“You’re not going to finance the movement with conventional financing.” So noted Clark Arrington, who was inducted last year into the national cooperative hall of fame and is a senior fellow at Seed Commons, a community development financial institution (CDFI) that supports worker co-op development in 30 communities. Arrington’s comment encapsulated a central theme of a day-long session on “Money and Movements” held last month in Philadelphia at the 2022 conference of the US Federation of Worker Cooperatives.

At NPQ, we have regularly looked at the question of community finance, including the need to develop more accurate standards for underwriting projects and assessing risk. In Philadelphia, in a series of four interconnected panels organized and moderated by Joe Marraffino, a loan and outreach officer of the Cooperative Fund of the Northeast (CFNE), participants explored these themes. The first panel set the stage by looking at the role of CDFIs and other sources of capital. The remaining three panels offered a series of case studies that delved into the details of what is working—and not working—in the field, as well as identifying potential solutions to ongoing financing challenges.


Mapping the Field of Community Finance for Worker-Owned Firms

The opening panel was titled “Understanding Socially-Aligned Capital.” Its five panelists were Daniel Wallace of Coastal Enterprises Inc. (CEI), a statewide CDFI in Maine; Josh Glickenhaus, director of lending at Local Enterprise Assistance Fund (LEAF), a Massachusetts-based CDFI; Sarah Kaplan, an attorney at the San Francisco Bay Area-based Cutting Edge Counsel, which advises community-based businesses on how to raise money through direct placements and other equity strategies; Zoe Schlag, a partner at Common Trust, which structures conversions of existing businesses into employee-owned trusts that distribute annual profits to workers; and Ellen Vera, director of co-op organizing and development at Co-op Cincy, a nonprofit co-op development incubator and small community-based lender in Cincinnati, Ohio.

Three themes emerged from their conversation:

  1. Where Does the Money Come From? Schlag from Common Trust noted that conversions to employee ownership trusts commonly involve some form of seller financing, which is a fancy way of saying that business owners do not receive all the proceeds from the sale of their business in cash, but instead receive a significant portion of these proceeds through payments over time as the sold business generates profit. This part of an owner’s payment can be structured as a loan (ie, with scheduled monthly payments), redeemable equity (ie, shares that can be sold at a later date), or earn-out (ie, payments tied to the level of firm revenue or profits).

Wallace from CEI identified four major funding sources for projects that do not involve seller financing. One is banks, which have long supported CDFIs as a means to satisfy federal Community Reinvestment Act (CRA) requirements to invest in low-to-moderate-income neighborhoods. A second source of money is philanthropy. A third source is government—for CEI, the US Department of Agriculture (USDA) is the leading government source. The final source of funding are what in the philanthropy world are called “high net worth individuals” and in investment-speak are referred to as “accredited investors.”

Different types of funding sources offer varying mixes of costs and benefits. Bank money, for instance, has few restrictions on its use, but is generally more costly (higher interest rate). Foundation money, by contrast, is low interest (if a program-related investment) or free (if a grant), but it is “way less flexible.” Government money shares some of the traits of foundation money.

The last source—individual investments—Wallace noted, has become increasingly important to CEI, with 280 investors collectively providing CEI with about $18 million in funding. For the past dozen-plus years, Wallace explains, the organization has offered fixed-term investment notes, which are for a fixed term (say, three years) but are often rolled over (reinvested) by investors. “It has been a very effective funding source for us,” Wallace said. “Seems to be the best values alignment … They [accredited investors] are completely willing to accept a very modest return on their funds.” To keep its 280 investors engaged and informed about lending performance, CEI offers quarterly webinar updates to its investment note holders.

  1. The tension between the need for local knowledge and the benefits of scale: Assuming the money is somehow raised, how is it deployed? “Local autonomy is critical to mission,” observed Glickenhaus. Schlag concurred that “Critical for success is integration of capital scale and local knowledge.” This, however, is easier said than done.

