How Cooperatives are Changing the Landscape of the New Economy: What Lawyers Need to Know
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On January 22nd, 2015, the Impact Law Forum invited Sushil Jacob and Ricardo Nuñez to facilitate a guided discussion on how cooperative businesses are shaping the landscape of the new economy and what legal practitioners need to know to support the growth of these revolutionary business models for social impact. About Sushil Jacob: Sushil is Director of the Green-Collar Communities Clinic (GC3) and Staff Attorney at the East Bay Community Law Center, a teaching clinic of UC Berkeley School of Law. GC3 is a community economic development legal clinic that provides education, advice and representation to workers, community groups and nonprofits seeking to establish or expand cooperative businesses in low-income East Bay communities. Sushil received his J.D. in 2011 from the University of California, Berkeley Law School. His practice spans the intersection of business law, cooperatives and the green jobs movement. Sushil serves on the board of the Cooperative Center Federal Credit Union, a seventy-two year old financial institution in Berkeley that is owned by its 13,000 members. He also serves on the board of the South Asian Bar Association of Northern California Foundation, a 501(c)(3) nonprofit that funds law students to do public interest work that will meet the needs of the South Asian community. About Ricardo Nunez: Ricardo is the Director of Legal Services and Cooperatives Program Director at the Sustainable Economies Law Center. He coordinates SELC's legislative strategies, popular education, and legal research around worker-owned businesses. As Legal Services Director, he coordinates SELC's direct legal services and public education programming. Ricardo is also becoming an attorney without going to law school! He is participating in the Law Office Study Program of the State Bar of California under the auspices of Janelle Orsi. The Law Office Study Program is an alternative to law school that allows would-be lawyers to obtain their attorney’s license through a four-year legal apprenticeship.
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How Cooperatives are Changing the Landscape of the New Economy: What Lawyers Need to Know
- 1. HOW COOPERATIVES ARE CHANGING THE LANDSCAPE OF THE NEW ECONOMY: WHAT LAWYERS NEED TO KNOW
- 2. PROBLEM STATEMENT Oxfam: 85 richest people as wealthy as poorest half of the world
- 3. TONIGHT’S ROADMAP Introductions and Expectations Why coops Examples of impacts of coops at different levels of society/economy- personal to systemic Basic legal concepts with coops Role Play Discussion
- 14. THE COOP PRINCIPLES 1. Voluntary and open membership 2. Democratic member control 3. Members’ economic participation 4. Autonomy and independence 5. Education, training and information 6. Cooperation among coops (inter-cooperation) 7. Concern for community
- 20. ORGANIZATIONAL FORMS Partnerships General Corporations Flexible Purpose or Benefit Corporations Mutual Benefit Corporation Nonprofit Public Benefit Corporations _________________________________________ Limited Liability Companies Corporations
- 21. ORGANIZATIONAL FORMS Partnerships: • Unlimited liability; Joint and several liability for actions of the partners • May be a good option for startup, particularly for immigrant or low-income workers • No $800 annual franchise tax • Partners are not employees Corporation • “C”- Separate person for tax purposes • “S” – No separate person for tax purposes Benefit Corporation/Social Purpose Corporation • Both provide protections for boards of directors to allow them to pursue non- shareholder profit maximization goals; accept tradeoffs that will lower shareholder value.
- 22. In CA, and many other states- co-ops are corporations • Separate person for legal and tax purposes • Membership structure How Formed: • Incorporator files Articles of Incorporation • Prepare bylaws for cooperative and draft a membership certificate/ disclosure document • Hold first board meeting with at least three members • Adopt bylaws • Issue memberships to co-op members COOPERATIVE CORPORATION
- 23. KEY GOVERNANCE REQUIREMENTS: Board of Directors Officers Members Annual Member Meeting Elections for Board Bylaws One-member, one-vote required
- 24. CAPITAL STRUCTURE AND TAX Capital structure: • Individual Member Capital Accounts • Taxed at member level • Collective Account • Taxed at entity level Can qualify for any corporate tax treatment: C, S or T. Taxation: Subchapter T • Profits- taxed at entity level (like a corporation) • Surplus- taxed at member level (like an LLC) • No self-employment tax on wages • There may be a self-employment tax on patronage (i.e. surplus)- unresolved question • In CA, annual minimum tax of $800
- 25. EMPLOYMENT LAW ISSUES Presumption that worker-members are employees • Must comply with employment law: minimum wage; overtime; workers’ comp; civil rights, etc. • Payroll withholding for wages Can also have non-member employees
- 26. SOME ADVANTAGES OF THE CORPORATE FORM OVER THE LLC: Can use the term “cooperative” in its name Corporate taxation is more stable than partnership taxation No $800 minimum franchise tax (CA) in first year Securities exemption for coop memberships up to $300
- 28. WHY ARE LLCS SO POPULAR? Flexibility • Tax • Employment • Little formality required What is an LLC? • A limited liability entity, but not a separate tax payer • Separating the incorporated form from tax characteristics This allows you to have a general partnership, with limited liability, something you couldn’t achieve with the corporate form. What does this achieve for worker coops?
