impact investing in worker cooperatives webinar 042617_final_updated

1 1 © Project Equity 2017

Impact Investing in Worker Coops: How to get involved

Webinar

April 26, 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


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


1. BACKGROUND


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


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


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


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


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


Two publicaAons coming out of > 40 interviews about paAent capital invesAng in worker coop conversions


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


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


2. DIRECT INVESTMENT, PREFERRED SHARES


Transforming Energy. Transforming Business. ™


About Us

•  Worker cooperaDve

•  12 years old

•  165 employees –  ~50% are “co-‐owners” –  ~25% are “candidates”

•  4 offices in CO, NY, CA



About Us

•  2016 revenue: $50M+ –  CAGR: 50% since 2005

•  Working capital: $15M+

•  Paid-‐in-‐capital: –  Co-‐Owners: ~$1M –  External investors: ~$4M



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


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


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


Examples

CooperativeYear

FoundedCapital 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%


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


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


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


3. INVESTING IN A COOPERATIVE CDFI LOAN FUND


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



•  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



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


Shared Capital Lending: Worker Co-‐op Conversions Electric Violin Shop Durham, North Carolina


Shared Capital Lending: Worker Co-‐op Expansions Hub Bicycle Co-‐op, Minneapolis, Minnesota


Shared Capital Lending: Worker Co-‐op Start-‐ups eQuality Home Care CooperaDve New Braunfels, Texas


Shared Capital Loans: CooperaAve Businesses & Housing


Shared Capital CooperaAve Impact in 2016


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


CDFI loan funds that specialize in cooperaAves and/or employee ownership


InvesAng in Shared Capital CooperaAve



Common Stock



•  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


4. INVESTING IN A LARGER CDFI LOAN FUND


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.


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


Financing OpAons


Our Impact


$-‐

$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


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


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


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


5. INVESTMENT CROWDFUNDING


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


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


QUESTIONS?

Blake Jones Co-‐founder & Co-‐owner Namaste Solar [email protected]

ChrisAna Jennings ExecuDve Director Shared Capital [email protected] Ma> Gla@ng Treasurer Capital Impact Partners [email protected]

Alison Lingane Co-‐founder Project Equity alison@project-‐equity.org Annie McShiras Investment Associate Self-‐Help Federal Credit Union amcshiras@self-‐helpfcu.org


APPENDIX


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


•  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