of Risk Units earned after the pie “bakes”. The Risk Units are earned usinga “slicing pie” formula that you design – e.g. uncompensated time counts for 5 Risk Units for every hour of uncompensated time; contributions of intangibles (e.g. lists of high likelihood customer prospects) count for 3 Risk Units for every dollar of value (based on a mutually agreed valuation of the contribution).

Here’s how it works:

• • You set up the Risk Unit pool (the Risk Units are not equity but simply a way to track contributions) and early key people earn allocations of that pool based on their contributions beyond their regularly compensated work hours (IP, unpaid work, etc.).
  • Once the pie bakes (based on a trigger you choose such as a particular number of profitable quarters), the co-op issues a nonvoting class of equity (Founder Series Equity) to all holders of Risk Units in amounts based on the number of Risk Units held by each member. The Founder Series Equity has the financial rights you choose such as dividends when the coop chooses to share some surplus with capital, the right to have the coop buy them back later at a pre-agreed formula, etc.

Practical example: You work six months at half your normal rate and contribute IP that you agree with your colleagues is worth $5,000. Your underpaid labor—$15,000 market value —earns you 45,000 Risk Units (at 3x). The $5,000 worth of IP earns 10,000 Risk Units (at 2x). Total: 55,000 Risk Units.

Your two colleagues also make contributions that result in the following (based on multiples you choose):

You: 55,000 Risk Units

Colleague A: 30,000 Risk Units

Colleague B: 15,000 Risk Units.

Once the pie “bakes” (when you hit a milestone like sustained profitability), those Risk Units “convert” into a fixed percentage of the Founder Series Equity pool. In this scenario, you would get 55%, Colleague A would get 30%, and Colleague B would get 15%.

Good for: Coops that want to keep work-based patronage calculated in the same way for everyone, but still reward early risk-takers.

Watch out for: This needs careful legal drafting to work with coop law, tax rules, and securities law. Key questions to decide upfront:

• • When does the “pie bake”? (specific date, profitability milestone, revenue target?)
  • What happens if someone leaves before it bakes?
  • What are the economic benefits associated with the Founder Series Equity?

The Non-Negotiable: Wages Come First

Employees must be paid at least minimum wage (and overtime where required). Any dynamic equity, patronage, or profit-sharing should be on top of that, not instead of it.

How to Get Started

Here’s a simple path:

1. 1. Clarify values –  Which of the two models better reflects your coop’s values?Write down your rules in plain language – What are different contributions that early members are likely to make and how do you want to value them relative to each other? When does the “pie bake”? What, concretely, do founders get in return? (Note that cash contributions may be included but need to be treated very carefully with skilled tax expertise to avoid unintended negative consequences.)
   2. Then take that to a coop-savvy lawyer and accountant – Ask them to turn it into bylaws, policies, and accounting methods that work in your jurisdiction and tax system.

One More Option: Profits Interests

Before committing to the Founder Series model, also consider “profits interests”—a well-established structure that can be used in entities taxed as partnerships that gives holders the right to share in future profits and appreciation, but not current value. They often have simpler tax treatment and work well for cooperatives structured as LLCs.

Final Thoughts

Dynamic equity can help coops honor the real risk and sacrifice that got them started, stay true to cooperative principles, and avoid importing startup myths that don’t fit their purpose or values.

These tools—whether patronage multipliers, Founder Series Interests, or profits interests—are meant to serve your coop’s mission, not replace it. Start from your fairness instinct, document clearly, and always keep wages and worker dignity at the center of your economic model.

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Important: This post provides a general overview. Before implementing any of these structures, consult with attorneys and accountants who understand both cooperative law and the specific tax and securities implications of founder compensation.