The basic concept behind matching local knowledge and scale is easy to describe. As Glickenhaus puts it, such matching involves a “hub and spoke” model, where the hub is the scaled capital, and the spokes are local co-op development organizations. This works somewhat but is still a challenge.

For instance, Vera at Co-op Cincy is one of about 30 spokes of Seed Commons, the national CDFI where Arrington works as a fellow. Vera observed that a key reason why local capital is important is that “when you’re working in your community, you want to have control.” Seed Commons, she noted, enabled Co-op Cincy to “focus on our community and raising funds locally” without having to worry about financial reporting. Seed Commons also assists with fundraising. The national Seed Commons fund does not support all the projects that Co-op Cincy wants to fund, but, Vera adds, “We have full control of any dollars we raise locally.” Effectively, the highest risk financing, such as early startup, is financed locally, with Seeds Common national financing available to scale up operations.

Kaplan, for her part, called for the development of more of what she labeled “middleware” (mission-driven finance)—funds such as Seed Commons that can help connect local groups with national mission-oriented funding sources and technical assistance to enhance the odds of successful business development. Kaplan also noted that startup costs for new investment funds are high; philanthropy, she said, could play a particularly important role here by enabling these nascent funds get past this startup cliff. Kaplan added that she did not believe that co-ops are higher risk than traditional businesses; therefore, as data becomes available, it should alter risk perceptions among investors, and the ease of financing co-ops should increase.

  1. The tension between debt and equity: A major challenge in the field is that while loans to support employee ownership are relatively easily to obtain, equity investment is not. As Wallace pointed out, “Debt is the most conservative” tool of finance available.

Wallace added: “That’s another tension in the CDFI industry,” since most CDFI assistance takes the forms of loans, which typically require monthly payments regardless of business performance. That makes loans more secure for lenders, but often more dangerous for borrowers. Improperly used, Wallace emphasized, debt can be an “anchor that drowns the business.” He explained that to avoid this pitfall, CEI often structures its lending as more “patient capital” that doesn’t require monthly payments.

There also are some lenders, like Seed Commons, which, as Arrington notes, offer hybrid (part debt, part equity) products, where “you don’t repay the loan until you generate a profit.” Often, such arrangements involve the borrower paying back more than they would with a loan, if successful, to compensate for the risk the lender bears for accepting zero payments if the business fails. Still, debt investments remain more accessible than equity investments.

Of course, equity investments bring their own challenges. Unlike the typical monthly payments required for loans, equity repayment comes after profitability is achieved—and if the business fails, the outside investor must accept the loss. This means that cash doesn’t come out of the business until the business can afford to part with the cash. But repayment still needs to occur. As Kaplan pointed out, equity means creating “a slice of ownership to the investor with specific terms.” Efforts to structure businesses to facilitate “exit,” or buyout, of outside investors’ shares through purchases by community-based owners—sometimes called exit to community—exist but are in their infancy.


The Role of Public Policy

Public policy can play a role in supporting co-op development. In Italy, for instance, worker co-ops receive government support. For example, under Italian law, profits that are reinvested in co-ops are exempt from corporate income tax.

In the United States, public support for worker ownership is growing. For instance, Colorado has established a statewide employee ownership office. And since 2014, New York City has provided annual support for nonprofit technical assistance to worker cooperatives. This support now totals roughly $4 million a year.

The New York City Network of Worker Cooperatives (NYC NOWC) programs director, Tammy Shapiro, noted that not just the amount, but the type of support matters. Specifically, in New York City, while city government funds have helped to expand worker cooperatives’ presence, the program structure creates incentives that can get in the way of long-term business sustainability. As Shapiro explained, “We have all of these technical assistance dollars. We haven’t figured out the capital assistance.” As a result, the movement can get “trapped in a cycle of needing to create more and more co-ops, while existing co-ops need more support.” Advocates would like to fix this policy design flaw but in some ways feel locked into the current support structure.


Stories from the Field

It would not be a worker co-op conference if the session did not include direct stories from worker co-ops in the field. One of the co-ops featured is the Drivers’ Cooperative. Based in New York City, the business is structured as a platform co-op, meaning that its members have access to the profits generated by the app. At the conference, Eric Forman, an organizer and cofounder of the co-op, and Michael Ugwu, one of the drivers, spoke about their experiences.

