I established a limited liability company (LLC) for a business venture initiated with friends. My objective was to ensure that all contributors received a fair share of the equity while maintaining a simplified structure for tax purposes. Additionally, I wanted to ensure that equity shares did not confer voting rights, functioning instead as profit-sharing interests. Legal counsel assisted in structuring the entity as a single-member LLC, where I am the sole owner, with profit-sharing units allocated to other contributors. This arrangement entitles contributors to a defined percentage of the company’s profits and proceeds from events such as a sale of the company.
My only regret is that I spent a lot of money on legal fees and the company ended up not being profitable so a lot of the work went to waste. But now I can re-use the structure again if I wish to create a new venture.
I wish more people know about profit sharing interests.
I was a part of a startup that offered profit sharing interests. When I joined the profit was X and left it was Y. I received a check for my percentage of the growth in profit. It felt pretty fair.
There was a relatively direct incentive to impact the company bottom line and I didn’t have to wait for the company to exit to get compensated.
Not OC but yes that’s what profit sharing is. You see it in businesses where investment back into the business doesn’t yield much, like sales or recruitment companies, so better to redistribute the profits back to the shareholders, the employees being a major shareholder.
You do this if the founder is not trying to hyper grow and sell the company but is rather content with dividend producing asset.
That's interesting, but I was thinking something possibly even farther. That the members of the co-op are the people that pay for the SaaS itself. Essentially the yearly fee is "dues" towards the organization.
Technically this is a consumer cooperative rather than a worker cooperative model.
But what you described truly is the most direct way to align the interests of stakeholders/users with the direction of the company/product. A downside I think in this case is that it becomes even more imperative to know who your “customers” are, as pivoting will be quite difficult.
Perhaps this is closer to Vanguard's ownership model, i.e. that Vanguard is an investment management company that is owned by its funds' shareholders?
I definitely think there is a way to make this viable at small scale in a tech/SaaS context. But to survive and grow to larger scale, I think you basically have to ensure your business following this model is not "too profitable" or else someone will want to crush and replace you, and hoard the profits for themselves.
It's kind of forgotten about now, but it's a bit of a minor miracle that Vanguard's unusual structure survived the early days, then grew to become an investing behemoth. I suppose the reason nobody tried to kill Vanguard to steal their customers is because the business model was pretty boring and profits were unsexy enough that others just let them do their thing (I mean, low cost index funds, and the boring type of customers attracted to them? Talk about a ceiling on profits, compared to what a more adventurous fund manager could make elsewhere selling a typical 2-and-20 deal to greedier customers...).
Customer owned co-operatives are an established business model. First one was founded in Rochdale, England, in 1844, and is still operating today as a convenience chain called simply "Co-op", across the UK.
The main advantage to this is that it gives customers incentive to support the business financially, not just take the assets. You can still have cashflows in way that don't exist in open source models, and around products that can't be open sourced (like loafs of bread, pints of milk, as per the Co-op model).
Open source just gives away the code, without setting up resources for the people who work on it. If I charge for the service, which is owned by the members, I could presumably pay upkeep (hosting, dedicated workers...etc).
As far as I know this is how places like REI or some groceries work. They are essentially customer owned. I'm not an expert in this, which is why I was asking for advice.
I don’t believe this is a great representation of REI. My understanding of REI, as a member, is that rather than holding shares, I receive a dividend relative to what I spend in each year, and I have access to certain perks, but I cannot elect board members and I cannot earn any additional power through working or volunteering labor for the organization
REI Board elections are open to all members. In the last election the REI union recommended not voting for all of the incumbent board members due to their hostility towards the union.
However I believe the board nomination process used to be open, but now only board members can nominate people for a board seat
The person directing you to the tech coop peer group is a spot on. There are many ways of doing this, but IMHO it ultimately comes down to writing bylaws for an organization that dictate how resources are accumulated and distributed, and evaluating the associated incentives and dynamics generated by those rules.
This is a beautiful vision, but I think it would be hard implement in practice. I’m trying to imagine how a pitch like this might work. Do you offer the customer/members some kind of profit sharing? A discount on future services?
