Publish Date: March 16th, 2016

This article was originally published in Entrepreneur Magazine by Michelle Goodman. 

When Boulder-based solar energy company Namaste Solar first went looking for capital to expand in 2004, it could have gone through the hassle of securing a bank loan or put together a dog-and-pony show to attract outside investors. But the company decided it wanted to partner with the people who knew the business better than anyone: its own staff.

Namaste invited its employees to buy up to 10,000 shares in the company apiece. The response blew co-founder Blake Jones away, with employees borrowing money from their friends and family to buy in. “The average employee investment was somewhere between $15,000 and $25,000,” Jones says. “And one person invested $100,000.”

Namaste operates what’s known as a worker co-op, a for-profit company owned and governed by its employees. Usually the domain of idealists concerned with workers’ rights, co-ops give interested employees a democratic vote in key business decisions and a cut of the profits. But they can also be a smart economic decision for businesses — so long as the conditions are right.

First thing to know: “Co-ops are almost never going to be completely capitalized by their members,” says Melissa Hoover, executive director of the Democracy at Work Institute, an advocacy group for worker co-ops. “To grow, they want to make sure the co-op can still attract outside investments.” And that can be difficult. Banks are often leery of investing in enterprises that appear to put their people before profits and exponential growth. And newly empowered workers may not want to sell off large swaths of equity to ROI-obsessed outside investors.

But if the idea still sounds appealing, organizations like the International Cooperative Alliance, National Cooperative Business Association and the United States Federation of Worker Cooperatives can help guide businesses toward a co-op structure that works for them. There are, for example, ways to keep the spirit of the program while also selling non-voting stock shares to outsiders. (A co-op “member,” after all, doesn’t have to be an employee.) That’s what fair-trade coffee distributor Equal Exchange does. Since 1989, it has sold more than $16 million in preferred stock to more than 600 individuals. “Whenever they sell, they sell out. There’s a wait list,” says Jones of Namaste Solar, who converted his company’s model to Equal Exchange’s in 2011 to expand his pool of potential investors.

A new breed of co-op is even using pre-launch, direct public offerings to get off the ground. CERO is one of them. It’s a Boston-area commercial compost hauler that raised its initial money through a local grant and an Indiegogo campaign in 2013. Then it hired San Francisco Bay Area financing firm Cutting Edge Capital to guide it through a direct public offering, which allowed CERO to sell shares to investors with a minimum investment of $2,500. More than 80 buyers grabbed $340,000 worth of shares.

Last year, the compost startup diverted more than 350 tons of restaurant, supermarket and school food waste from landfills. It expects to breakeven in 2017, and expects investors to earn a 4 percent annual dividend. “We want people to come back,” says Lor Holmes, who leads CERO’s venture development and capitalization strategies, “and invest when we decide to grow the business.”

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