Transcript of Episode 99 – Jason Weiner on Alternative Business Structures

The following is a rough transcript which has not been revised by The Jim Rutt Show or by Jason Weiner. Please check with us before using any quotations from this transcript. Thank you.

Jim: Today’s guest is Jason Weiner. Jason’s the principle and founder at the Jason Weiner PC Law Firm in Boulder, Colorado. He’s also the founder and chair of the Main Street Phoenix Project.

Jim: A very interesting guy. I learned about Jason in my podcast EP68 with Mara Zepeda. We were talking about how hard it was, but how critical it is to find good professional help in forming exotic business entities. Specifically, were talking about hybrid cooperatives in our wide-ranging conversation about how to have business forums that don’t just have maximizing short-term money on money return as their ethos, and that topic came up. So I looked up Jason’s law firm and I go, hell yeah, I’d definitely like to talk to this guy. So welcome, Jason.

Jason: Well, thank you very much, Jim. Good to be here. That’s quite an introduction. Thank you.

Jim: One of the things I found on his website as always, of course it will be on our episode page, but it’s nice and short. So I’ll actually read it off. J-R-W-I-E-N-E-R.com. And as always, it will be on the episode page.

Jim: First thing that caught my mind was he has a section called ethos. And I go, lawyer, ethos? Okay. Actually, I have used lots of attorneys with good result over the years where I’m not one of those people who bashes attorneys needlessly, but sometimes they deserve it, but I loved his ethos. Some excerpts from that is your mission will always remain top of mind in our dealings and we will always advise you of potential threats to your mission. I go, wow. That’s pretty cool. What did you mean by that?

Jason: To me, I understand having lived inside of a company as both an owner and as an executive that you don’t go into business as a human being just to make a return for yourself or a shareholder. It’s this myth that we’ve come to lionize and I think celebrate that, business really is just about making money. And we know that there’s a deep sense of pride in one’s craft or a sense of purpose in serving a community, or a sense of loyalty to your workers. And so to whatever degree somebody has been doing just about anything in an organization for any measure of time, they’re led by something non-financial, they’re led by a mission, by a pursuit, by a purpose. And I learned really early on that that’s not just the basis of a rapport between the lawyer and their client. This is really fundamentally what drives the business leader. And it’s what they’re thinking about. And it’s what frankly gets them up in the morning and it’s what weighs on them late into the evening.

Jason: I’m a lawyer who empathizes and understands the position of my clients. I too am a business owner. I too am a founder. I too I’m a leader and a manager and I am led by the mission of our work. I put that front and center because I want to work with people and I do work with people who are led by that same visceral drive to do right by a constituency bigger and broader than themselves.

Jim: I love that. Socio with many startups as a founder, as an advisor, as a director and as investor, I think 17 or 18 at last count. And I agree with you. I’ve never been on one yet that was purely cynical moneymaking play. People either love their product or they love their customers, or they love their employees or, optimally some combination of the three that make really the best companies. And I’ve always thought it to be a mistake of reality for those people who are selling the idea that the only purpose for an organization is to maximize its shareholder value. And no company I’ve ever been associated with have that as its ethos fortunately, and I think it’s very important that you recognize that. Unfortunately, there are many vectors in our economy that try to move early stage companies away from their missions.

Jason: Very much so. And it’s really a perversion of law, as well as economic theory. Milton Friedman in writing a piece in the mid ’70s in The New York Times was articulating a value set that became doctrine out of a gross distortion of legal precedent. And in doing so created essentially an unanticipated, but highly lucrative connection between shareholder capitalism and venture finance. And that means today we live with this distorted reality where founders might start out to build a business to solve a problem that they care deeply about or to address a need or a purpose, but ultimately, it’s through the structures they adopt that they end up having to become cynical and pursue financial maximization. And that’s strictly due to the legal constructs that we’ve bought into, and that we rarely question.

Jason: And so very often we’re dealing with founders that have been getting conventional advice and some have even been through traditional venture backed startups. And those intrepid few that question the trajectory they were on, question the structures they adopted are the folks I love working with most because they retain an open mind and a sense of spaciousness in looking at the way to approach a business structure that isn’t quite as extractive or myopic as the traditional Delaware C Corp. And I believe that that’s really the unanticipated product of design and the laziness of practice, which is that we’ve created a conformist culture in the law and in business practice that creates an engine for venture capital and public markets for IPOs and for consolidation. And this is based on, I think, an underlying intellectual laziness to look at alternatives and look at tailored solutions that may be a little harder to design, but serve a more holistic purpose. And one that probably makes the business more sustainable and ethical.

Jim: Exactly. And I like the way you frame that as laziness. I often point out to people that fortunately in our English common law system, which is the United States and most of the English speaking countries, there’s a remarkable amount of flexibility in what one builds into the legal underpinnings of a business entity. You don’t have to just grab a hundred dollar Delaware C Corp or the equivalent LLC with a very generic set of operating agreements. Essentially within very, very broad reasons, if you can think of it and it doesn’t violate any obvious laws, you can cook it into your bylaws or your operating agreements or into your co-op structure or wherever. There’s tremendous flexibility available under the English common law.

Jason: There sure is. Not only do we have legal structures that can be suited and tailored, but we have a variety of legal structures that most folks don’t even really know exist. And by that, I mean, we of course have the relatively uniform business corporation law, which itself is flexible despite how it may be used in practice, The limited liability company form, which again is probably the most flexible. We also have throughout the country, a variety of versions of cooperative statues and limited cooperative statutes, along with of course, public benefit corporations. We have this rich patchwork of state law that allow creative practitioners to implement a wide variety of legal designs.

Jason: Again, should they be tolerant of creativity and risk and understanding that all we can do is codify and enshrine a set of assumptions and purposes and relationships and let the facts play out as they may. I think all too often, lawyers are trained to be risk averse and to do what’s been most often done on the trodden path. And that is so limiting and it deprives the business community and our economy, frankly, of the kind of biodiversity as I call it or economic diversity that’s necessary for innovation and necessary for identifying patterns and hopefully solving some of our deepest, most entrenched social economic and political challenges and inequities of our time.

