exit_to_co-op.md 7.5 KB
% Exit to Co-op % Nathan Schneider + Jason Wiener % (Use lateral arrow keys to navigate)
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?
Identify candidates in fund portfolios for co-op conversions
Co-op capital partners finance buyout with exit to future co-owners
New co-owners pay off bridge capital with revenue from their business
What might the terms look like?
Example 1: Direct buy-out
Consider a portfolio company, PortCo, with steady cash-flow and a vibrant user community. The founder doesn't want to raise additional capital in a qualified financing; 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 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 |