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Impact investing in worker cooperatives webinar 042617_final_updated
- 1. 1 1 © Project Equity 2017 Impact Investing in Worker Coops: How to get involved Webinar April 26, 2017
- 2. 2 2 © Project Equity 2017 INTRODUCTIONS Blake Jones Namaste Solar Annie McShiras Self-‐Help Federal Credit Union Alison Lingane Project Equity Ma> Gla@ng Capital Impact Partners ChrisAna Jennings Shared Capital Coopera?ve Insert headshot
- 3. 3 3 © Project Equity 2017 AGENDA 1. Background 2. Direct investments, preferred shares 3. InvesDng in a cooperaDve CDFI loan fund 4. InvesDng in a larger CDFI loan fund 5. Investment crowdfunding
- 4. 4 4 © Project Equity 2017 1. BACKGROUND
- 5. 5 5 © Project Equity 2017 Employee ownership brings significant benefits TO EMPLOYEES ü BeKer pay and benefits ü Assets (business ownership) ü A voice in key decisions TO BUSINESSES ü Higher producDvity and growth ü Lower employee turnover ü Improved business longevity TO SOCIETY ü Local spending mulDplier ü Higher voDng levels ü CorrelaDon with other social benefits
- 6. 6 6 © Project Equity 2017 Employee Ownership CooperaAves Housing Coops Consumer Coops Purchasing Coops Employee Ownership takes many forms Worker-‐ Owned Coops Employee Stock Ownership Plans (ESOPs) Stock grants Employee Benefit Trusts
- 7. 7 7 © Project Equity 2017 Worker CooperaAve Overview • Business owned and governed by their workers – 100% employee ownership, high employee engagement – Board of Directors made up of majority worker-‐owners – Profit-‐sharing via patronage, based on hours worked • Management is usually tradiDonally structured • Equity – VoDng equity only for members: one worker, one vote – Non-‐voDng preferred shares can be available to non-‐members
- 8. 8 8 © Project Equity 2017 A coop conversion is a sale of a business Typically financed by lenders or investors to a new worker coop Worker Coop Business Owner © Project Equity 2016
- 9. 9 9 © Project Equity 2017 Coop conversions versus tradiAonal leveraged buy-‐outs Worker coop conversion leveraged buy-‐outs TradiAonal leveraged buy-‐ outs Who provides % of financing % of financing Common equity Worker-‐owner voDng shares 0-‐10% 25-‐35% Preferred equity Private investors Historically low usage 6-‐12% Mezzanine financing Infrequent Historically low usage 0-‐15% Subordinated debt Seller CDFI Friends & family TOTAL: 25-‐50% Selling owner: 10-‐20% Other: 15-‐30% 15-‐30% Senior debt CDFI Bank 50-‐70% 30-‐50% Highest risk / return Lowest risk / return First in line for payback if default
- 10. 10 10 © Project Equity 2017 Coop conversions versus tradiAonal leveraged buy-‐outs Worker coop conversion leveraged buy-‐outs TradiAonal leveraged buy-‐ outs Who provides % of financing % of financing Common equity Worker-‐owner voDng shares 0-‐10% 25-‐35% Preferred equity Private investors Historically low usage 6-‐12% Mezzanine financing Infrequent Historically low usage 0-‐15% Subordinated debt Seller CDFI Friends & family TOTAL: 25-‐50% Selling owner: 10-‐20% Other: 15-‐30% 15-‐30% Senior debt CDFI Bank 50-‐70% 30-‐50% Highest risk / return Lowest risk / return First in line for payback if default
- 11. 11 11 © Project Equity 2017 Two publicaAons coming out of > 40 interviews about paAent capital invesAng in worker coop conversions
- 12. 12 12 © Project Equity 2017 OpAons for invesAng in worker cooperaAves 1. Member equity voDng shares Members only: One worker, one vote 2. Direct investment through Class B preferred stock 3. Invest through loan and investment funds 4. Investment Crowdfunding
- 13. 13 13 © Project Equity 2017 Matrix of investment opAons Investments in First Loss Pools / Guaranty Pools Direct Equity Investment in Coops Investments in CDFI Loan Fund Direct Loans to Coops Lower Return Higher Return Higher Risk Lower Risk
- 14. 14 14 © Project Equity 2017 2. DIRECT INVESTMENT, PREFERRED SHARES
- 15. 15 15 © Project Equity 2017 Transforming Energy. Transforming Business. ™