Jim: Well said. Which gets actually to the next part I took out of your ethos, which is the section on democratization. When practical and appropriate, will advise you as to innovative ways to democratize elements of your business. In governance, capital, supply, credit, and finance and other business issues, we will help you evaluate creative ways of distributing and sharing management, decision-making, control, wealth and risk. Now that’s, I think part of what you talked about about, having our business enterprises be part of the solution, not just part of the problem with respect to having a more equal distribution of outcomes that come from our businesses.

Jason: Yeah, absolutely. Again, I think one of the other kind of perversions of business structures and capitalism without appearing as a zealot an economic zealot one of the perversions we live with is the notion that business ownership is an endeavor of control, domination and exercising power and dominion over people like our employees. The employment relationship is rooted in a style of fiefdom and domination. And yet, we’re suffering with the consequences of that. We suffer with things like the lack of a social safety net. We suffer from a high turnover and burnout. We suffer from employment discrimination and the need for collective bargaining in unions. Much of that is symptomatic of the societal harm that’s done through this control and command business ownership structure.

Jason: And so there is a whole realm of solution building that comes from recognizing that we’re actually within an organization’s four walls, within the cell walls of an organization as some friends and colleagues of mine like to describe it, there’s a lot of alignment. There’s cultural alignment, there’s alignment of vision, and there are different strengths and weaknesses within an organization. And what better way to tap the potential of an organization than to get everyone rowing in the same direction.

Jason: Now, one way to do that is obviously through the stock option program that traditional startups use. I think that’s somewhat of a cynical but helpful structure. But to go further and to create many business owners and share ownership broadly, doesn’t just create an alignment of incentives. It taps into people’s deepest motivations of purpose and meaning, and long-term commitment that unlocks a degree of productivity and enrichment and engagement that you just can’t simulate by paying people well, or putting them under a non-competition covenant or providing them good benefits. We need to go further. And the enterprises that will solve the most deeply entrenched problems on long-term thinking, they rely on us to tackle deep thorny questions in a way that’s based in trust, deep relationships and an alignment of incentives and vision that has people rowing in the same direction we need to do away with the corporation that puts more money into enforcing its policies and in creating spiritual, energetic, philosophical alignment that gets people moving quickly and autonomously within their domain.

Jason: And democratization is one meta level construct that offers us a pathway to tapping into that potential, tapping into that engagement and also solving the deepest, most entrenched economic woes we face. Income inequality, the racial wealth gap, income insecurity. We can address these things using the same levers that build strong resilient organizations. It’s not magic. It’s really just about creating more of an enlightened sense of self-interest and tying people’s fate to one another. It’s a deeply Western European and indigenous philosophy, and I think it’s making a comeback.

Jim: That’s quite interesting. I, over the years have quite a few General Electric refugees, GE refugees that work for me. And apparently, there was a folk saying in GE which kind of sums up the problem with the classic command and control organization. And you don’t get much more command and control either GE in the 1990s. And that was, the typical GE person, especially anyone on the fast track, spent a third of their time managing their boss, a third of their time managing politics, and third of their time doing their job. And, that’s pretty scary that only a third of the actual working day was spent on constructive work and the rest was dealing with the overhead of a command and control bureaucracy.

Jason: That’s right. And isn’t it ironic that the big corporation is held up as the pinnacle of capitalism, maybe at least under a 1980s vision of it. And yet, the style of management and leadership is command and control, the most Cold War era, Soviet style form of governance and management. And yet we hold these up as kind of the lioness of American capitalism.

Jason: It’s just ironic to me but it should be no surprise that the broad based form of ownership is not… We’re accused of this all the time actually. We’re accused of creating socialistic or communistic business structures. When in fact, the godfather if you will, of employee ownership, Louis Kelso who was both an economist and a trained lawyer from the ’50s on to his passing, is famous for having said that employee ownership is actually about creating many, many, many more capitalists.

Jason: I think I agree with the sentiment, but maybe not the characterization, but I think there’s some truth that by leveraging the motives and incentives embedded in capitalism, we unlock a degree of autonomy, a sense of liberation and a sense of an honor to the relationships that build organizations. Even to scale. I mean, really, the largest Aesop company in America is public supermarket with over 80,000 worker owners. These are not small scale hippy-dippy co-ops that we associate with. This is a much larger organization that we might understand could be employee owned.

Jason: And, to some degree, sharing ownership is what has made them successful, resilient, profitable, and has built wealth for tens of thousands of people who are otherwise working relatively low to modest wage jobs.

Jim: Indeed. And I worked for a very large employee owned company relatively briefly, SAIC at the time was a large $8 billion a year beltway bandit, employing 50,000 people. It was 98.5% employee owned. The founder kept the big 1.5% for himself. Now, I understand that subsequently they went and reorganized, [inaudible 00:16:12] pieces off, took part to public and all that, but the original founder was quite adamant against that obviously. He didn’t set the structure up to survive his leaving the company, but it was pretty impressive that the founder who there was a company that required no external investment capital, he could have kept a 100% of the company, but he gave away 98.5% to the employees.

Jason: That’s really incredible. I mean, that really shows a level of forethought and commitment, and I think a real understanding as to who the real value contributors are within the organization. I think it’s in some ways kind of intrinsic to the Aesop model, that it is still susceptible to restructuring and even to hostile takeovers. But it’s also in part due to kind of a lack of awareness around some mission protection devices. And this gets back to the first segment of our discussion, which is why mission matters. If mission protection, if self ownership and autonomy are truly important to a founder or to a business owner, we can go further than just democratized ownership. We work with some incredibly exciting bespoke tools that lock in mission and make it illiquid. They make it impossible, or at least very, very difficult to de mutualize or restructure a business merely for financial outcomes. And so there’s been a lot of creative lawyering in that space and we’re a part of it.