- 29. HOW FORMED Similar to a corporation, file Articles of Organization • Indicate whether the LLC is member-managed or manager-managed • Note: Most worker coop LLCs are member-managed, not manager-managed The Most Important Agreement in an LLC is the Operating Agreement
- 30. THE OPERATING AGREEMENT DEFINES: Purpose as a worker cooperative Member Rights and Duties How to become a member How to leave the co-op How to govern the coop How to manage conflicts What to with the member capital How to make decisions in the coop But the Operating Agreement can be amended!
- 31. EMPLOYMENT FLEXIBILITY Worker members of an LLC are not presumed to be employees of it if they behave as partners • The test for partner is someone who has managerial control over the business and their own work. Implications for undocumented workers: • IRCA/INA bans employers from “hiring for employment” • An LLC is not an employer under IRCA, because partners are not hired for employment
- 32. TAX FLEXIBILITY LLC defaults to partnership taxation • The basics are that the LLC is not a separate taxpayer, the partners pay the taxes • This means that all of the LLC property and profits are allocated to the partners, and the partners must report their allocations on their individual partnership returns • Tax forms; • Schedule K-1 – Partner’s Share of Income, Deductions, Credits • Partners must pay self-employment taxes on their earnings
- 33. CAPITAL STRUCTURE If partnership taxed, then: It is not a corporation. There is no collective account, all earnings are allocated to the member accounts. • This can lead to instability in the co-op. • Accounting/bookkeeping can be more complicated if you have a lot of members/or members coming in and out
- 34. BUT AN LLC CAN ALSO ELECT CORPORATE TAXATION File form 8832 • Tells the IRS that your LLC wants to be taxed as a corporation Why do this? • Eligiblity for sub-chapter T treatment • Ability to pay your worker-members as employees • Members no longer pay self-employment taxes • Ability to create a corporate account that is not allocated to the members
- 35. OTHER ISSUES: Cannot use the word “cooperative” in its name Can convert to a co-op or other corporation LLC memberships are likely not considered securities if all members are actively involved in the management (Cal Corps Code 25019, providing for definition of “security”)
- 36. Conclusion: the 2 things to know about cooperatives: 1.Board elected on a one-member, one-vote basis. Capital ownership doesn’t determine voting power. 2. Profits distributed on the basis of patronage. Capital ownership doesn’t determine profit share.
- 38. GOVERNANCEA Few Things Everyone Should Know About Governance Whoa! It’s all about governance!
- 40. Every member has one vote… In the election of the board and major decisions Power Power
- 41. Cooperatives don’t have to be this:
- 42. Alvarado Street Bakery Elects a Board Arizmendi Bakery is a Collective Members Board Every Member is on the Board
- 43. Members Board Every Member is on the Board Cooperative with a small Board of Directors Collective
- 44. Officers don’t necessarily have more power than others Secretary: Gives notices, tracks membership, keeps minutes, etc. President: Signs official documents Treasurer: Keeps accounts The State of California wants to know that SOMEONE is doing this stuff.
- 46. Members Elect the Board on a One Member, One Vote Basis This means that co-ops are ultimately accountable to members, even if members don’t call the shots on a day to day basis.
- 47. It helps to remember that there are different realms in which people exercise control: 1. Worker Owners/Members: Elect the Governing Board and make certain major decisions. 2. Governing Board: Appoints the Officers and managers; make high level decisions that steer the company/organization toward its goals. 3. Officers: Corporations generally require President, Secretary, and Treasurer. These are primarily administrative in nature, and have special powers if you want them to. 4. Managers: Manage the day-to-day operations.
