itshalfempty

Over the last few months, I’ve started to think more about what kind of company values appeal to me. Something I’ve really started to dislike about modern corporate culture is the insane quest for profitability. Especially in the tech world, companies are driven by a need to achieve insane growth. In my opinion, that often puts the company’s goals at odds with what is best for customers and employees. While I think it’s totally fair for a company to exist to make money in some capacity, I’ve really started to resonate with the idea that a company’s main purpose should be to improve the lives of its workers and its community.

That idea isn’t particularly compatible with public companies, or companies that are looking to exit, or startups whose founders have aspirations of a big payday one day. But I do really appreciate smaller companies that seem to care a lot about their workers and their work environment. That said, it generally seems like those intentions get dropped when those companies grow or change owners. So how can a company intentionally keep that environment and culture as it evolves?

Learning about worker co-ops recently have really made the pieces click together for me. In a worker co-op, employees are the owners, and they collectively decide how to run the company. There are some baseline legal requirements (either for tax treatment by the IRS, or that govern cooperative corporations for states that support them), in addition to some common guiding principles.

The core principles behind a worker co-op is that the business is owned by its workers and run in a democratic manner. Membership should be open to all employees, with a clear path for transitioning from an employee to an employee owner. All owners share in the profits (and loss) for running a business, and they all have an equal say in the business itself. That also means the information about the business, like its policies, contracts, and accounting books, should be available to all worker owners for review. That said, there is a lot of variation in how worker owners run a business, and are ultimately determined by the company and its bylaws.

Profits and losses are shared with members via a patronage dividend, which is largely guided by IRS rules that grant favorable tax treatment. In a worker co-op, this would be the net profit or loss generated by member workers, proportional to their “patronage.” Generally companies use hours worked to determine how much patronage each worker owner contributed. Profits (or loss) generaged by worker owners are paid out each year to worker owners and are taxed only as individual income. Companies can also defer a pretty significant portion of these patronage dividends (up to 80%), instead allocating it towards an individual capital account the company tracks. These accounts are still payable to the individuals, though the terms of payout are set by the company.

While all of this sounds really good to me for a company that is stable and has achieved profitability, one thing that is less clear to me is how to structure a company in the “early” days. Many founders of small businesses put in an incredible amount of “sweat equity” into a business to get it off the ground, and often don’t take any money out of the business until it starts to generate a profit. Depending on the business, that could take years. While I don’t think anyone would start a worker co-op to see a large return on that investment, it does seem reasonable to ensure that founders are compensated fairly for their effort and risk.

There are a few different strategies I’ve seen for handling “founder pay”, and generally speaking, they all require that founders explicitly determine the value of their contributions up-front and commit to a reasonable way to defer compensation. It could be via a separate member class for founders that retain more power over the company for a limited time. Or that have a higher patronage payout for a few years. Or it could be instead via awards of non-voting preferred shares that might pay a modest dividend and can be redeemed at face value. No matter what approach is used though, explicitly setting founder benefits up-front makes it a lot more transparent to future member-owners how founders will be compensated for past founder work, and importantly when those benefits will expire.

I’m currently very interested to learn more about worker coops, and specifically hear how businesses have adopted this model. While a few common examples seem to be touted across the internet, I’d love to learn about more businesses, and better understand whether businesses that adopt a coop model are more less likely to fail than a traditional business, and how being a coop may have helped or hindered the business operate and grow in a principled way.