Jim: That’s great. Because I’m sure as you know there’s been a shitload of demutualization of mutual insurance companies and mutual banks, et cetera, over the last 30 years. And again, they didn’t have structural protections inside to keep that from happening and management teams often did it very cynically for their own self-interest.

Jason: Yeah, absolutely. It’s interesting. I follow very closely the demutualization of True Value Hardware, which is a multi hundred million dollar, or was a multi-hundred million dollar purchasing cooperative for independent hardware stores. It was the chief competitor to ACE hardware and it’s what allowed independent hardware stores to compete with Home Depot and Lowe’s to get better wholesale pricing. And, private equity firms cynically made a play to the board of directors into their management that they would provide liquidity to a majority of the members as they approach retirement age. And they essentially commandeered a plurality of the voting membership into the private equity play.

Jason: Now, interestingly, True Value was structured as a Delaware C Corp and not a true cooperative. But it’s been an interesting story to watch and to compare to the more recent attempt at demutualization of the outdoor retail brand MEC up in Canada, which is organized as a cooperative and is now in the midst of litigation by their members claiming to undo the sale as not having had proper approval by the membership.

Jason: And so while there’s been a spate of demutualization in the cooperative and broad based ownership space, we’re starting to see new forms of organizing and even new capital campaigns that help to keep some of these groups financially independent.

Jason: Another kind of fun anecdote that I share… I shared this with my team the other week, of all insurance products that are out there the most commoditized are obviously life insurance, disability insurance. And, I’ve gone out, I have two small children, so I’ve gone out and purchased life insurance and disability insurance. But the one thing that I wanted to do differently was to prioritize buying it through an insurance mutual. And so I did. I found homeowners through Liberty Mutual and some other insurance through MassMutual. And just the other day, not only do I receive and actively participate in the annual proxy votes for directors, but this year I received a dividend check from MassMutual. And it wasn’t 27 cents, it was a couple hundred dollars. And this was a dividend from a cooperatively owned insurance mutual that paid me back from the overpayment of my premiums. And I thought, gosh, this is really, really [inaudible 00:20:28] sob story of capitalism in the era of COVID, in the 21st century. We really should be thinking about how we can mutualize our economy and the ethos elements that you’re citing to are really important ingredients in that.

Jim: Great. Let’s move on to the next section. I imagine an important part of the work you do, you have a section on your website is to help founders think through what entity type might be right for them. How do you do that then what are some of the questions that you might ask?

Jason: The one thing that I do differently is I don’t presume that every founder is looking to raise outside money. When we disabuse ourselves of the notion that there’s only one way to grow a company paranthetical raise outside money, there’s a range of other pursuits and other avenues and ways of structuring the company.

Jason: The first thing that we do is we take a page out of the architecture world, the tech development world, and we sit down and we engage in a real design process, a charrette, if you will, where we start with first principles, we try to understand what the social, what the deeper existential purpose of the founder is and what the organization’s purpose is. We start with the building blocks of purpose of mission and of what common pursuit seeks to do through its organization. And we build on top of that and taking account of what are real-world constraints and parameters? Where do they need to be? What are the limitations and real world constraints that they’re working with? And we begin to design from the ground up.

Jason: And, unlike traditional practitioners that might have, maybe a narrow or even a broad focus on business corporations, we try to keep our options open. We remain form agnostic as we go through that process, and we try to hear the client and hear the words coming out of their mouth. We ask questions to really develop a deep understanding of what they’re trying to build and why and how, and, importantly, what trade off they’re willing to make. Every decision in life as in business involves trade offs and we help to articulate and educate the client on what those trade offs entail, what bundle of pros and cons should or will the founder accept? And so through that process, we can come out with a design informed structures and we can look at the pros and cons in relation to other structures, or we might even have just kind of zeroed in on one structure that seems the most suitable, given the design that we’ve been working with. And we begin to optimize as best we can that structure for the range of objectives that it has given the time constraints it has and given priorities.

Jason: And so we identify further what sort of pivot points there might be. So a particular client might present like a patient does to a doctor with certain temporal requirements, certain priorities, and there may be thresholds and triggers for those priorities to adapt and change. And so we bake in adaptability as things evolve and change. And we try not to do that using the most open-ended flexible structure because, sometimes that open-endedness will lead to the siren song temptation of accepting the most kind of lucrative short term appeal of outside capital. And if that’s not the founder’s goal, it can actually be beneficial to kind of screen out or mute out the siren song and optimize the structure for a different capital campaign, a different strategy, different structure with different thresholds for change over time.

Jason: We know that we can’t prescribe and draft a document for every eventuality or every potential. And so we try to be cognizant of when the form will need to undergo overhauls and tune-ups. And so if you can tell using my kind of metaphoric language, we’re building organizations in the spirit of real-world organisms. We’re building these to be evolutionary and emergent. And so we identify when we need to change things. So the vision a founder has, might be very different than what an organization looks like once it has employees, or once it has admitted members or once it has customers. And so we identify that as a pivot point and consider what reforms might be necessary to re optimize.

Jason: And we do that in a flexible and adaptive approach over time, and we grow and live and learn with that client. And we do that on a cost-effective basis and in a way that’s empowering and educational to the client so that they feel they understand and have the tools to make the business executive decisions split-Second where the rubber meets the road. We’re not holding their hand every second of every day. It’s not cost-effective or even practical. You don’t want your lawyer making every decision for you as a business executive, but you do want to know what those trade offs are, and we try to develop and build that kind of relationship.

Jim: We talked about trade-offs and as you say, life is full of trade-offs and navigating trade-offs is one of the arts of living in my mind. But, maybe you could talk through an example of a trade-off that might be a client like the clients you have, could be facing and what advice you might give them.