- 48. I’m going to work in an organization where my voice matters, I have control over my work, I can use my creativity, build community, and have fun!
- 49. Everyone is behind the wheel!
- 51. Beware of the Tyranny of Structurelessness I know what we should do! Rex
- 52. Cooperatives often make the mistake of not adopting clear governance procedures. Need to be quite specific about stuff like: •Procedures for meetings •Procedures for making, reviewing, and adopting proposals •Process for giving notice and creating agendas •Spheres of decision-making, management, and operations •Committees, Circles, Spheres, Managers, etc. •Composition and election of governing bodies/committees, etc. •Voting rights •Procedures for amending governing documents •Conflict of interest policies Note that this stuff is partially dictated by the statute that governs the entity.
- 53. Documents can’t look like this:
- 54. Give Governance Models Some Legal Teeth Need to be quite specific about stuff like: •Procedures for decision-making, AND •Spheres of decision-making, management, and operations •Committees, Circles, Spheres, Managers, etc. •Composition and election of governing bodies/committees, etc. •Place, time, process for meetings •Process for giving notice and creating agendas •Voting rights •Procedures for amending governing documents •Conflict of interest policies
- 55. Meetings can’t feel like hell.
- 56. Get trained. Learn the system. Practice it. Grow to love it.
- 57. Some worker cooperatives are exploring Holacracy (www.holacracy.org) 1. Distributing Governance Throughout the Organization, rather than requiring that all decisions flow up the chain of command. Division of the organization into semi- autonomous circles that are strategically interlocked to ensure communication flows up to a general circle.
- 58. 2. Roles: Each person in the organization fills multiple roles and can move in and out of the roles somewhat flexibly, rather than filling a single position with a single job description. Within a role, people have a lot of autonomy. 3. Accountabilities: Each role is accountable to a circle of people - i.e., they report to that group on how they are doing with the tasks required of that role. Role: Accountable to: Recycling Building Management Circle Grant Writer Fundraising Circle Cartoonist Communications Circle Window Washer Building Management Circle Legal Advice Legal Services Circle Happy Hours Fun Circle
- 59. 4. Highly Structured Meetings! •Everyone Has a Voice: Most meetings are held by going in a series of circles, which helps to ensure that everyone has a voice. Everyone can bring a proposal. • Keeps Personality Politics at Bay: The high level of structure keeps personality politics from dominating organizational culture, and keeps individuals from taking up too much space with too much talking. •Different Meeting Process for Different Types of Meetings: Governance meetings, strategy meetings, and tactical meetings.
- 60. 5. Proposals Move Things Forward! • Anyone can bring a proposal. In fact, everything discussed in the context of a governance meeting is discussed in the context of a proposal. This allows everyone to follow their passions and inspirations, and also have a voice in the direction of the organization. • Proposals are adapted through a structured feedback process. •Proposals are accepted if no one objects to the proposal on the basis that it moves the organization backward in its mission or harms the organization. • Accepted proposals can be revisited and adapted at any time. This allows the organization to be nimble, experiment, shift course quickly, and adjust to small changes, all while moving forward.
- 61. Let’s encourage hundreds of thousands of existing businesses to sell to workers and convert to cooperatives! Because
- 62. GETTING THE GREEN I: BANK LOANS AND MEMBER CONTRIBUTIONS
- 63. SHOW ME THE MONEY!! Businesses need money to operate, how do we get some? • Overview • Traditional Businesses and Worker-Cooperatives • Best Practices • Alternative Sources of Funding • Securities Law
- 64. TRADITIONAL BUSINESSES A Traditional Business (non-cooperatively run) • Typically, the owner would use person savings. • Over time, the business owner may approach a bank or venture capitalist for additional funding. Personal Savings Loan Alternatives Venture Capital Successful Business
- 65. FINANCING A WORKER CO-OP GENERALLY…. Member contributions/Outside Investors = Equity Financing Loans = Debt Financing Member Contributions/Outside Investors Loans Alternative Financing Successful Worker Cooperative
- 66. RAISING MONEY LOANS – Traditional Lenders • Banks want to see that you have enough money to cover your debt. • Trend of Profitability • Personal Guarantee • Business Plan • Size of the Loan
- 67. BEST PRACTICES Preparation Understanding their Perspective Attention to Detail Research Follow-up/Keep at it!
