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?

  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?

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.


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