Exit to Co-op

Can cooperative ownership improve your deal-flow?

We think it might.

Who are we, anyway?

Jason Wiener

Principal at Jason Wiener|P.C., “a boutique law and business consulting practice providing expertise to social enterprises and mission-driven business models”

Nathan Schneider

Assistant Professor of Media Studies at the University of Colorado Boulder, leader in the “platform cooperativism” movement; co-organizer of the original conference and co-editor of the collective manifesto, Ours to Hack and to Own

What is Platform cooperativism?

A growing movement to build democracy into the operating system of the internet, from worker-led startups to #BuyTwitter

So, what’s the problem?

The internet economy needs better options

• Dominant platforms built on surveillance and monopoly
• Investor expectations have decentralized the network
• Problems start with early funding terms
• With fake news, hate speech, and bullying, investor interests conflict with those of users

Investors need better options, too

How many companies in a given VC or angel portfolio either:

• don’t need subsequent financing
• are operating profitably
• are not likely to IPO or get acquired
• have a founder who doesn’t want to sell

Is there latent value in your portfolio that a strategic co-op conversion can unlock?

Can we do better than a 1/10 success rate for liquidity?

What’s the addressable market we’re talking about?

• % of convertible note portfolio

• # of growing portfolio companies with no strategic buyer

• # of mature portfolio companies ready to exit

Where do co-ops come in?

A new market of potential buyers

• Users, workers, or other stakeholders buy the company from early investors

• The company benefits from the trust and loyalty that come through co-ownership and democratic governance

• Early investors benefit with a fair return

• All can celebrate the social benefit

How would this actually work?

1. Identify candidates in fund portfolios for co-op conversions

2. Co-op capital partners finance buyout with exit to future co-owners

3. New co-owners pay off bridge capital with revenue from their business

What might the terms look like?

What does this mean for PortCo?

• Founder negotiates enterpise valuation
• PortCo undergoes user/worker/contributor buy-out of controlling interest
• NewCoop becomes a multi-stakeholder cooperative with:
  • Worker owners (employees)
  • User owners (customers)
  • Contributor owners (contractors)
• Net profit allocated on basis of patronage and target dividend (or capped revenue share) to outside investors
• Fund converts at buy-out valuation or valuation cap, then holds preferred stock

Example 2: Leveraged buy-out

Consider a portfolio company, TechCo, that is growing rapidly and not yet profitable, but the founder doesn’t want to exit. A mission-aligned private-equity buyer with co-op experience negotiates a buy-out with committed exit to user-ownership. There is little to no likelihood of a convertible note converting. The fund prefers to extend the note rather than claim the principal with accrued interest.

What does this mean for TechCo?

• Negotiated buy-out valuation to mission-driven private equity (PE)
• Fund gets converted at buy-out valuation or val. cap, then position liquidated
• PE takes control, restructures with balance of profit and growth
• Plans multi-year transition to user-ownership
• PE recoups investment through profitability
• Resulting entity is either earn-in or buy-in coop or trust

Example 3: Seed stage

• Un-priced, quasi-convertible note investment
• Equity line of credit - 10% equity- preferred stock
• Repayment:
  • Discretionary cash distributions
  • Profit Sharing
  • 3x cap
  • If 3x cap is reached in < 3 years, 5% equity
• No need for exit or additional financing

(Adapted from Indie.vc)

What makes us think this really can work?

or, why is this not utopian?

Namaste Solar

A North Boulder solar pv company converted from a partnership to a worker-owned cooperative. Jason was in house counsel during the process.

Stocksy United

A thriving, women-led stock-photo platform co-owned by hundreds of photographers, competing effectively in a competitive online market.

dojo4

Successful Boulder technology services firm and social innovator converted from a partnership to a worker cooperative in early 2017, preserving flexibility and boosting a high-integrity brand.

Associated Press

Founded as a cooperative in 1846, it’s no accident that nobody accuses this company of “fake news.” Today it models the potential for co-ops in large-scale media.

Twitter (?!)

At the 2017 annual meeting, Twitter shareholders voted on a widely publicized proposal to study the possibility of co-op conversion. Is this as crazy as it sounds?

How can we graft these models into the mainstream tech economy?

We want to build pathways for entrepreneurs and investors to embrace cooperative models—and a fairer internet for everyone.

We’d love your ideas and your help

• What players need to be involved to make this work? Incubators, accelerators, fund managers, private equity, legacy co-ops?
• What barriers exist to deploying capital?
• How do we identify and vet deals?
• Who would be receptive to continuing this conversation?
• What role might you play?

How can you learn more?

The Internet of Ownership
Directory of the platform co-op ecosystem

Ours to Hack and to Own
A collective manifesto on platform cooperativism