- 68. ALTERNATIVE WAYS TO RAISE $$$ Membership Capital Donations Micro Loans Pre-Selling Bartering
- 69. QUICK COMPARISON Traditional Sources (Banks and Credit Unions) Alternative Financing (microloans, for example) Greater Funding Potentially higher interest rates May require 2 to 3 years of profitability May require good credit, collateral, or equity Less Funding Potentially lower interest rates May invest in startups Credit, collateral, and equity requirements vary by lender
- 70. GETTING THE GREEN II: SECURITIES LAW
- 71. THINGS TO KNOW
- 72. The definition of security You cannot offer or sell a security without registering it … … unless you have an exemption.
- 74. You create a security when you ask people to put money into your business or venture, and you offer them a return. BASIC DEFINITION SECURITY Walt Disney Stock Certificate (a security!)
- 76. WHY DOES SECURITIES LAW MATTER Offering or selling securities must be registered with the proper authorities Even ASKING people to invest in your business could be illegal, unless you register that security.
- 78. SO WHAT ARE YOU DOING THAT IS CREATING SECURITIES? Selling Stock Asking people to invest money in your business Offering a share of your business’s profits Member capital buy-in
- 81. HERE ARE A FEW EXEMPTIONS TO HELP YOU OUT!
- 82. CA LIMITED OFFERING EXEMPTION § 25102(F) In California Up to 35 lenders or investors People with whom you have a pre-existing relationship No Advertising Simple online filing with the CA Department of Business Oversight
- 83. UNLIMITED # OF ACCREDITED INVESTORS Really rich people Directors and Officers
- 84. CA COOPERATIVE EQUITY EXEMPTION §25100(R) A California cooperative can raise up to $300 from each member without that qualifying as a security Each person must be a member and have voting rights Can’t use a promoter
- 85. CROWDFUNDING
- 86. CROWDFUNDING
- 88. THE CROWDFUND ACT PROPOSED EXEMPTION • You can raise up to $1,000,000 • You can invest the larger of $2,000 or 5% of annual income/net worth
- 89. DIRECT PUBLIC OFFERINGS Can publically advertise investment opportunities to the public Can DIRECTLY sell securities without a 3rd party intermediary
- 90. TO REVIEW! 1. Raising money from friends and family? Use a limited offering. 2. Raising money from directors, officers, managing members, or Mitt Romney? Think accredited investors. 3. Raising $300 from all your voting co-op members? Try the cooperative exemption. 4. Using the internet to raise little bits of money from lots of people? Might use crowdfunding in the future. 5. Don’t fit into an exemption? Don’t forget DPOs.
- 91. OUTSIDE INVESTING VS. COOPERATIVE PRINCIPLES
- 93. CASE STUDY: EQUAL EXCHANGE CD Certificate of Deposits pooled together to guarantee loans to buy coffee, tea, and cocoa from farmer cooperatives at fair prices Control preserved Profit returns limited to the interest rate of CD
- 94. SECURITIES LAW REVIEW! 1. A security is created when you offer a return when you ask people for money for your business 2. When offering or selling securities, you must register the security unless… 3. There are several exemptions that worker-owned cooperatives can take advantage of to avoid registration of securities. USE THEM!!
Editor's Notes
- 1. Voluntary and Open Membership: Not mandated by the state to join. Open to the public to join, don’t discriminate on basis of race, gender, religion, etc. 2. Democratic Member Control: One-member one vote is a core principle of co-ops. 3. Member Economic Participation: Members control the capital, not the other way around. Limited returns on capital. Surplus (profit) is re-invested into the coop or distributed to the members. 4. Autonomy and Independence: Cooperatives are autonomous from government control. They are primarily self-help organizations .If they enter to agreements with other organizations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their cooperative autonomy. 5. Education, Training and Information: Cooperatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their cooperatives. They inform the general public -- particularly young people and opinion leaders -- about the nature and benefits of co-operation. 6. Co-operation among Cooperatives: Cooperatives serve their members most effectively and strengthen the cooperative movement by working together through local, national, regional and international structures. 7. Concern for Community: Cooperatives work for the sustainable development of their communities through policies approved by their members.