Given that customers often want to avoid lock-in on any purchasing decision, it seems hard to build a service that has a larger up front psychological and legal commitment. I love the idea of getting bonus points in life for building structures with collaborative ownership, but realistically most people and businesses only want a simple “buy a service that I can cancel” relationship.
That said, I'd love to see someone try it! I think it could work well in a niche environment, or something like a Kickstarter where people feel they helped bring something into being.
I think my (and other) Community Supported Agriculture (CSA) farms would disagree with you.
I buy shares in the farm per my needs. The CSA takes my money and buys seeds, fertilizer, etc. I get discounted (100% :-) products from them throughout the growing season. They also sell their goods at farmers' markets, do deliveries, etc. My CSA has been growing for years. They're a part of a larger co-op org that spans the NE US, IIUC.
So yes, the "beautiful vision" can be, and is, implemented. Even in tech; I'm sure you've heard of neighbors getting together and building their own local networks because the local ISP won't service them.
And credit unions, and mutual insurance companies, and on and on. I love this commenter who cannot imagine a customer that has an ownership stake in a business or why anyone would want that. No time to think, too much uninformed posting to be done:
We’re talking specifically about a SaaS app in this post. I’m well aware of this working at small local levels, and even mentioned in my comment that it might work in niche environments, but I have a hard time believing it would work for a disconnected SaaS app, where there isn’t some larger form of Community bonding people together.
As far as I know this is how places like REI or some groceries work. They are essentially customer owned. I'm not an expert in this, which is why I was asking for advice.
I wouldn't say they work well, though, given the state of REI and grocery customer cooperatives.
I would be careful here and think through the governance well, as the time goes those nice customers may end up being bought by your competitor who would want to do everything in their power to destroy your project
While People change, companies change even more as "good people" may leave and even "good owners" may sell the company, in additionally to changing themselves
Comments
I established a limited liability company (LLC) for a business venture initiated with friends. My objective was to ensure that all contributors received a fair share of the equity while maintaining a simplified structure for tax purposes. Additionally, I wanted to ensure that equity shares did not confer voting rights, functioning instead as profit-sharing interests. Legal counsel assisted in structuring the entity as a single-member LLC, where I am the sole owner, with profit-sharing units allocated to other contributors. This arrangement entitles contributors to a defined percentage of the company’s profits and proceeds from events such as a sale of the company.
My only regret is that I spent a lot of money on legal fees and the company ended up not being profitable so a lot of the work went to waste. But now I can re-use the structure again if I wish to create a new venture.
I wish more people know about profit sharing interests.
I was a part of a startup that offered profit sharing interests. When I joined the profit was X and left it was Y. I received a check for my percentage of the growth in profit. It felt pretty fair.
There was a relatively direct incentive to impact the company bottom line and I didn’t have to wait for the company to exit to get compensated.
Specifically, annual profit not valuation? So if the company had not become more profitable, you get nothing?
Not OC but yes that’s what profit sharing is. You see it in businesses where investment back into the business doesn’t yield much, like sales or recruitment companies, so better to redistribute the profits back to the shareholders, the employees being a major shareholder.
You do this if the founder is not trying to hyper grow and sell the company but is rather content with dividend producing asset.
That's interesting, but I was thinking something possibly even farther. That the members of the co-op are the people that pay for the SaaS itself. Essentially the yearly fee is "dues" towards the organization.
Technically this is a consumer cooperative rather than a worker cooperative model.
But what you described truly is the most direct way to align the interests of stakeholders/users with the direction of the company/product. A downside I think in this case is that it becomes even more imperative to know who your “customers” are, as pivoting will be quite difficult.
Perhaps this is closer to Vanguard's ownership model, i.e. that Vanguard is an investment management company that is owned by its funds' shareholders?
I definitely think there is a way to make this viable at small scale in a tech/SaaS context. But to survive and grow to larger scale, I think you basically have to ensure your business following this model is not "too profitable" or else someone will want to crush and replace you, and hoard the profits for themselves.
