

ASK HN: Is a worker-cooperative a model for sustainable and successful business? - roder

After watching this video posted on HN (http://www.nytimes.com/packages/html/business/2009-private-equity/index.html) and seeing Michael Moore's new release over the weekend, I am wondering how viable you think it is for a startup to succeed using a worker-cooperative model (http://en.wikipedia.org/wiki/Worker_cooperative)?<p>Here's some other good resources:<p>http://www.ncba.coop/abcoop_work.cfm<p>http://www.ica-group.org/2nd%20Row/FAQs.html<p>Example Companies:<p>http://www.belugasoftware.com/overview_s.html<p>http://www.webcollective.coop/<p>http://www.isthmuseng.com/aboutus/workerownedcoop/workerownedcoop.aspx<p>http://www.alvaradostreetbakery.com/coop.html
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rg
There is one very interesting example at a fairly large scale, the John Lewis
Partnership which runs very successful major department store and food store
chains in the UK. This is a real partnership, owned by the permanent staff (no
public shareholders), with a written constitution which sets out how the
management operates and how the employee-partners participate and share the
profits.

A FAQ about the organization with copy of its constitution is online:

[http://www.johnlewispartnership.co.uk/Display.aspx?MasterId=...](http://www.johnlewispartnership.co.uk/Display.aspx?MasterId=773891b4-4508-48a0-845e-f8bf003e0975&NavigationId=681)

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ZeroGravitas
Another popular success in britain is the group of companies simply called the
Co-operative:

<http://www.co-operative.coop/aboutus/>

Note the cool domain name: *.coop

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netsp
Incidentally, Does anyone have a good resource for understanding leveraged
buyouts and how they work? I understand that this broadly means funding the
acquisition of a company by placing the debt on the target company's balance
sheet but every explanation I have read just leaves too many obvious holes:
_The goal is to buy a company for $100m and sell it for $500m._ (why does such
a gap exist and why are private equity funds the only ones jumping on it?) or
_Instead of taking on the equity themselves, the fund will place this debt on
the target company's balance sheet, not its own_ and statements like _target
companies often have strong cash flow that can be used to service the loan_
(How does a company worth $100m take on $500m in debt _without_ going
bankrupt? If it can do this [I assume they would be paying very junk bond
rates of 20% or so], that means that they could have paid that amount in
dividends to the owners instead and should be worth a lot more then purchase
price.)

It reminds me of those hack video by Guy Kiyosaki about how rich people print
money: _I create a company and invest $10,000 in it. At $0.01 per share that
is 1,000,00 share. Then I take the company to IPO and sell the shares for
$1-$2 each._ He then explains the math on whiteboard. $10,000 /0.01 * $1 -
$10,000 = $990,000. Wow! This guy is one smart cookie.

In any case, if you know any books, articles etc. that will make a dim person
like me understand, please tell.

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aaronblohowiak
Many companies are "under-leveraged". The example you gave is just an extreme.
If borrowing a ton of money means you can build new factories / expand product
lines / take on new markets, then it might put you in the red for a little
while to service the debt, but over time those capital expenditures will pay
themselves off.

You don't take out one $500m loan, you leverage yourself in many different
ways to maximize the cash you can get out of it (with the rates you pay on it
increasing over time.)

Also note that large companies that lose some money are "worth more" than
smaller companies that make a little.

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netsp
What you are describing is just normal financing. IE using debt or equity to
fund additional business activities. My understanding of a leveraged buyout is
that it usually means:

Buying a company using its own balance sheet. Borrowing at a high rate. Paying
back the loan using the companies own cash flow. Selling the debt-ridden
company off.

I feel like I am missing something. If it can service these massive loans, why
isn't it worth more? How does it become worth more after taking on this
(expensive) debt? If the company is so under financed that junk bond rate debt
is going to be well worth it, any form of financing should do. Why would you
need a private equity fund to do that? I never hear private equity funds
described as "experts at finding under financed companies and growing them to
full potential."

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netsp
I am not sure. How can I be? There aren't many examples of this existing and
something like this would have to be answered empirically. If it is roughly as
good as more common structures, then you might have an uphill battle because
those other structures have the benefit of other people's experience. To
succeed it would probably need to be an advantage of some sort.

In any case it is worthwhile (for society) having as many such experiments
happening as possible.

In many senses, you might say that you are searching for a non coercive
socialism.

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yummyfajitas
It is almost certainly very viable, provided you don't plan to get bought out.

Near as I can tell, a worker cooperative is nothing more than an LLP with a
cool name. Many law offices, consultancies and family businesses are
structured this way.

<http://en.wikipedia.org/wiki/Limited_liability_partnership>

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aaronblohowiak
I like consumer cooperatives like REI and credit unions. The incentive should
be to serve people! The profit motive is just one way of trying to achieve
that...

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jacoblyles
A worker cooperative has the incentive to maximize wage expenditures, which
isn't exactly ideal for thriving in the marketplace. The traditional
corporation's incentive to maximize profits is healthier from a competitive
standpoint.

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aaronblohowiak
If the company management runs a more efficient company, than they get more
profits.. it just so happens that the rest of the "shareholders" are also the
workers. I don't think it is right to look at the profit-sharing is not a
"wage expenditure."

Also, the desire to maximize short-term profits, as a traditional corporation
with liquid equity is incentivized to do so, often leads to a lack of
research, maintenance and other negligence that eventually adds up. The
profit-sharing employees arguably have the long-term health of their source of
income in mind and so they don't suffer the same tendency.

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jacoblyles
Good point on the idea that a coop might have a longer-term planning horizon.
However, the point that a corporation has only short-term profit in mind is
overstated. Drug companies take decades to bring a product to market, that's
some long-term planning.

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aaronblohowiak
Drug companies are a special case due to extreme regulation, research grants,
and tax breaks.

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petesalty
In San Francisco there's a very successful grocery store called Rainbow
Grocery that's a worker co-operative. I think this kind of thing can work well
on this scale but I doubt it scales very well.

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netsp
When I try to think of how it might scale, I usually end up with small pieces.

* Eg, imagine a business model similar to YC bu relying on revenues of companies they helped create rather then exits. More integrated then I think YC is. A company where divisional managers are (or start as) majority owners of their division. They raise capital themselves (with help). They run their own game. Thinking about it, it sounds similar to research institutes. These businesses would need to mature at a relatively small size to make this resemble a coop in some way.

* A franchise is something like this also. Here (in Australia) there are a lot of franchises that aim to have <2 full time employees per franchise on average.

* Limited partnerships often scale.

* Some Israeli Kibbutzes were run like cooperative businesses or cooperative clusters of businesses.

* A traditional agricultural village may actually be some version of a cooperative.

The first one is interesting in concept. I don't think that tech startups are
the best area to experiment. There is already plenty of expirementation going
on with company structure and financing.

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iterationx
maybe look at the amish or the hutterites