Jason: Great question. The quick one that comes to mind is let’s say there’s a technology-based cooperative. And I’ll just make up a hypothetical. This is, let’s say a cooperative of independent musical artists. that’s looking to build an artist centered platform for music distribution that’s less extractive and more focused on the artists than say Spotify or Apple music or Pandora. And to build the technology and market to artists, they know that they need hundreds of thousands of dollars. And so at the outset, a founder might be inclined to say that we can never penetrate the stronghold that the incumbent players have on the market just bootstrapping and just winning pitch competitions and earning $10,000 here and $20,000 there. And so they may present to us looking for a structure that allows them to build and attract a team of engineers and developers and marketers for their core team while recruiting artists and while developing distribution channels.

Jason: And they may say, well, we need to keep our options open so that we can fundraise. This is going to take hundreds of thousands of dollars to build the technology. And so to develop that technology in one fell swoop, likely they’ll need to raise the funds pretty quickly and be able to spend it pretty quickly. And so, we have to have a real sober conversation with that use case or that client and evaluate whether the advantages of raising six figures or seven figures in early stage funding is worth the downside of having those types of investors part of your board, exercising control over your decision-making and scrutinizing your every move and every quarterly report and, causing tension with your vision for workers intricity.

Jason: Is it worth it? And so we evaluate that set of pros and cons against the alternative of doing more of a democratized bootstrap which is, focus on maybe not building the technology of your dreams right away, but rather, piecing together the technology using products that are off the shelf and strategic partnerships and bootstrapping the fundraising through your artists membership. And cooperatives presents a really interesting way to raise startup capital buy-in from your members. And if you think about just focusing on your core constituency, if your business model, your vision is really to develop an artist centered approach, then who best to design your product for, and who best to ask for the capital commitment and who best to design your pricing structure around than the artists themselves? And if you’re able to target a thousand artists at say, $500 a piece, that’s a real startup capital.

Jason: And so, the pros and cons of raising capital that way and deploying and implementing the business startup strategy that way, look very different than a venture backed startup, but it comes with it different set of pros and cons around fundraising, product design, marketing, and business structure. And so that’s away that we would compare and contrast two different business structures, and look at the different price and tensions they create within the organization both at a legal level, as well as a more practical and strategic level.

Jim: Very good. You mentioned cooperatives and getting that was what actually triggered my interest in tracking you down. It was a discussion about hybrid cooperatives. Not everybody in our audience is even aware of the legal form of the cooperative. It might be helpful for you to explain what a cooperative is, and maybe distinguish between an employee owned cooperative and a customer owned cooperative. And then we can go from there to talk about hybrid cooperatives.

Jason: Certainly. So, pure a cooperative is an organization, a business organization that is operated for by an of its members. And traditionally, we think of cooperative as either food co-ops, grocery co-ops owned by and of their shoppers, which is very much like a consumer co-op REI. There are other co-ops like credit unions, which are owned by their depositors. And these are what I call single stakeholders, single constituency co-ops. They have one core constituency and they provide a set of goods and services for that core constituency. Every other constituency is essentially an arm’s length relationship, either an employment relationship or a contract relationship. And, they’ve been formed for different economic purposes and under different state laws.

Jason: What’s been interesting is, over the last 10 years there’s been a real movement to create multi stakeholder or multi constituency enterprises. This is in part a nod to the B Corp movement, which has kind of expanded the realm of decision-making for corporate directors to say, it’s not just about the shareholders. It’s not just about the money. It’s about these other stakeholders. Well, the co-op memorializes that, enshrines that multi-stakeholder constituency in its DNA. It says, we operate as an organization for, of and by the following multiple stakeholder groups. And we’ve developed our financial system, our governance system and our goods and services products, and our strategy to straddle those constituencies.

Jason: And so what we’re likely talking about often talking about are creating different classes of ownership within a cooperative. That often involves founders. We create special rights and privileges for founders to attempt to get somewhere close to the traditional kind of founder status within a corporation, knowing that we’re not going to be able to simulate the kind of upside potential for a founder in a co-op, but we can create some level of special recognition and economic gain for them. We might have a separate class worker owners, the back office that’s doing the day-to-day business development and tech engineering and the folks who are not founders plus advisors and other consultants. And then we might have one or more classes for the primary constituents. So there may be a taxi cab or transportation co-op where, that constituency is drivers.

Jason: A multi-stakeholder co-op might have drivers, and then it might have its consumer members as a separate class. And so what we’ve created is a miniature economy for the transactions that are necessary for this cooperative to create and equitably distribute value. And we prescribe the economic and governance relationship between those stakeholder groups. And we’re creating essentially a complex miniature economy for the transaction of goods and services on a cooperative basis where everyone’s economic benefit from the surplus, the profit of the enterprise is rooted in their contribution of what’s known as patronage or patronage, which is the value of goods or services that they either contribute or purchase from the cooperative.

Jim: Interesting. And certainly much more nuanced than the traditional choice of either an employee owned co-op or a consumer owned co-op. And one of the, as I understand it at least, the attributes of a classic simple co-op is the one person one vote rule and a single class and all that sort of thing. Sounds like you guys have moved well beyond that in your thinking.

Jason: Yes and no. We’re still operating within the one member, one vote framework. That democratic form of ownership we recognize is not the same thing as saying one member, one vote for operations and for management. You don’t have your credit union calling members every day or every week on routine matters of policy or procedure or business strategy. We delegate that through the board of directors, to the management team and to the employees. Likewise, even multi-stakeholder, co-ops delegate those core functions to professional management through its board of directors. What’s different is that we’ve created a rich and decidedly complex governance system, meaning that a board of directors might be comprised of directors elected by these different constituencies, sent to Washington to do the members business and hammer out compromise.