- 16. 16 16 © Project Equity 2017 About Us • Worker cooperaDve • 12 years old • 165 employees – ~50% are “co-‐owners” – ~25% are “candidates” • 4 offices in CO, NY, CA
- 17. 17 17 © Project Equity 2017 About Us • 2016 revenue: $50M+ – CAGR: 50% since 2005 • Working capital: $15M+ • Paid-‐in-‐capital: – Co-‐Owners: ~$1M – External investors: ~$4M
- 18. 18 18 © Project Equity 2017 Why? • Rapid growth • High working capital requirements • Low margins • No intenDon to sell the cooperaDve or to seek a “liquidity event” • “No external investment” vs “no external control” • Non-‐voDng preferred stock vs subordinated debt
- 19. 19 19 © Project Equity 2017 Brief History • 2004-‐2012: – EnDrely funded by co-‐owners and retained earnings – Frequent inquiries: VC, private equity, strategic acquisiDon • 2010: converted from custom employee ownership model to cooperaDve model • 2012-‐2013: Raised ~$750k via 1st private offering • 2015-‐2016: Raised ~$3.2M via 2nd private offering
- 20. 20 20 © Project Equity 2017 Non-‐VoAng Preferred Stock • 6.5% annual target dividend (non-‐cumulaDve) • $10k minimum investment amount • 5-‐year minimum investment term • No voDng rights • Preferred rights for dividends, redempDon, and liquidity/dissoluDon • Non-‐assignability and non-‐transferability • Available to accredited and non-‐accredited investors • “Slowly revolving door” concept
- 21. 21 21 © Project Equity 2017 Examples Cooperative Year Founded Capital Raised Annual Dividend Target Equal Exchange 1986 ~$17M 5.0% Organic Valley 1988 ~$85M 6.0% Namaste Solar 2004 ~$4M 6.5% Real Pickles 2001 ~$500k 5.0% Maple Valley 1991 ~$100k 6.5%
- 22. 22 22 © Project Equity 2017 Investor Profile • IdenDfies as an “Impact Investor” or “PaDent Investor” • Interested in cooperaDves, employee ownership, workplace democracy, and/or B-‐Corps • Believes in our mission and has aligned personal values Measures investment return “holisDcally,” not just in terms of financial gain • Is comfortable with a long-‐term, illiquid investment • Seeks income, not a capital gain
- 23. 23 23 © Project Equity 2017 Lessons Learned • Build a track record • Bring on external board directors • Plan for a gradual progression over 5+ years • There’s more investor demand than we thought • Private offering process is easier than we thought • Tap into “impact invesDng,” investment advisor, and stakeholder networks • Become a cerDfied B-‐Corp (and show off your “B-‐Score”) • Offer a financial and “holisDc” return • Screen heavily for values-‐aligned investors
- 24. 24 24 © Project Equity 2017 Next Steps: Impact InvesAng Fund • Focus on “impact companies” that are owned by: – Employees – MinoriDes – Women • ParDcular interest in worker cooperaDve conversions • Offer empathy and apply lessons learned
- 25. 25 25 © Project Equity 2017 3. INVESTING IN A COOPERATIVE CDFI LOAN FUND
- 26. 26 26 © Project Equity 2017 Shared Capital CooperaAve • NaDonal Community Development Financial InsAtuAon (CDFI) Loan Fund • Specialized in financing cooperaDves • 40-‐year successful track record • Financed 850+ co-‐op projects • Mission: Foster economic democracy by invesAng in cooperaAve enterprise
- 27. 27 27 © Project Equity 2017
- 28. 28 28 © Project Equity 2017 Shared Capital CooperaAve • DemocraDc Control of Capital • CooperaAvely Owned and Governed – Members: more than 200 cooperaDves in 36 states – One member, one vote • The Fund for CooperaDves • Capital from the cooperaDve sector and its allies • For cooperaDves
- 29. 29 29 © Project Equity 2017 Shared Capital CooperaAve Worker Ownership Loan Fund • Founded in 2007 • With US FederaDon of Worker CooperaDves • Create jobs and democraDc workplaces in economically disadvantaged communiDes • 45 worker co-‐op loans totaling $3.5 million
- 30. 30 30 © Project Equity 2017 Shared Capital Lending: Worker Co-‐op Conversions Electric Violin Shop Durham, North Carolina
- 31. 31 31 © Project Equity 2017 Shared Capital Lending: Worker Co-‐op Expansions Hub Bicycle Co-‐op, Minneapolis, Minnesota
- 32. 32 32 © Project Equity 2017 Shared Capital Lending: Worker Co-‐op Start-‐ups eQuality Home Care CooperaDve New Braunfels, Texas
