Equal Exchange is a worker-owned cooperative business based in Massachusetts that has created an amazing model for fulfilling its mission while simultaneously making money for its investors.

Equal Exchange purchases coffee and cacao from farmer cooperatives throughout the world and processes it into products that it sells to retailers.  All products meet rigorous standards for fairness and sustainability.

All of the employees of Equal Exchange (with the exception of new employees that have not completed an initial probationary period) own voting shares in the business.  Only employees may own voting shares.  The employees elect the board, with each employee having one vote.

To become a worker-owner at Equal Exchange, you are required to buy your ownership share, which currently costs $3,250 (the amount is adjusted for inflation each year).  To ensure that all employees can afford to buy their share, Equal Exchange offers a four-year no-interest loan for share purchase.  When employees leave, they must sell their share back to the cooperative.

In addition to voting rights, the employees are entitled to a share of the profits.  At the end of each year, 40% of the after-tax profits (or losses) are allocated to the workers.  Last year, each worker’s share was approximately $5,000.  The remaining profits stay in the company as retained earnings.

The company has been profitable every year but one for the last twenty years.

When the company needed to bring in outside capital, it created a second class of shares – a non-voting share.  These shares were originally priced at $25 (the price was increased to $27.50 after demonstrating a track record for paying reasonable returns).  After an initial offering to friends and family, the company sought out accredited investors to purchase shares in private offerings.

In exchange for their investment, the non-voting shareholders receive an annual preferred dividend (paid before the workers receive their patronage dividend).  The board decides each year how much the dividend will be, with a target of 5%.  Most investors choose to reinvest their dividend in non-voting shares.  The investors may redeem their shares after five years.  The shares are non-transferrable.

The following chart shows the performance of the Equal Exchange non-voting shares compared to the S&P 500 over the last 10 years.

Equal Exchange set up its financial model so that, while workers and investors can benefit from company profits, no one can benefit from increases in share prices.  This brilliant innovation ensures that none of the company’s stakeholders will ever be tempted to sell out to Starbucks or Hersheys.  The way this was accomplished was to prohibit the transfer of shares and to include a “sellout protection clause” in the company’s formation documents.  This clause requires that if the company is ever sold, all of the capital gains will be donated to fair trade organizations.  The workers and investors cannot receive capital gains on sale.

Many cooperatives have a great deal of difficulty raising outside capital because few investors are willing to purchase non-voting shares.  Yet Equal Exchange has raised over $8 million by selling non-voting shares.  How did they do it?  A number of mechanisms give non-voting investors comfort that the interests of the voting shareholders (the employees) are aligned with their interests.

These mechanisms include the following:

• The highest paid employee at Equal Exchange can never be paid more than four times what the lowest paid employee receives – this ensures that Equal Exchange’s profits will not be diverted to pay outrageous salaries
• The worker-owners receive half of their patronage dividends in non-voting shares so they have an interest in paying a fair return to the non-voting investors
• The workers are required to invest their own capital in the company and share in profits as well as losses, giving them a meaningful stake in the success of the company
• The workers spend time visiting the farmers and learning about how the company operates, putting them in the best position to make decisions about how the company is run.

The only thing that was missing from the model was a way for the public to invest in Equal Exchange.  The cost to sell shares to the public is prohibitive (as discussed at length in previous blog posts).  To remedy this problem, Equal Exchange partnered with a bank to create a company-specific certificate of deposit.  Investments in the CD go to a line of credit that can be used by Equal Exchange as working capital.

For more information, see Equal Exchange’s web site (http://www.equalexchange.coop/index.php) and blog (http://eeinvest.wordpress.com/).

Related posts:

1. Are cooperative patronage dividends subject to employment tax?
2. Important Tips for Employers
3. More employment law basics for California employers – a guest post
4. Proposed reforms from the SEC Government-Business Forum on Small Business Capital Formation
5. Love a Local Business? Advise it to be careful about selling shares!

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