Jason: We’ve essentially simulated the equivalent of a house of representatives for these multi-stakeholder co-ops because we know that the interests of employees might not be the same as the interest of founders or the interest of even investors. But we want to form an organ of governance to hammer out compromise and address the equities of governance decision-making on behalf of members. And there’s a form of democratic accountability to that, which is the members are elected, the directors are elected, I’m sorry. And so we’ve kind of attached the ideal version of functional governance with business ownership by leveraging and utilizing both new and existing forms of management.

Jason: Some of these are more self-managed and some of these are more sociocratic or holocratic, or some other kind of newfangled form of distributed decision-making, but others are more conventional. And at the end of the day, we’ve created the necessary tools of transparency, accountability, and democracy to make the system work and make it truly accountable in ways that in some cases, even public benefit corporations can’t go far enough to do.

Jim: Quite interesting. Now are these multi stakeholder co-ops supported by the state law in all states? Or is this something that’s always supported in some states?

Jason: Not every state has a cooperative statute in the US unlike in many other places, corporate law, organizational law for that matter is principally the domain of state law, unlike say securities law or employment law which has state law, but also regime or federal law. There’s no federal corporate law. There’s federal regulation of corporations through tax and securities, but we’re dealing with state law. Cooperatives have not undergone the level of harmonization that has been applied to corporations and LLCs, or even partnerships or associations for that matter. And so we still have a patchwork of state law.

Jason: And a lot of cooperative laws are really rooted in the specific lobby that passed the law. So we might have states that have just agricultural co-op laws or just credit union co-op laws. Or a state like Florida interestingly, only has producer co-op laws for citrus growers or housing co-ops for their resident population, but they don’t have a general co-op law that allows for anything else, like a worker co-op or consumer co-op for that matter. So not every state has a co-op law period, and certainly not every state has a flexible or general purpose co-op law that would allow for worker ownership or even multi-stakeholder ownership.

Jason: And so we have identified that there’s a specific emerging uniform law called the Uniform Limited Cooperative Association Act. It’s been adopted in I believe 10 US jurisdictions. It was drafted and adopted by the Uniform Law Commission in around 2008, 2009, and the first wave of six or so states adopted a version of that statute in around 2010 or 11. Colorado was in that first wave. We’ve seen another recent wave in the last year or two with Washington State and Illinois adopting versions of it. And that form of statute is flexible enough to accommodate multi-stakeholder cooperatives. And we’ve actually branded Colorado as the Delaware of cooperative law, by which cooperatives or businesses should form sharp and look to laws that are flexible and robust like Colorado’s laws and treat it like corporations have been doing since time immemorial to form under Delaware’s corporate law.

Jason: We actually have three different general purpose cooperative laws in Colorado, and they provide a great deal of flexibility and can be incorporated regardless of where business is done. And we can qualify that business to do business in just about any other state.

Jim: That’s interesting. I did not know about that ability to play Delaware game. I always assumed that if you did the co-op, you were stuck with the state that you were in.

Jason: Nope. And that’s why we hark into the Delaware reference there because corporations and startups have elected Delaware law for more than a century. And the reason for that is fairly arcane. It’s actually because once upon a time before corporate law had made its way through the jurisprudence in states across the land, business lawyers view the Delaware Chancery court as the Genesis of contemporary corporate law. And that was before we had any sort of uniform corporate statutes. Now in the ’70s and beyond, there was a real move to harmonize corporate statutes across the country. And so by now, most states have a version of a standard uniform business corporations law, and the state courts have either developed a body of corporate law, or will reference the Delaware Chancery court law.

Jason: And so, there isn’t as much of a pressing benefit to forming under Delaware law, but it’s still custom, it’s still tradition. We’re kind of nodding to that tradition in the cooperative space and telling founders that where there’s a strong body of law or a strong set of statutes there’s no reason not to look to incorporate there. And, just like say Facebook is probably organized as a Delaware corporation, even though their headquarters is in Silicon Valley. There’s really no reason that cooperatives can’t do the same and form under flexible, favorable law like Colorado’s Limited Co-op Association Act and do business in Iowa or Arkansas.

Jim: Interesting. That’s something new I’ve definitely learned today. I have to keep that in my working kit. Here in Virginia, we have a thing called the foreign corporation status. If you do incorporate in Delaware, you still have some taxes you have to pay to Virginia if you want to have your headquarters here. And if you’re not careful, it could be somewhat onerous. I wonder if the foreign corporation rules apply to co-ops?

Jason: Yeah. That’s exactly what I’m getting at. So every state has a mechanism for a business to become authorized to do business there. It’s a little bit like generating income and developing what’s called tax nexus. It’s a little bit the same and a little bit different. But for any business to quote, do business in a state there’s a certain legal test based on the facts and circumstances of that business’s operation that may or may not require a business to register there as a foreign entity. A foreign entity meaning it is incorporated under the law of a different state.

Jason: And precisely as you say, for say a Colorado limited cooperative association that wants to do business in Virginia, we would register the business as a foreign entity under Virginia law to avail it of the protection of Virginia law. And that might require it to pay a filing fee. And, separately, but relatedly, it might also require them to file a tax return in Virginia. But that’s based on a slightly separate analysis of how income is earned and recognized versus whether business is done there. There are two slightly different analysis.

Jim: Interesting. Very interesting. Let’s go back to this multi-stakeholder forum. This really sounds extraordinarily interesting. I’d like to dig into it and learn more about this. One of the bottlenecks that the conventional either worker co-op or consumer co-ops have had is it’s relatively difficult to raise outside capital, at least in any form other than very traditional debt. Because you run through a scenario where you could use your multi-stakeholder structure to raise slightly sportier forms of investment than very basic debt.

Jason: First thing is most of these multi-stakeholder cooperative forums are relatively new. And so we’re still largely operating in kind of in uncharted waters, pick your metaphor or an untrodden path or an environment with no playbook. And so all we really have are the deals that have been struck using creativity and actual deal-making.