According to Ugwu, 7,000 drivers currently participate as co-owners of the platform co-op. The business has recruited drivers by paying higher rates per mile and taking a lower cut of the fares collected (15 percent vs. 21.5 percent for Uber). At this stage though, most drivers work for both Drivers’ Co-op and investor-owned companies such as Uber and Lyft. Shared Capital Cooperative, a CDFI based in Minneapolis, provided a lead $200,000 investment. Other funding sources include LEAF, a co-op equity group known as Start.coop, and a regulation CF (crowdfunding) raise (ie, a federally regulated form of raising small-dollar equity investments from a large number of individual individuals through an online platform).

Forman estimates that between 100 and 200 drivers are core members who earn a substantial share of their income through the co-op. This, Forman adds, is an intentional strategy. Rather than compete head-to-head with Uber and Lyft and get crushed, the co-op aims to achieve scale first through anchor customers. The overall strategy, as Forman puts it, is to “get large contracts to bring in lots of trips” and reach breakeven early. To date, Drivers’ Co-op has provided customers with over 100,000 trips. Later on, the co-op will organize a drive for individual consumers. Having a mass driver membership in the thousands means that when demand is activated, the co-op will have the ability to scale quickly and meet that demand.

Another co-op featured at the conference was a union co-op known as White Electric Coffee, based in Providence, Rhode Island. As Aketzali Villanueva, a co-op member owner, explained, in 2020, in the wake of the racial justice uprising that took place after the murder of George Floyd, “my coworkers sent a letter to the owner to address social and unfair labor practices. In response to that, all coworkers but two who did not sign that letter were laid off, and those two were told to secure replacement hires.” But the laid-off workers organized, secured their jobs back, and formed a union. When the owner let the workers know that he was putting the coffee shop up for sale, the workers crowdfunded for the deposit. They also secured loans from CFNE and the Fund for Jobs Worth Owning Fund in Massachusetts. “None of that would have been possible but for the unionizing strategy and the organizing,” Villanueva added.

Two other case studies profiled were the formation of the Kalchē Wine Cooperative in Fletcher, Vermont, which was financed with support from CFNE and the Vermont Employee Ownership Center; and an effort by a Black community-led effort in Los Angeles—in which Arrington participated—that raised over $30 million to convert a shopping center into a 40-acre community-owned urban village known as Downtown Crenshaw. The community group outbid the Heritage Development Group, but Heritage was selected by the mall owners nonetheless. Arrington emphasized that the Downtown Crenshaw group was challenging the sale in court on civil rights grounds and as a breach of fiduciary duty. Efforts to preserve other Black-owned commercial property through community land trust structures in Crenshaw continue.

Arrington also emphasized the replicability of the financing structure developed by the group. To simplify, the nonprofit Downtown Crenshaw and an aligned developer became general partners of a limited liability corporation (LLC). They then raised funds through limited partnerships. By definition, as with stock shares, limited partners’ risk is limited to the amount of investment. Meanwhile, governance rights remain with the LLC general partners. Arrington noted that money was actually raised through three partnerships in order to raise funds at different rates of return for different classes of investors, with impact investors accepting the lowest rate of return.


The Road Ahead

Without a doubt, the financing structure that has emerged over the past decade considerably outpaces what existed previously. Many of the organizations described here, such as Seed Commons, did not exist a decade ago. Government support, though small, has also increased considerably. And new innovations, such as the financing strategy developed by Downtown Crenshaw, are also emerging. Even the funds that did exist a decade ago have grown in scale.

Yet, major gaps remain. Near the day’s end, Hendrix Berry of the Massachusetts Solidarity Economy Network observed that such tensions are common. “I want things to move faster, but I’m not in the daily grind,” she remarked. “Sometimes the vision moves fast, and the implementation moves slower, and we get out over our skis. I would like to see more of that vision,10 steps ahead, but moving together.”