# Exit to Co-op
Author: Nathan Schneider + Jason Wiener

Nathan Schneider + Jason Wiener

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## 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

Nathan Schneider nathan.schneider@colorado.edu | Jason Wiener jason@jrwiener.com