Mike Leung on the Economics of Worker Cooperative Startups

Mike Leung offers another thoughtful look at worker cooperative economic structure, this time exploring startup losses.   AbstractThis paper examines the losses in the startup phase of a...

Mike Leung offers another thoughtful look at worker cooperative economic structure, this time exploring startup losses.  

Abstract
This paper examines the losses in the startup phase of a worker cooperative. The startup operating losses are shown to translate into capital losses for the founding members, which are ignored or misinterpreted under the standard accounting treatment. The losses mean the fixed price buy-in (capital contribution) is inherently equal, as later members experience no reduction of their investment. The startup losses raise fundamental questions about the interpretation and implementation of core values like worker ownership, and what qualifies as a valid (non labor based) return on capital.

Worker Cooperative Startups
Worker cooperatives are worker owned, democratically managed businesses. Worker ownership means that members appropriate any profit or loss the coop incurs. Outside investors are limited to a fixed rate of return. Democratic management means one member, one vote in the governance of the cooperative, giving the workers control. The standard worker cooperative model has internal capital accounts comprised of member investments, a collective reserve account of unallocated retained earnings, debt, and preferred equity (non-voting, non-convertible, fixed value, fixed return shares).  This paper focuses on the special case of a worker cooperative startup. Startup worker cooperatives are expected to have an initial operating loss. After the startup period worker cooperatives are generally expected to be profitable, barring unforeseen circumstances.  Worker cooperatives create a unique investment situation where initial members are required to make an investment that is expected to decline in value, something unprecedented in mainstream finance.

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