- Capital structure: It is not a corporation. There is no collective account, all earnings are allocated to the member accounts. This can lead to instability in the co-op. Accounting/bookkeeping can be more complicated if you have a lot of members/or members coming in and out
- At SELC, we’ve figured out that its all about the governance. The systems of governance that you decide on can be just as important as the business planning, market research, and all the other ingredients you’ll need to be a successful entrepreneur or to run a sustainable business. So, there’s a few things that everyone should know about governance. Like, what is governance?
- Governance is all about how decisions are made, who is making them, and how those decision makers are held accountable. The type of governance structure that your organization decides on will shape how you make decisions. Decisions that range from “will our company provide the workers coffee” to “should we sell our company?”
- In a worker owned cooperative, workers own and control the company! One member has one vote. If you are a CA Cooperative Corporation, the “one member, one vote” rule is mandated by law. This is different than a typical business where your vote depends on how much money you have invested in the business. In a cooperative business, money doesn’t equal speech! This is where democracy in the workplace really comes alive. The workers are able to make key business decisions. But what’s this actually look like?
- This is what I used to think governance looked like in a cooperative. There’s no real system in place for who’s making the decisions, how their making the decisions, and how they’re being held accountable. Deciding on no or very little hierarchy is one thing, but having no clear governance structure is another. So how do we make our cooperatives function better?
- There are a few main options when considering how to structure your cooperative. One is having a relatively small Board of Directors that is elected by the members, a.k.a. worker-owners. Another option is to have all of the members directly control the operations of the company by all being on the Board. This second type of cooperative, where all the worker are involved in management decisions, is typically known as a collective. And a third option is to have no Board of Directors. The way you structure your business will effect how employment, securities, tax, and other laws that will apply to your company.
- And while the Board typically must be at least 3 members there aren’t restrictions on who those members can be. So members of the cooperative are free to sit on the Board. In fact, all of a cooperative’s members can sit on the board, if desired. This, however, is really only advisable for relatively small cooperatives. If the board becomes too large it makes the decision-making process more difficult. When all of a cooperative’s members sit on the Board it is referred to as a “collective Board.” Many organizations have a collective Board to ensure that the cooperative ideals of direct democracy and worker control over operations are fully embodied in their governance structure. Like we said before, The Arizmendi Bakeries, a local chain of bakery cooperatives, has a collective Board. In a cooperative with a small, elected board of directors, there usually must be at least 3 members. But, you aren't restricted n who those members can be, or how many there can be.
- The Board of Directors also appoints the company’s Officers, who are empowered as “executive agents” of the company to carry out specific responsibilities within the cooperative, like signing legally binding documents on behalf of the cooperative. A few important notes on Officers: • For companies formed as California Cooperative Corporations, the law requires 3 Officer positions to be filled –President, Secretary, and Chief Financial Officer a.k.a. Treasurer. But, one person can hold all of these titles simultaneously. • Additionally, while cooperatives have to have 3 Officer’s positions filled, they do not have to give these positions any kind of managing power or decision-making authority. Meaning, Officers don’t necessarily have more power than others. It is up to the Board of Directors to decide how much authority is given to the Officers. The State of California just wants to know that SOMEONE is doing this stuff for administrative reasons. The president signs contracts for the corporation, the secretary keeps records and provides notices, and the treasurer tracks finances. If the cooperative chooses, the Officer positions can simply name individuals to these positions to comply with the statute, but divest these positions of any authority to manage or make decisions for the cooperative. Officers without any real authority are called “figurehead Officers.”
- Let’s look at a cooperative with a relatively small Board of Directors. In this company, the worker-owners elect the Board of Directors. The Board has legal responsibilities to act with care, loyalty and honesty, and to operate the company for the benefit of the membership. The members of the cooperative delegate responsibilities to the board to make high level decisions that steer the company or organization toward its goals. The Board does not serve as managers of the cooperative, though. Instead they set the company’s broader policies and empower others to take on day-to-day management responsibilities. Managers are usually hired by the board for their expertise in a certain field, like distribution, marketing, or sales.
- The Board of Directors are usually elected positions, so if the workers don’t agree with the policies and decisions being made, they can vote the bums out!
- It helps to remember the different areas that people exercise control. Managers, Board of Directors, Officers, and Members.
