At OFN’s 7th annual Small Business Finance Forum, more than 500 mission-driven small business lenders and partners gathered in Chicago to learn best practices, address challenges, and network with peers. The Forum’s opening plenary focused on worker-owned cooperatives. This model, while not new, is gaining momentum as a sustainable one for community development.
The plenary discussion was led by Oscar Perry Abello, editor, Next City, and featured Rebecca Dunn, Executive Director, Cooperative Fund of New England (CFNE) and Daniel Fireside, Capital Coordinator at Equal Exchange. Equal Exchange is a pioneering worker-owned cooperative Fair Trade food and beverage company based in Massachusetts. Daniel has raised nearly $10 million in preferred stock and loans as working capital from over two dozen alternative lenders and several hundred investors, but when Equal Exchange was a small cooperative in the late 1980s, they sought financing from the CFNE
CDFI Connect sat down with Daniel and Rebecca to learn more about the worker cooperative model from both a management and financing perspective.
Daniel, let’s start with some background on Equal Exchange: how did this highly successful cooperative come to be?
(DF) In the mid-1980s, our founders—Jonathan Rosenthal, Michael Rozyne, and Rink Dinkinson—came out of the co-op culture that was taking off in the Greater Boston area, working at a distribution company that was owned by grocery co-op stores in New England. At the time, they were frustrated about issues of ethical sourcing of foods and worker exploitation. Grocery cooperatives were having their moment back then, but it was a time in history when there weren’t really “social enterprises.” Our founders didn’t want to have a coffee company. They wanted to develop a social change company that happened to sell coffee and demonstrate a different way to do business. At the time, CFNE was really one of the only funders that got what they were trying to do. Thirty-odd years later, we are one of the largest worker cooperatives in the country, with over $70 million in sales and more than 125 co-owners, with another two dozen employees on the pathway to co-ownership.
How exactly do cooperatives work for businesses, and are there ideal businesses for this model?
(DF) Member-owners invest in and own the business together. They share in both the profits and the losses as well as decision-making and governance. When funders or investors come in, they really have to fit the same mission-driven model. But cooperatives also have their own unique models. They can elect board members who are not employees. You can have a conventionally-run business that happen to be owned cooperatively. But it’s also more likely that you’ll have a much more democratically-run workplace. You'll see co-ops run the gamut of this. Any business can be a cooperative.
(RD) A cooperative is an ownership structure, not necessarily just a management structure. We have lent to car repair companies, tech companies, construction companies, food retailers, which may be the most commonly known in many communities. But really any type of business can have a cooperative model.
What is the process to become a cooperative?
(DF) The biggest difference between a typical business and a cooperative is the bylaws and structures that you need to have in place. If you work with a lawyer in the co-op community they can come up with these documents very easily. There are a few extra steps but it is not a frightening process.
Being part of a cooperative opens certain doors and closes others. It closes the door to outside investors who are out to maximize profits and return on investment without regard to the long-term health of an organization. But it will also open doors to financers and investors who look to create longer term value, especially in the communities where they live.
(RD) Generally, cooperatives are more successful businesses because you have worker buy-in and communal decision making. We have made over 930 loans and at least 75% are still in business. This is not the case for many small businesses, which often do not make it past 5 years. What happens is you have a larger pool of people that come together to meet an economic need. They feel responsible for the success of the business and share the load. Pooled energy, resources, and commitment are key benefits of cooperatives. Wealth is retained in the community. Jobs stay, there are benefits, savings plans, and the business really becomes woven into the local economy. Cooperatives are not looking for quick exit strategies and buyouts by nonlocal large investors.
How do new entrants navigate this as they are starting up a business?
(RD) There is a national network of co-op developers that has been growing. There are accountants, lawyers, and other professionals specializing in co-ops, teaching each other, creating shared documents, training, and creating internship opportunities to help grow—they’re creating an ecosystem..
In particular, Democracy at Work Institute (DAWI) and the US Federation of Worker Cooperatives have training materials readily available online as well as people ready to connect with you in all different locations. Both host regular conferences where one can gain more insights if you are interested in this field as both a future co-op or a co-op lender.
(DF) Cooperatives really do like to share. For example, at Equal Exchange we share our bylaws and operating documents all the time, and I am on the road a lot not, only sharing our success story but also helping others go co-op.
What about conversions? You mentioned in the opening plenary the concept of the “Silver Tsunami.” It seems like baby-boomers are a growing source of conversions.
(RD) Business owners aged 55 and older are retiring, many without succession plans, which means many businesses will be sold or closed. There are a growing number of consulting firms specializing in co-op conversations as a path to succession that keep businesses and jobs in place. These assurance providers are helping walk business owners through the process. So when it comes to CDFIs who are looking to help a business through a succession plan, this worker-owned model is readily available to them. CDFIs do not have to be masters in the process.
From a financing point of view, what are some key differences CDFIs might want to know?
(RD) This is a natural fit for CDFIs. We also keep the human side front and center so that financing and money are provided with respect and integrity. CDFIs worry about problems like gentrification—creating a fix to a problem but creating another problem at the same time. Cooperatives on the ground are less likely to flip properties or sell out for the big bucks, they become an integral part of the community so it is an opportunity we can feel good about as an investment.
(DF) It is what I like to call “human-based economics,” and the financing and work puts an additional obligation on everyone involved. If everything is financial or transactional, it becomes all about the money and everything else gets pushed aside. It truly is putting people before profits and building these relationships. Cooperatives must be transparent about everything. At Equal Exchange, we invite people into our operations, show them the real story, and are completely transparent about our financials—we even post our audited financials online!
Any closing thoughts?
(DF) There are two models in our economy: The first is where everyone is pressing their advantage, the company over the suppliers and customers, bosses over workers, investors over everyone, sucking out all the profit. This leads to a small number of people making a lot of money. This is the dominant model.
But Equal Exchange and others have shown that there is another way. Everyone that interacts with a company should come away better off. That is the cooperative model. We are responsible for the wellbeing of our suppliers, who in our case are farmers. We won’t relocate or cut wages and benefits without the consent of the workers, and they have an equal claim to annual profits. We are honest and engaged with our customers. Our investors and lenders are stakeholders, but they don’t call the shots. Capital is a tool for the business and the workers, not their master.
(RD) The model has been around for a while and I am seeing what is, hopefully, a tipping point for the growth of this ecosystem— getting lawyers, investors, and accountants learning and understanding what it takes to make cooperatives succeed. It is a very exciting moment for this to be happening.
Yet despite the renewed interest, there is such a knowledge gap out there. Cooperative models need to be taught more in business school, and they need better exposure, a bigger space at conferences and business incubators. When people are asked what kind of business structure they want to pursue, cooperatives should certainly be supplied as an option.
(DF) Maybe the best model they have!
To learn more about the capital model for worker cooperatives, check out this article Daniel recently authored here.