Raising the Stakes?

The ability to raise capital -- to collect a little bit from a lot of people and build something greater than anybody's bit could have built alone -- is one of the great strengths of the cooperative model, and that defining characteristic makes us different from nonprofit "community based" enterprises as well as conventional investor-owned markets. Equity means ownership, and widespread ownership brings the opportunity for the kind of care and commitment and "buy-in" that make our stores unique. As cooperatives, we are in the business of bringing together stakeholders, not just enriching stockholders.

From a financial point of view as well as a community organizing perspective, equity is golden. An adequate equity base allows the co-op the freedom to make sound long-term choices and to take advantage of opportunities:

  1. By definition, equity is designed to be the kind of low cost, patient capital that provides the funds the co-op needs to make long term investments that will result in overall benefits to members.
  2. Equity dollars also make it possible for the co-op to leverage other dollars from outside sources such as banks. Before putting a buck in your business, the lender is going to want to know how much the owners have sunk in it.
  3. Equity combined with a solid member education program allows us to differentiate ourselves from all the "frequent buyer" programs and pseudo-membership gigs out there. This is not a Sam's Club we are running, we are a network of cooperatively owned, democratically governed, community based enterprises.

First: make money!

But oftentimes it is difficult to raise enough equity for the business simply through memberships. Particularly when a store is faced with rapid growth and expansion opportunities, the "trickle in" approach for member dollars just isn't enough. Where else can a co-op turn for equity of "quasi-equity" funds? The first place to look is retained earnings. For a long time, retained earnings were anathema to the co-o movement. We prided ourselves on our ability to live just on the margin -- no dirty profit for us. By now, however, we have all heard enough sad stories of communities losing their co-ops when these marginal enterprises just couldn't hold on. Your members are counting on you to take care of their investment and build them a store of which they are proud to be an owner. This takes money, and making money in the first place is still the best way to get there.

When additional equity capital is needed for a specific project, many co-os initiate the sale of a different class of shares (often class "C" stock) that, unlike member shares, pays a regular dividend. This approach has potential, but it is essential to get sound legal advice on both the cooperative laws and securities laws that might govern such a sale in your state.

A much more popular method recently for raising additional member capital is to start a member loan program. Unlike stock dividends, the interest paid on member loans is a tax deductible business expense, and co-op members across the country have proved themselves willing to loan hundreds of thousands of dollars to help their co-ops expand and grow. Again , since the parameters governing a member loan program vary greatly from state to state, it is crucial to get sound legal advice before initiating a member loan program. [See also "Member Loans and Securities Laws," CG #35, July-August 1991.]

A final source of quasi-equity or patient capital not to be overlooked is funds potentially provided by other community resources with a stake in the cooperative's future. Landlords, public sector agencies and community based nonprofits have all recognized the value that cooperatives hold for communities and have contributed to co-op success through grants or unsecured loans.

Sound suggestions all, but there's nothing new in this bag of tricks. Even with a full arsenal of member programs, growing stores often face the accelerated costs of expansion projects. Raising adequate equity for growth is a real challenge. Investor-owned companies with high growth potential can look to venture capital firms. Is it time we organized our own cooperative source of venture capital? Let us know what you think!

See other articles from this issue: #076 May - June - 1998