Finance Your Co-opA New Guide for New Times

(Part 2 of 2)

Planning for Financing

Co-ops embody the values of community, trust, and fairness where the corporate model needs to maximize profits, often at the expense of these values. But in the end, your co-op needs to be financially sustainable.

You need to consider carefully whether your co-op is (can be) a good co-op.:

Does it provide better solutions? Can it provide products or services at lower costs? Are members able to understand the benefits the co-op is providing for them?

The Critical Ingredient

Since most start ups fail, we need to look for the most powerful driver of success.

There are really only three to choose from:The effectiveness of those running the co-op.

The quality of the services/products.

The receptiveness of the market(s) they are selling to.

A brilliant team may be able to sell poor services/products into a very good market, and a less talented team may able to sell good services/products into a very good market. In short, a strong market for what you produce can be the key driver to your co-op’s success.

What is Your "Real" Market?

Be realistic when defining your market.

Define your market from the bottom up.What segment of the market can your co-op afford to serve?

Don’t rely on expensive staff or consultants.Does a hired gun know your market better than you?

Focus on existing markets rather than creating new ones.There's plenty of space for you in existing markets.

Don’t try to appeal to everyone.Don't let distractions remove focus from your goals.

Start as a service co-op.Focus on people, let them help you define your products.

Test, test, testDon't worry about perfection, focus on improving.

In Planning, Less Can be More

It makes sense that a plan would help as a guide in building your co-op, but the planning process is based on being able to accurately forecast the future, which likely isn’t possible; even over the short term.

Planning should be restricted to factors you can control, things such as costs. Consider these (very) wise words.

"Stop presuming you can be right in a world of massive uncertainty. The only plan you should make is to plan on improvising.”

WORKSHOP: Co-op plans for investors and leaders

In spite of the “less is more” debate, there will be timers when you need to produce a plan for investors or leaders.

If you're going to do it, do it right. Download our workshop that includes the latest formats, checklists and advice on how to create a winning co-op plan.

The workshop is titled “How to create a winning co-op plan” and can be downloaded using the links below this presentation.

Creating a Lean Co-op

The Lean Co-op is about improving the odds of success.

Start with the daunting fact that most start up projects fail. And of those that succeed, more than two-thirds report changing their plans drastically along the way. What separates successful start ups is not necessarily starting with a better initial plan, but finding a plan that works before you run out of resources.

The Lean Co-op

The Lean process is about running as long as you can on existing resources with a plan that should fit on one page. The “lean co-op”:

Eliminates wasteRecognizes that time is more valuable than moneyFaces extreme uncertainty with a simple roadmap that is adaptive to changeReacts quickly to change in a disciplined wayIs always testing to improveEngages with members to decide what comes nextFocuses on product/service validation from users..

WORKSHOP: Creating a Lean Co-op

If we've learned anything, it's the value of keeping our co-ops lean.

Download our workbook on creating a lean co-op.

The workshop is titled “Creating a lean co-op” and can be downloaded using the links below this presentation.

The Lean Start Up

Based on Eric Ries’ The Lean Start Up there are five guiding principles for the lean organizationThe creative spirit is everywhere; not just in the founding of a new co-op but in large existing co-ops looking to innovate

Start ups require management in the face of extreme uncertainty

Lean start ups exist to become sustainable through learning

The main activity of a lean start up is to build, measure, and learn

Innovation accounting is needed to measure progress and prioritize work

These guiding principles are a way to manage the exuberance and change of new ideas. As Ries says: “The passion, energy, and vision that people bring to new ventures are too precious to waste.”

Finance a Growing or Existing Co-op

Adapting Public Company Financing Practices

There are two areas where co-ops can adapt the practices of publicly-owned companies for their own financing needs.

1) Develop security types that offer more appeal to a co-op’s existing or prospective members.

2) Improve liquidity. Co-ops can easily improve liquidity by using standardized preferred shares or bonds.

Co-op/Corporate Partnerships

Beyond differences in capital structure, there is no reason that co-ops and companies can’t provide financing to each other.

Especially in cases where co-ops or companies can provide complementary services.

Where a co-op has tangible assets, the following are options that can attract equity investment within the co-op framework.

Co-operatives with Capital Raising EntitiesStrategic alliancesTrust entitiesSubsidiaries

Private Company Subsidiaries

Affinity/Revenue Sharing

The rapid development of e-commerce has made it very easy to track and share revenue with other companies or co-ops.

Co-ops can use coupon codes to identify the referral sources of new members, or link out to products on other sites (affiliate sales) and earn commissions on sales.

What other opportunities for revenue sharing exist?

Financing Resources and Securities

There's no shortage of financing sources and securities, including many from other countries that may be applicable to Canadian co-ops.Bank financing

Member shares

Unallocated equity/reserves

Specialist lenders

Subordinated debt

...

There are literally dozens of financing sources available, which ones will be right for your co-op?

'Investment Banking' for Co-ops: a Critical Need

Investment banking is often associated with large, public companies raising multiple billions of dollars on Wall Street through an investment banking firm like Goldman Sachs.

However all businesses, regardless of size, will at some point require funding for capital purchases, expansion or other investments. Issuing shares or bonds to investors can be the most efficient to raise the funds necessary for those investments.