- 33. 33 33 © Project Equity 2017 Shared Capital Loans: CooperaAve Businesses & Housing
- 34. 34 34 © Project Equity 2017 Shared Capital CooperaAve Impact in 2016
- 35. 35 35 © Project Equity 2017 Why Invest through a CDFI Loan Fund Benefit from CDFI ExperAse • Co-‐op Lending ExperDse – UnderwriDng – Deal structuring – Loan servicing – Monitoring – Workout • Technical Assistance – Assistance during & aqer loan • High Impact – Mission focused Reduce Risk & Cost • Reduce TransacDons Costs • Diversify Porrolio • Leverage • Target Demand – Minority & low-‐income owned businesses have highest need for loans < $350,000
- 36. 36 36 © Project Equity 2017 CDFI loan funds that specialize in cooperaAves and/or employee ownership
- 37. 37 37 © Project Equity 2017 InvesAng in Shared Capital CooperaAve
- 38. 38 38 © Project Equity 2017 InvesAng in Shared Capital CooperaAve Common Stock
- 39. 39 39 © Project Equity 2017 InvesAng in Shared Capital CooperaAve • Non-‐member, accredited investors • Term notes: 1-‐10 year • Fixed rate: 2-‐4.5% return Senior Investment Notes • Member cooperaDves • FoundaDon PRIs • Bank EQ2 Subordinated Investment Notes • $5K min., non-‐cumulaDve, non-‐voDng • Target return: 4-‐6% • Private offering; possible public offering Preferred Stock
- 40. 40 40 © Project Equity 2017 4. INVESTING IN A LARGER CDFI LOAN FUND
- 41. 41 41 © Project Equity 2017 Capital Impact History ● 501(c)3 Non Profit OrganizaDon, created under Title 2 of the NaDonal Consumer CooperaDve Bank Act of 1978. ● UnDl 2010, Capital Impact was the nonprofit affiliate of the NaDonal CooperaDve Bank (“NCB”) and a member of the NCB Financial Group of companies. ● In 2010, Capital Impact (iniDally known as NCB Capital Impact) became an independent nonprofit organizaDon and, in 2011, was designated a cerDfied community development financial insDtuDon (“CDFI”) by the CDFI Fund of the U.S. Department of the Treasury. ● Since 2009, consistently maintained AERIS raDng of ****+AAA, the highest possible raDng for impact performance, financial strength and performance, and policy impact. One of only six CDFIs to reach this raDng. ● Earned AA issuer credit raDng with a stable outlook by Standard & Poor’s in 2017. ● Over our 30 year history, we have disbursed more than $2 billion in our key focus areas.
- 42. 42 42 © Project Equity 2017 Capital Impact Capitalization 42 ● One of the highest equity balances in the CDFI industry (FYE 2016): ○ Unrestricted Net Assets of $103.6 million; 32% of Total Assets ○ Total Net Assets of $ 128.4 million; 39% of Total Assets ● Capital Impact manages nearly $800 million in loans including on and off balance sheet 12/31/2016 ● Awarded $55 million in 2014 round and $40 million in 2016 round of CDFI Bond Guarantee Program ● Member of Federal Home Loan Bank of Atlanta since January 2015 ● Awarded NMTC allocaDons of $562 million ● Manager of California FreshWorks Fund, Detroit Neighborhood Fund, AgeStrong Fund, Michigan Good Food Fund, and Woodward Corridor Investment Fund CONFIDENTIAL -‐ NOT FOR DISTRIBUTION
- 43. 43 43 © Project Equity 2017
- 44. 44 44 © Project Equity 2017
- 45. 45 45 © Project Equity 2017 Financing OpAons
- 46. 46 46 © Project Equity 2017 Our Impact
- 47. 47 47 © Project Equity 2017 $-‐ $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 $35,000,000 $40,000,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 CIP Co-‐op Lending History by Year 67% 23% 7% 2% CIP Co-‐op Lending History by Sector Housing Healthy Foods Community Development & Other Health Care