Jason: We have successfully advised clients, we’ve successfully structured what I would consider exotic venture capital financings of multi-stakeholder cooperatives separately. And, the first thing to recognize is that, for a startup, whether it’s a cooperative or otherwise debt financing is just not available. There’s often no collateral and no revenue to secure or help underwrite debt. And so equity is really the only thing available other than revenue. And I tell clients, revenue is actually the cheapest source of capital that you can raise. It’s also the more liberating I should say. But when that’s insufficient or not available, then some form of equity capital needs to be raised.

Jason: Now equity in a multi-stakeholder co-op is different for a variety of reasons. First, a cooperative is designed to operate for buy in of its members. It’s not designed to grow fast and sell big. And so if it’s designed to center the needs and wants of its members, then it may not operate in an environment of perpetual growth. And so without perpetual growth, you’re not able to offer an attractive value proposition to traditional venture capital. Venture capital’s looking at early stage companies that grow to large scale and ultimately liquidate either through corporate acquisition or IPO or going to private equity for a sum that more valuable than when the investor invested.

Jason: So enterprise growth in the cooperative sector is not keyed to liquidity. It’s not key to an exit. So the investor return has to come from somewhere else. If they want their money back and they want a rate of return has to come from somewhere else. So we have been operating on the equity financing side with a species of financing called revenue-based financing or performance-based financing or cashflow financing. And it’s a little bit of a hybrid. Some call it quasi equity, some call it synthetic debt. It’s really a form of equity that is not guaranteed to be repaid. It doesn’t come with an interest rate, but it comes with an expected rate of return that’s generated through the cashflow and profitability of the firm, either in the form of capital appreciation or more often dividends. And so the dividends accrue based on some metric revenue, EBIDTA, net income, and those dividends can be accrued and paid out.

Jason: There are some limitations under state law, as well as under the tax code for cooperatives. And so that rate of return is not totally open-ended. And it has to be structured very carefully under state law and under a subchapter T tax law. But, there is a mechanism to pay a reasonable rate of return for early stage investment in a multi-stakeholder co-op provided that that return is generated from the performance of the firm, not from some liquidity event and likely not through some third-party sale, meaning we don’t typically look at co-ops and say to investors, “Well, someday the shares will be worth more and you can go out and try to sell them to a third party.”

Jason: Now that’s possible. Some are looking at secondary markets for some of these shares but, the way to value an equity stake, or a share of a co-op, is very, very different than valuing the equity or a share in a traditional corporation because that share doesn’t come with pro-rata control it. It doesn’t come with X percent of a company. It comes with a specific, as you say, sporty structured gain share, or profit share or dividend. And it comes with very constrained voting rights, or sometimes no voting rights. Sometimes it has no control rights. And so these are usually fairly exotic and bespoke terms that come with these shares.

Jason: In some of these cases, these co-ops are actually growing revenues quite quickly. I would say there’s no reason to believe that the aggregate return on investment of some of these shares is all that different from a venture capital internal rate of return. It just looks different, and that’s what scares traditional investors, because it is new and different and takes some learning and familiarity. But I think we’ll get there. I think we’re close to seeing a trend.

Jim: One could easily imagine with this kind of flexibility, which I did not know existed, you could attract, if not yet traditional VCs, at least the equivalent of angel investors, particularly those that have a multi-part bottom line they’re looking to do good as well as do well.

Jason: Yeah, precisely. I think that’s the right place to look. And I think angels tend to be a little bit more comfortable with more creative or exotic terms. There’s also a growing movement of alternative finance, alt finance or impact finance that is looking at these revenue-based financing instruments. There are practitioners that Mara is deeply connected to and involved with. There are investors who are moving in that direction. There’s a group called IndieVC, it’s an investment fund operated by a gentleman, Bryce Roberts, I believe, out of salt Lake City or that area. And they strictly use revenue-based financing for their investment terms. And those are often early stage companies that are in sometimes pre-revenue, but, just beginning to earn revenue.

Jason: And so I think, we’re starting to see, the analysis of this, what I call kind of biodiversity. And there’s a woman based in South Africa, who’s actually writing a book, a definitive book about these self-liquidating alternative financing instruments.

Jim: Interesting. I will point out the want to be entrepreneurs in the past, I’ve called revenue based payouts revenue trusts, and they work okay in very high margin businesses, but they can be really dangerous in low margin businesses. You could be paying out dividends while you’re actually losing money and don’t have a pile of cash flow. So a lot of serious thinking needs to go into your financial modeling to see if a revenue payout will work for you.

Jason: Yes. And again, that has to be carefully reviewed under state law. State statutes will very often prohibit making distributions out of a company that’s either insolvent or unprofitable or where the liabilities exceed their assets. So it has to be very carefully constructed to comply with state law. As you say, modeling is number one. I tell all clients before proposing any of these creative term sheets that they need to do the diligent financial modeling to make sure that these expected returns are sane and achievable.

Jim: Yep. My wife and I, on my side, I tend to dabble in very high margin, exotic software, online services, et cetera. And while my wife tends to look at alternative agriculture, and those businesses have very minimal margins. So while a revenue flow model works fine for the kinds of things I would look at, they do not look good at all for alternative agriculture.

Jason: Yeah. And I mean, we have to be realistic with what the underlying business model is. We have to avoid the temptation to financialize these companies and alternative agriculture is chiefly focused on producing healthy food and feed for people and animals in a sustainable way. It’s not generally to create positive cashflow. They’re often reinvesting in equipment or in stock and distribution.

Jason: I think to your point, this is really about tailoring financing for the underlying business model. And that ties right back into cooperatives, which is these multi-stakeholder co-ops are really about their membership. They’re not about creating cashflow engines for investors. And so investors have to understand that at some level, their financial return is subordinate to the needs and value created for workers or for their members. And so there’s a degree of member centricity that’s baked in.