- People want to work in organizations where they can be creative and get better and stuff (mastery), have autonomy (self directed), and have control. That’s why cooperatives are the next evolution in business.
- But with everyone behind the wheel, how do we manage the operations of the business since, effectively, we ALL are the boss? Beyond the “One Member, One Vote” rule how do we carry out the principles of Member Governance, Control and Ownership?
- Sometimes organizations are so against any hierarchy that we find new types of hierarchies emerge that you can’t even acknowledge, like when there are strong personalities in the room and other members aren’t as vocal. We call this..
- The Tyranny of Structurlessness! The “tyranny of structurelessness” was a term coined about the organizations during the women’s liberation movement. The organizations were resisting the idea of leaders and even discarded any structure or division of labor. However, “this apparent lack of structure often disguised an informal, unacknowledged and unaccountable leadership that was all the more pernicious because its very existence was denied.” These earlier versions of cooperative and collective management inform our work today in advising clients on how to structure their businesses. What does that mean for the next gen of cooperatives?
- It means that we shouldn’t make these mistakes again. We can move our cooperatives forward by adopting clear governance structures, including for our day to day operations. The document that defines the day-to-day rules for your organization and provides guidelines to keep things running smoothly are the by-laws. You want your day-to-day governance structures to be defined in your by-laws, as opposed to your Operating Agreement or Articles of Incorporation, because the by-laws can be modified without having to send any paperwork to the State.
- Usually, by-laws are drafted by attorneys and use a bunch of gobbledeegook legal lingo. We can’t have hard to read documents for coops! They need to be easy to read so everyone can understand them! Members need to follow the procedures put in place to create a more efficient and profitable business.
- That means you need to have some governance models that have some teeth. Here are some things you should be REALLY specific about when you’re describing how your business will be governed and managed.
- These procedures will hopefully stop you from having situations like this…
- To having meetings like this. That’s why its so important to have clear by-laws and to train yourselves and new worker members on these processes.
- Some coops are looking toward new governance models, like holacracy. At SELC, we use holacracy, which gives each member the autonomy to be creative and fulfill the mission of the organization while still being accountable to the other members for their work.
- Instead of individuals creating fancy titles with nebulous responsibilities, there are roles that each person fills to complete the project in that circle.
- Holacracy has highly structured meetings, so we don’t replicate the mistakes of the past.
- And, anyone in any circle can bring forward proposals.
- WE LOVE COOPS!
- I want you to think back to the landscaping company presented to you earlier. They owners may want to start a landscaping business, but how will they afford to buy tools (shovels, lawn mowers, fertilizer). Where will their workplace be? Will they rent a building. Will they need trucks? Obviously, you need money to do all of these things. That is exactly what I want to talk to you about today. It is a fact that business, either cooperatively run or otherwise, need money to succeed. So how do you get money?
- Gaining capital is one key to success. Capitalization is the money that a business needs to start and continue running. Some main sources of capital are private loans, micro loans, personal savings and member contributions. Now, its important that you realize that worker cooperatives are a UNIQUE business entity. Most worker cooperatives don’t have a lot of equity capital. Equity capital is one way banks will gauge a business’ potential for receiving loans. Equity capital refers to money/resource that are not debt. This means positive sources of funds like your personal savings. By contrast, debt financing is borrowing money that the business will have to pay back. The lender wants to see more equity capital then debt.
- In contrast, a worker cooperative may begin with each member making a contribution to the business. Capital is one key to success Member Contributions – the $$$ that each member puts in (e.g., each of 5 founding members contribute $300.00 for a total of $1,500.00). Worker Cooperative are different from traditional business because the founding members/also workers are a group. Initially, money raised is based on what is contributed by each member. Gaining capital is one key to success. Capitalization is the money that a business needs to start and continue running. Some main sources of capital are private loans, micro loans, personal savings and member contributions. Now, its important that you realize that worker cooperatives are a UNIQUE business entity. Most worker cooperatives don’t have a lot of equity capital. Equity capital is one way banks will gauge a business’ potential for receiving loans. Equity capital refers to money/resource that are not debt. This means positive sources of funds like your personal savings. By contrast, debt financing is borrowing money that the business will have to pay back. The lender wants to see more equity capital then debt.