- 48. 48 48 © Project Equity 2017 Capital Impact worker coop lending examples:* CooperaAve Home Care AssociaAon Equal Exchange Co-‐op DescripDon The cooperaDve provides in-‐home health care services to ill and elderly clients, as well as to individuals with physical disabiliDes. CHCA was founded in 1985, when federal Medicare policy was forcing thousands of paDents out of their hospital beds and back into their homes. Founded in 1986 to establish equitable trade relaDonships between peasant farmers and U.S. consumers. Bypassing the middleman, the cooperaDve buys green coffee beans directly from farmers‘ cooperaDves and imports the coffee to the United States. Financing Need CHCA was recently awarded a new contract with the City of New York Human Resources AdministraDon (HRA) to provide home aKendants to 400 clients. Equal Exchange was planning on buying 95 new coffee containers in 2005 at a cost of $55,000 each, and will need the line increase to assist in the financing of this inventory. Employees 1,000 (700 owners) 55 worker owners (191,500 farmers) Amount of loan $1.6 million $2.5 million Type Working capital Revolving Line Lending history $400k line of credit in 1992, increased several Dmes to $1.3MM $1.5 million exisDng line of credit *data as of the date of CIP internal underwriAng memo
- 49. 49 49 © Project Equity 2017 InvesDng in worker cooperaDves through Capital Impact Type of Investment Term Amount Other ConsideraDon FoundaDons Program Related Investments Longer Term (~10 years) $1 million to $10 million Sector and/or Geographic Focus Financial InsDtuDons Lines of Credit; Term Loans Short to Medium Term (usually <7 years) $10+ million Geographic Focus (e.g. CRA credit) Other (CDFIs) Loan ParDcipaDons; Term Loans Medium Term (5 to 7 years) Varies Individual Investors Note Varies Varies See next slide
- 50. 50 50 © Project Equity 2017 AddiDonal consideraDons for engaging mission-‐driven investors => Note: Set up costs and ongoing annual expenses can be prohibiAve for smaller Note offerings. • Consider back office needs and type/number of investors Paper-‐based Note Program vs. Electronic Offering • Selling Agents, Broker Dealers, CUSIPs Selling & MarkeDng • Every offering is unique and legal counsel should be consulted to determine filing requirements (e.g. under Blue Sky Laws) Regulatory Framework • Trust Indenture, Prospectus, Credit RaDng DocumentaDon Legal Expenses
- 51. 51 51 © Project Equity 2017 5. INVESTMENT CROWDFUNDING
- 52. 52 52 © Project Equity 2017 Investment Crowdfunding: 3 Approaches 1. Direct Public Offering (DPO) 2. Title III Federal Crowdfunding 3. State-‐specific investment exempDon through a state cooperaDve statute Real Pickles successfully uDlized a DPO to finance its coop conversion
- 53. 53 53 © Project Equity 2017 Matrix of investment opAons Investments in First Loss Pools / Guaranty Pools Direct Equity Investment in Coops Investments in CDFI Loan Fund Direct Loans to Coops Lower Return Higher Return Higher Risk Lower Risk
- 54. 54 54 © Project Equity 2017 QUESTIONS? Blake Jones Co-‐founder & Co-‐owner Namaste Solar blake.jones@namastesolar.com ChrisAna Jennings ExecuDve Director Shared Capital chrisDna@sharedcapital.coop Ma> Gla@ng Treasurer Capital Impact Partners MGla~ng@capitalimpact.org Alison Lingane Co-‐founder Project Equity alison@project-‐equity.org Annie McShiras Investment Associate Self-‐Help Federal Credit Union amcshiras@self-‐helpfcu.org
- 55. 55 55 © Project Equity 2017 APPENDIX
- 56. 56 56 © Project Equity 2017 PaAent Risk Capital OpAons Type Equity, debt or hybrid Member equity VoDng equity (members only) Private offering Class B Preferred Stock Non-‐voDng equity Accredited investors only Investment Crowdfunding Direct Public Offering (DPO) Equity, debt, revenue share or other; voDng rights vary Title III Federal Crowdfunding Equity, debt, revenue share or other; voDng rights vary Investor – Member shares through CA Worker CooperaDve Act (AB816) Equity only, limited voDng rights Indirect investments through CooperaDve Loan Funds Invested in fund (not coop): Equity, debt, revenue share or hybrid / other
- 57. 57 57 © Project Equity 2017 • Financial feasibility • Employee interest • Assess leadership transiDon opDons • Timeline and roadmap • Plan leadership transiDon • Sales agreement • Financing • Set up coop • Employee educaDon • Execute sales agreement • Close financing • Finalize bylaws and governance DECISION TO PURSUE FORMAL COMMITMENT SALES TRANSACTION Assess Prepare Convert 6 to 18 months Selling to employees through a worker coop