Click here to read the previous post in the series, Part 3: Option A – The Integrated Tech/Data Cooperative
In light of the design and practical challenges that face certain kinds of #platformcoops, we have re-incarnated a traditional private equity strategy that houses different operational functions within separate legal structures. I call this the “TechCo and Co-op Marriage” strategy.
First, we form two separate legal structures, one is a plain vanilla start-up entity structure. If you like Delaware corporations or public benefit corporations, then form that. If you like Colorado public benefit corporations, form that. The purpose of this entity is to house the intellectual property assets that form the tech architecture. This entity will look and feel like a traditional start-up, eminently (almost) financeable with VC and angel capital. This is the “TechCo”.
Second, we form a cooperative (either a cooperative corporation, or a limited cooperative association). The purpose of this cooperative will be to organize and structure governance for the community of users, and to house and own the throughput data; that is the data flowing through the platform. This is the “Co-op”.
Third, we thoughtfully design and build a pre-nuptial agreement between the TechCo and the Co-op. The purpose of this agreement is manifold:
- To secure the Co-op’s access to the platform architecture being developed by TechCo (whether an instance, API, or license of source code).
- To provide TechCo with some early stage monthly recurring revenue for giving Co-op access to the prototype product (before a traditional TechCo would otherwise have MRR).
- To document that Co-op is an anchor client and beta tester for TechCo’s product(s).
- To provide Co-op with a right of first refusal on the sale of any of TechCo’s assets.
- To document TechCo’s provision of certain managerial, operational, and/or administrative functions and support to Co-op.
- To firewall ownership of the infrastructure intellectual property within TechCo and the platform throughput data within the Co-op.
- To make “divorce” expensive and somewhat painful. This has the primary purpose of preserving the Co-op’s access, which the fundamental basis of their bargain. The parties can still terminate if it’s economically efficient to do so, but the Co-op will be made whole, in hopes that it can use the termination payments to find substitute platform services from another supplier (or build what it needs in house, thereby delaying the transition to an integrated Co-op).
- Preserving the parties’ collaborative relationship during the incipiency of each party’s development: the TechCo’s product development period and the Co-op’s community development period. Once the two entities become more mature, the terms of the agreement can make divorce more amicable and less expensive.
- TechCo could consider issuing to Co-op a golden share that either has economic participation rights in a liquidity event and/or a super-majority vote (for a limited period of time) to veto a change in control or liquidity event.
- To give the Co-op anywhere from nominal, to minority, to even a controlling interest in TechCo, depending on what can be tolerated in the TechCo structure while leaving it readily financeable.
- Send me an email if you have other ideas for what could be baked into this agreement.
Through this structure, TechCo retains the look and feel of a traditional start-up. Accordingly, it should be financeable to a substantially similar degree; lest the “pre-nuptial agreement” deter a VC from seeing unicorn-scale returns.
This structure allows the Co-op to focus more narrowly on developing the member community, and building the marketplace for the member-created data, content, ancillary revenue from the throughput data.