Jason: I think, the original social enterprise impact investment. I mean, if impact investors are looking at positive impact, look no further than the cooperative. The cooperative puts the needs of members front and center. And if that membership is either an underserved or inequitably excluded cohort, either black, brown, indigenous, underserved farmers, then investing in a business that serves their needs is in and of itself an impact investment, regardless of how it provides goods and services in the marketplace.

Jim: Very good point. And we’ve done a really excellent and informative deep dive into these new exotic multi-stakeholder co-ops and I’ve really learned some valuable stuff here today, but there are plenty of other entity structures that people have that are worth considering. Maybe we could go over some of those.

Jason: Happy to. We do work actually with a fairly traditional structure, the limited liability company, I mentioned this earlier. The limited liability company and even the traditional corporate structure, both of both can be adapted to social and environmental purposes and missions. We’ve created broad-based ownership structures within the corporate forum, within the LLC forum. And I think that’s really the unsung story of both the employee ownership world and the kind of broad-based ownership world, which is, there are many, many, many more LLCs and small corporations than there are businesses ripe for cooperatives or ESOPs, and it’s actually fairly easy to amend an operating agreement to broaden the ownership. And so we’ve been able to create more broad based ownership within LLCs, within corporations.

Jason: Now in terms of other more recent advents, there’s the public benefit corporation form, which is now available as a statutory entity in more than 32 jurisdictions in the US, as well as under jurisdictional law in many countries. It’s the creation of B lab, which is the nonprofit that created the B Corp certification. And it’s a legal entity form that accompanies the certification, but the legal entity form purports to solve the shareholder primacy issue.

Jason: So the privacy issue, as we said, is this perversion of doctrine that holds directors and officers to the highest legal standard under the law, the fiduciary legal obligation to maximize shareholder wealth. And it says that any decision that does anything other than, or has any purpose other than maximizing shareholder wealth, exposes officers and directors to a derivative lawsuit on the basis of breaching their fiduciary duty. And it has led to directors and officers making very myopic and very narrow financial decisions. And it tells directors and officers… This is an analogy I borrow with credit to other practitioners, which is that the shareholder primacy notion tells directors and officers that they are better off spending $1 to pollute a river and pay money damages than to spend $10 cleaning up the river and changing their supply chain. Because, their objective is to minimize financial risk and maximize shareholder return even if it means poisoning a river and killing people.

Jason: Now, that’s obviously a highly simplified, colorful analogy, but the doctrine holds true. So the public benefit corporation form was a model statute that B lab and others collaborated to create. And I worked in concert with them to draft and adopt the statute in Colorado back in 2014. And it says to directors and officers one, it’s an elective form, so it’s not obligatory. The shareholders and the board have to choose this legal form. It’s a legal form of a corporation. So a corporation can elect to be treated as a public benefit corporation if it adopts in some states, a specific public benefit that they articulate, our business shall be to protect clean air and clean water in our business operations, as well as subscribed to general public benefit purposes, which are laid out in the statute, and to operate in a sustainable and ethical fashion. There’s both a means and an ends component to being a public benefit corporation.

Jason: And in exchange for that higher purpose, there’s legal protection for officers and directors. And that legal protection immunizes directors and officers from considering the interests of the stakeholders affected by this purpose, and by making a decision that carries out this alternative purpose. And in exchange for that legal protection, there’s higher standards of accountability and purpose.

Jason: That’s a mouthful. That’s the public benefit corporation. Now, there are also movements to enshrine purpose and mission in a legal vehicle that is more or less enshrined and protected from private interest. And so there are different structures for putting the purpose and mission of a company in legal trust in a way that’s carried out by a totally third party trustee or a group of trustees and their purpose is to protect the mission of a business, both in ordinary governance, as well as in the event of hostile takeovers or acquisition tender offers. And it’s to act as the kind of better angel on the shoulder of a corporate board that is considering a lucrative financial proposition. And so there are perpetual purpose [inaudible 00:59:07] that have been created to own the stock of a company or to hold a golden share of a company, and so there are various models for using that.

Jason: That structure has also been used to create something called a worker ownership trust, which is to create, again, a business where the shares are put in trust. The trust has a purpose of perpetuating worker ownership and worker benefit. And so it’s purpose is actually pay living wages, treat workers fairly and equitably, provide them benefits, reduce turnover. It’s not a direct beneficiary trust, but it’s a purpose trust. And so the trustees are legally obligated under the trust instrument to carry out that non beneficiary purpose. Those are just the other forms that are available and being toyed with.

Jim: That last one, the golden share of the trust is one I know about. A company I was along with affiliated with Thompson Corporation, when they acquired Reuters, Reuters had a golden share that was protected in a trust that was designed around protecting the independence of the news operation. And the company could not be sold without the approval of this trust, which owned one share, but it was the golden share, and there was some very extensive negotiations about the preservation of this trust after the acquisition. And actually the trust continued to exist after the acquisition and continue to defend the editorial independence of the news operation.

Jason: Yup. That’s a great, great example. And that’s a structure that we’ve used in some of our financing transactions and some of our legal structure work. And there’s a group based in Germany called Purpose Ventures and Purpose Network. And they’ve been creating some thought pieces and some case studies around this form of trust ownership, and there’s some use cases here in the US. I think that’s a great example that you just cited too.

Jim: It sounds like it could have also been a solution for the case I gave where SAIC was set up as an employee of incorporation with the intent of the founder. But when the founder got booted out eventually, then they got converted into all kinds of high powered, half public, half private, et cetera. If he had been thoughtful enough to wrap the employee ownership condition around such a golden share trust, that might not have happened.

Jason: Yep. Precisely. Yep. It sounds like, at the time, a fairly creative tool for a pretty intentional purpose and that purpose came to pass. So kudos. That involves some creative lawyering I’m sure.

Jim: Yep. Indeed. There’s another form that some people in areas that I work in are interested in, which is the land trust. Do you have any expertise in that?