It's kind of forgotten about now, but it's a bit of a minor miracle that Vanguard's unusual structure survived the early days, then grew to become an investing behemoth. I suppose the reason nobody tried to kill Vanguard to steal their customers is because the business model was pretty boring and profits were unsexy enough that others just let them do their thing (I mean, low cost index funds, and the boring type of customers attracted to them? Talk about a ceiling on profits, compared to what a more adventurous fund manager could make elsewhere selling a typical 2-and-20 deal to greedier customers...).
So you mean a customer? Why do you want them to own it? Just open source it if you want to share without building a business.
Customer owned co-operatives are an established business model. First one was founded in Rochdale, England, in 1844, and is still operating today as a convenience chain called simply "Co-op", across the UK.
The main advantage to this is that it gives customers incentive to support the business financially, not just take the assets. You can still have cashflows in way that don't exist in open source models, and around products that can't be open sourced (like loafs of bread, pints of milk, as per the Co-op model).
SWIFT is the cooperative of banks, for instance.
Open source just gives away the code, without setting up resources for the people who work on it. If I charge for the service, which is owned by the members, I could presumably pay upkeep (hosting, dedicated workers...etc).
As far as I know this is how places like REI or some groceries work. They are essentially customer owned. I'm not an expert in this, which is why I was asking for advice.
I don’t believe this is a great representation of REI. My understanding of REI, as a member, is that rather than holding shares, I receive a dividend relative to what I spend in each year, and I have access to certain perks, but I cannot elect board members and I cannot earn any additional power through working or volunteering labor for the organization
REI Board elections are open to all members. In the last election the REI union recommended not voting for all of the incumbent board members due to their hostility towards the union.
However I believe the board nomination process used to be open, but now only board members can nominate people for a board seat
The person directing you to the tech coop peer group is a spot on. There are many ways of doing this, but IMHO it ultimately comes down to writing bylaws for an organization that dictate how resources are accumulated and distributed, and evaluating the associated incentives and dynamics generated by those rules.
This is a beautiful vision, but I think it would be hard implement in practice. I’m trying to imagine how a pitch like this might work. Do you offer the customer/members some kind of profit sharing? A discount on future services?
Given that customers often want to avoid lock-in on any purchasing decision, it seems hard to build a service that has a larger up front psychological and legal commitment. I love the idea of getting bonus points in life for building structures with collaborative ownership, but realistically most people and businesses only want a simple “buy a service that I can cancel” relationship.
That said, I'd love to see someone try it! I think it could work well in a niche environment, or something like a Kickstarter where people feel they helped bring something into being.
I think my (and other) Community Supported Agriculture (CSA) farms would disagree with you.
I buy shares in the farm per my needs. The CSA takes my money and buys seeds, fertilizer, etc. I get discounted (100% :-) products from them throughout the growing season. They also sell their goods at farmers' markets, do deliveries, etc. My CSA has been growing for years. They're a part of a larger co-op org that spans the NE US, IIUC.
So yes, the "beautiful vision" can be, and is, implemented. Even in tech; I'm sure you've heard of neighbors getting together and building their own local networks because the local ISP won't service them.
I love it when tech people are like "this isn't remotely possible", and it's like... happening at the farmer's market already lol.
And credit unions, and mutual insurance companies, and on and on. I love this commenter who cannot imagine a customer that has an ownership stake in a business or why anyone would want that. No time to think, too much uninformed posting to be done:
https://news.ycombinator.com/item?id=42748956
We’re talking specifically about a SaaS app in this post. I’m well aware of this working at small local levels, and even mentioned in my comment that it might work in niche environments, but I have a hard time believing it would work for a disconnected SaaS app, where there isn’t some larger form of Community bonding people together.
This is exactly how Vanguard works.
I wouldn't say they work well, though, given the state of REI and grocery customer cooperatives.
I would be careful here and think through the governance well, as the time goes those nice customers may end up being bought by your competitor who would want to do everything in their power to destroy your project
While People change, companies change even more as "good people" may leave and even "good owners" may sell the company, in additionally to changing themselves
Any chance you'd share the docs for that?