A Creative Tool For Financing a Worker Cooperative
by Erin M. Kesler
Real Pickles sold its first jar of organic dills in 2001, when founders Dan Rosenberg and his wife, Addie Rose Holland, decided to turn their pickle-making hobby into a business. By 2015, the business had grown to over than $1 million in revenue.
As the Rosenbergs began to consider the long-term sustainability of the business, they wanted to enshrine structural tools that would help keep Real Pickles in the community for the long-term and ensure that the company continued operating by the values it had been founded on. The solution, they determined, was to bring the workers on as co-owners and establish the new company as a worker cooperative. The financing mechanism they used to achieve this, an innovative financing tool called a direct public offering, offers lessons in grassroots financing for employee-ownership.
In 2012, the co-founders and staff members of Real Pickles together formed a new corporate entity, structured as a worker cooperative, to purchase the business. For the initial equity, the five employee-owners each purchased a $6,000 membership share. They then faced a hurdle of raising more than $500,000 in financing for the remaining buyout plus working capital.
Issuing preferred stock was considered the most viable option. The aim is to pay investors a 4 to 5 percent annual dividend; this was deemed more workable than the 8 to 12 percent interest likely to accompany debt financing, or the approximately 15 percent annual return needed for a royalty arrangement (in which royalties are a percent of profits). Adding a touch of creativity, Real Pickles decided to issue these preferred shares through a direct public offering (DPO).
A DPO is similar to an initial public offering (IPO), in that the business can advertise the offering openly and can accept unaccredited investors; yet because a DPO is offered on a more limited geography, SEC filings are not required (therefore it costs substantially less in legal fees) and the investors have ties to the local community (meaning many are stakeholders who care about the company, such as customers and neighbors). Real Pickles was assisted by Cutting Edge Capital, which has helped more than 60 clients launch DPOs.
Real Pickles set the minimum investment through the DPO at $2,500. This was a “key decision,” Rosenberg has said. “It was a figure low enough to allow for relatively broad participation, while high enough to keep our investment pool at a manageable size.” Shares are non-transferable, except to the coop, and they target a 4 percent dividend when the board decides to distribute dividends. Shares must be held for at least five years, at which time they may be sold back to the company at the same price for which they were purchased.
Real Pickles sold $500,000 in shares to 77 investors; some of whom were individuals that tapped their self-directed individual retirement accounts to access the capital. Institutional investors included consumer co-ops that purchase from Real Pickles, other wholesale customers, one supplier, a foundation, and a CDFI. The company originally planned a six-month campaign, but the shares sold out in two months. Employees completed the purchase of the business in May 2013.
Adapted from The Democracy Collaborative report, Strategies for Financing the Inclusive Economy.