Jason: I don’t. As some like to say, I will say I know enough to be dangerous, but not enough to be fully educated and articulate on the matter. I believe that at a high level, what a land trust is, it can be used in a couple of different ways. But, land is not just the physical immovable identifiable parcel, but it’s the embodiment of speculation and aspiration. Meaning by that, what do we do with land? We extract from it, we build upon it, we conduct commerce on it, we house people on it. And so the land trust is a legal structure that protects certain uses of land by taking it out of the speculative market. And usually that involves removing development rights or even speculative financial value off of land by putting those deep dis-aggregated or unbundled versions of land rights into a trust.

Jason: And the trust, has its own kind of legal protection and legal purpose to not carry out speculative activity, to play the market and buy land low, develop it and sell high. And so the trust is able to kind of then lease out certain rights or license out rights to do things like build affordable housing or preserve recreational space, or keep land unoccupied and green, by stripping off the development rights and putting them either in the deed of the land or just in a legal instrument, putting those rights outside of private commerce. And it’s essentially kind of taking them out of the marketplace that provides that degree of protection.

Jim: Yeah. You probably know a little bit more than I. Yeah, that seems pretty close. And you can also do clever things like for instance, a group of farmers could put their land into a land trust and then do some small amount of say vacation development around the edges and all jointly profit from that development as an example.

Jason: Yeah, that’s right.

Jim: And yet preserve, let’s say 90% of the land must be preserved for agriculture. And so when people buy in, they realize they’re going to be next to a stinking dairy farm, that’s right there in the deed. This land is reserved for agriculture, including the current incumbents in perpetuity. So it’s, again, one of those interesting forms which has been around for a while, but which isn’t too well known.

Jason: Yeah, exactly. Now I just know a little bit. I live in Boulder and the city of Boulder has kind of an alternative version of that for their affordable housing program, wherein the city will not use a separate legal vehicle like a land trust, but rather uses deed restrictions in the deed itself to limit the market appreciation of the land and of the dwelling or improvement on the land. And so I think there are different legal devices to solve those particular challenges and issues. And of course, that’s deeply rooted in the state law of real property.

Jason: There’s something called the rule against perpetuities, which can become an issue for trusts and trust law. So whether a trust is used or deed restriction is used, I say that’s out of my wheelhouse because it does involve fairly deep knowledge of trust law and of real estate law or real property law. Because there are these pretty arcane doctrines from English and French law that we’ve imported that can create some unintended or unforeseen consequences to using one structure or another.

Jason: Whenever we try to do things like put restrictions in perpetuity or exercise what’s called dead hand control, there are legal doctrines that limit the ability for people to alienate property as it’s called, or dispose of property or restrict property in perpetuity. We should understand part of the philosophy is because under Western law and our real property law comes from the French, there’s a philosophical preference for using property to its highest and best value. And so when we restrict the ability to put real property or other property to its highest and best value, the law disfavors it and says, not so quick. And so even with land trusts, and even with these deed restrictions, we have to be very cognizant of these legal operations that undo those perpetual restrictions.

Jim: That’s a good warning that if you proceed in this direction, make sure you find a professional advisor who knows the intricacies of medieval French landlords.

Jim: So we’ve talked about some quite interesting, innovative and modern ways of doing more beneficial forms of entity construction and operation. What kind of industries have you actually applied this in, or that of these kinds of ideas have been applied in? You have quite a list of them on your website.

Jason: Yeah. I would say almost, it seems that they could apply in any industry, any sector in any stage of business maturity. We’ve done this in farming and agriculture. We’ve done this in value add food production. We’ve done this in professional services. We’ve worked with consultancies, with law firms, with accountancies. We’ve done this with transportation providers. We’ve done this with manufacturing and light industrial applications. We’ve done a lot of this work with food, beer, beverage producers, and we’ve done this with networks and movement organizers and political networks as well. We’ve certainly done this with technology, wherein we’re looking at platforms and again, virtual networks or communities of people.

Jason: I think where they tend to work is where there’s a fairly homogenous cohort around which we can design. And by that, I mean, similarly situated people or entities that can come together to address a need or a problem or an opportunity together.

Jason: That can exist anywhere. I mean, we’ve built a driver own taxi cab company in Denver. We’ve worked with transportation network companies, alternative to Uber and Lyft. We’ve worked with architecture firms, law firms. We’ve worked with Mara and the dazzle community of alternative founders and underrepresented women and people of color owned startups. We’ve worked with impact investors, even, and foundations and nonprofits to both invest in and consider some versions of this in the way that they operate even to democratize their own operations.

Jason: So these are almost, I wouldn’t say universal, but they’re fairly generally applicable legal structures and certainly broadly applicable strategies. Even if the legal structure may not apply, say to a nonprofit, there are ways to democratize management or create self-managing teams within a nonprofit even if it’s not finance driven or profit distributing business entity.

Jim: Well, very good. And not just for food co-ops anymore, it doesn’t sound like.

Jason: No. No, I like to sometimes say that we’re not talking about your grandparents’ food co-op anymore. We’re talking about really a 21st century version of business enterprise these days. There’s been a lot of innovation to keep up with the innovation in technology, in organizing and political and social consciousness as well.

Jim: Well, Jason, I want to thank you for an extraordinarily interesting presentation. Without a doubt, the best I have ever heard on how to use these non-traditional business entity forums to accomplish worthwhile goals towards democratizing capitalism, essentially, and maybe saving capitalism from itself, maybe so, right?

Jason: Well, that’s ambitious. I sure hope so. It’s been a real pleasure here. I’ve enjoyed talking to you and sharing some of the ideas and structures that we work with. Let’s hope that there’s salvation somewhere in here, for sure.

Jim: Yeah. And anyone who wants to talk to Jason, get his services, Jason Wiener, PC Boulder, Colorado. And again, the link will be on the episode page. Thanks again.

Jason: Thank you.

Production services and audio editing by Jared Janes Consulting, Music by Tom Muller at modernspacemusic.com.