Branded Securities to Build

Co-ops and CommunityRather than each co-op devising its own securities, standardized securities would offer many advantages:Create comfort and trust (like Canada Savings Bonds) with national co-op branding

Simplify regulatory requirements by having securities pre-approved with instructions for use

Minimize legal consulting costs

Attract Federal and Provincial tax incentives

Add tax efficiency with Dividend Tax Credit and contribution to registered savings plans

Streamline the financing process where members are involved

Improve community engagement for financing of local co-ops

Easier RRSP contribution of securities for further tax advantage

CommercialSources of Financing

Credit Cards

As a startup, you don't need travel rewards or cash back. What you really want is the lowest rate possible to turn your credit card into a no hassle credit line.

Lines of Credit

Interest rates for lines of credit are usually lower than they are for credit cards, personal loans or other short-term loans. Common types of of lines of credit are:

Home equity line of creditPersonal line of creditStudent line of credit

Lines of Credit Checklist

How will you control spending on your line of credit?

Are there any fees with this line of credit? If so, what are they?

How much do you want to borrow? How much can you afford?

Do you need to make this purchase now using a line of credit, or could it wait until you have saved the money to pay for it?

How much will you be able to pay back each month?

Do you need extra insurance to cover your line of credit, to protect the co-op if you become disabled or die?

Personal Loans

Questions to ask before getting a personal loan Do you need to spend this money now, or could the purchase or expense wait until you have saved up for it?

What types of fees are charged?

Will the interest rate change and, if so, will you still be able to afford the loan payments?

What would happen if you missed a payment?

How would this debt affect your budget? Will you be able to make the required payments on this loan or on the other debts you have?

Protect Yourself

Download the Protect Yourself Checklist before you take on a personal loan.

Being aware of your rights and responsibilities is the best thing you can do to protect yourself against acquiring bad debt.

Remember, the devil is in the details!

Micro-credit

Micro-credit is the provision of small loans to individuals, to help finance income generating activities or set up small co-ops or businesses, though it really isn’t any different than taking out a small personal loan.

Established Co-ops

Consumer co-ops or credit unions in your area may offer grants or loans to local co-ops, either existing or start up. Forms may be available on their websites with a list of criteria.

Canadian Worker Co-op Federation

CCEC Credit Union BC Co-op Association Momentum

Fund

Financing fromIndividuals and Members

What you need to know about provincial securities regulations

Securities laws apply to any issuer, including co-ops, which issue securities to their owners or founders.

Financing larger issues for established co-ops are beyond the scope of this guide and should be reviewed by a securities lawyer with experience in your province.

Exemptions available to co-ops for financing

Don’t panic – depending on the size of your co-op and the amount of money raised during financing, you are not typically required to be registered or to issue a prospectus to sell member shares in your co-op.

The following slides highlight the various exemptions available to co-ops.

1. Private issuer exemption

A private issuer has:

Less than 50 security holders excluding employees and former employees (doesn’t apply to membership shares).

Restrictions on the transfer of its securities in its articles, memorandum, bylaws or its shareholders agreement.

Can sell securities only to a select group of people: directors, officers and employees of the issuer, family members, close friends and business associates of those directors, officers and employees; and accredited investors.

2. Family, friends, and business associates exemption

Under this exemption, you can sell securities in any amount without providing any disclosure to the following: A director, senior officer or control person of the issuer

A family member (spouse, parent, grandparent, brother, sister or child) of a director, senior officer or control person of the issuer

A close personal friend or close business associate of a director, senior officer or control person of the issuer

3. Accredited investor exemption

An accredited investor includes: Financial institutions, registered advisers or dealers, pension funds

Mutual funds selling only under a prospectus or to accredited investors or persons buying at least $150,000 of securities

Corporations, limited partnerships, trusts or estates having net assets of at least $5 million

Individuals who have at least $1 million in financial assets before taxes.

Individuals whose net income before taxes exceeds $200,000.

Individuals who have at least $5 million in net assets

4. $150,000 exemption

Under the $150,000 exemption, you can sell securities to anyone without providing any disclosure to the purchaser, provided the purchaser buys at least $150,000 worth of securities.

5. Employee, director, officer and consultant exemption

Under this exemption, an issuer can sell securities in any amount without providing any disclosure to its employees, directors, senior officers or consultants, provided the purchaser is buying the security voluntarily. This means that the purchaser has not been persuaded to buy the security due to a promise that he or she will be, or will continue to be, employed, appointed or engaged by the issuer.

6. Offering memorandum exemption

Under this exemption, the issuer can sell securities in any amount to anyone provided, before the purchaser signs the agreement to purchase the securities, the issuer:

Obtains a signed risk acknowledgement form from the purchaser, andDelivers an offering memorandum, prepared in the required form, to the purchaser

7. Not for profit issuer exemption

The prospectus requirement does not apply to a distribution by an issuer that is organized exclusively for educational, benevolent, fraternal, charitable, religious or recreational purposes and not for profit in a security of its own issue if:

No part of the net earnings benefit any security holder of the issuer, andNo commission or other remuneration is paid in connection with the sale of the security.

Forms you will need

Contractual agreements needed to document the selling of securities to individuals. These could include:Share Purchase AgreementShare CertificateShare Repurchase AgreementShareholder AgreementShareholder Loan AgreementShare Subscription

You can access any of these forms for a small fee at www.lawdepot.com.

Getting help

For specific regulatory question contact the securities regulator in your Province. They can also refer you to lawyers who have experience in securities issues (although not for co-ops).

Please note that these lawyers are very expensive and charge an hourly rate.

Build a Support Network

Your need for investors and their type may change over time. Build a list, both members and non-members who have shown an interest in your project. Stay in touch and let them know how the project is progressing. Apart from non-financial contributions they may be able to make, these or people they know could be future investors.