- The idea is fairly simple no equity no LOANS. Many business will fail if they can’t obtain the money the need to buy tools, a space to work etc. Before we go over how you can obtain a loan or alternative sources of funding, it is important to understand WHY it is so difficult for worker cooperative to get money. First, worker cooperatives, cooperatives in general, are a fairly new thing. Banks and other financial institutions typically don’t know much about cooperatives. On top of being unsure what cooperative are, our research suggests that banks usually think of cooperatives as risky. Banks are in business to make money. So, you will need to convince them that lend to your worker-owned business is a worthwhile investment. We want to help you to be able to do this by educating you, so you can educate the lender and helping you to be prepared. (When analyzing the creditworthiness of a business, lenders like to see that the members of the business have invested their own money in the business first, before seeking outside funding. Lenders are also more comfortable giving loans if they feel that a business has its own resources to pay the loan back. Banks are not in business to lose money, so you need to convince them that lending to your worker-owned business is a worthwhile investment. Thus, in the eyes of banks and other lenders, the more equity capital the cooperative holds in the form of membership shares and other capital contributions, the more deserving of the loan it is.)
- Obtaining a loan may be challenging. It may work out or it may not. Loans are NOT the only way you can earn money for your business. There are other ways to earn money for your business. Member Capital Contributions If cooperative member will be participating in the management of the business, the members’ capital contributions are generally not considered a security. Donations When people give money without the expectation of receiving anything in return, they are donating. Many entrepreneurs are using so-called crowdfunding websites such as Kickstarter.com and Indiegogo.com to raise money for various enterprises. Entrepreneurs that solicit donations often provide non-monetary rewards to donors. Micro Loans While traditional banking loans are sometimes difficult for cooperatives to obtain, an alternative is a micro loan. A micro loan is a small, low interest rate loan, supplied through various sources. . Typically, the organizations that provide micro loans are socially conscious about the difficulties that community entrepreneurs face when trying to secure financing. Two examples of micro lenders are Kiva Zip and Working Solutions Pre-Selling If you’re an existing business and want to expand your business, one possible way to raise funds is to pre-sell gift certificates. For example, you might sell a $150 gift certificate that a customer can redeem at your business, but only charge $100 for the gift certificate. Charging less than the value of the certificate gives the buyer an extra incentive to purchase the gift certificate. Loans with Return of Principle Only Return of principle only means giving back the money that the funder gave, and not offering a return on the investment. Not offering a return means that the business will not offer anything more than the original investment amount, such as an additional dividend, interest, or appreciation in value. It is important to note that, in California, this is likely considered to be a security, so you should proceed with caution and consult with a lawyer if you choose to utilize this funding method. Product Discounts Another way to raise capital for your business is to charge a membership fee and offer product discounts in exchange. REI provides an interesting model for product discounts funding. REI is a consumer cooperative that sells memberships to its customers. At the end of the year, REI members receive a “dividend” based on the amount spent at REI during the year. This “dividend” can then be used to shop at REI. Bartering One unique and sometimes unthought-of way to gain needed resources is to avoid money altogether for certain goods or services your business needs. Bartering, or exchanging services or goods directly, is a means of obtaining resources. If you need to raise money to pay for something such as web design or compostable cups, consider whether you might be able to barter your goods or services to get what you need. This is not a traditional means utilized by businesses when financing their business; however, it can be utilized as an alternative way to obtain much needed resources for your business. However, you should note that bartering may be subject to taxation.
- One thing to keep in mind when raising money for your cooperative is securities law. A security is a financial instrument that represents money. For example, selling stock in your company would trigger securities law. Asking people to lend money to your business. Offering a share of your busines’ profits. Now, there is nothing wrong with doing these things. BUT there are certain regulations and rules of disclosure that go along with doing these things.
- Here is a problem budding worker cooperatives will face when trying to bring in outsider investors, the types of investments that often run into securities laws issues: You of course want the money and resources represented by outside investors. But these investors rarely are willing to invest without getting some skin in the game, in terms of profits or control. Giving up profits and control goes up against two core principles in worker cooperatives. Under the classic worker cooperative, profits are distributed based on how much work the workers put in, and control decisions are made under a one member, one vote basis. By contrast, outside investors are going to want profits and control to be distributed based on how much money THEY put in.
- So what do you do as a co-op? You need the money. You don’t want to not be a worker-cooperative. This is why it can be hard for co-ops to raise money. You guys are stuck between a rock and a hard place.