Socialism: member capital accounts and the founder problem in numbers

Add capital-accounts.md (profit split, cash share, formula interest,
payout rules, solvency test, savings protections, worked outcomes).
Rewrite founder-problem.md with a discounted co-op vs conventional
comparison, the risk evidence (Hall-Woodward, Hamilton), and bounded
founder tools. Add founder-related measures and safeguards to the
pilot pages, and renumber open problems.

Co-Authored-By: Claude Opus 5.5 <[email protected]>
Claude-Session: https://claude.ai/code/session_01QWPs69B8nQZjtPEUXMKzZx

JoshHeaps.Net/Content/Socialism/capital-accounts.md

@@ -0,0 +1,96 @@
+---
+title: Member Capital Accounts
+section: The Co-op
+order: 25
+summary: How a co-op member builds real savings from the firm's profits without the firm ever being sold, how those savings are protected, and what they add up to.
+---
+
+# Member Capital Accounts
+
+In a conventional company, you build wealth from the business by owning shares and eventually selling them. In a locked co-op, nobody can sell the firm (see [The Lock](the-lock.md)). So there has to be another way for the value you help build to become *yours*. That's what a member capital account is for.
+
+The idea isn't new. The Mondragon co-ops in Spain have used it since the 1950s, and US worker co-ops use it under ordinary federal tax law. This page describes how it works in this model, and how members' savings are protected. Protection matters, because savings held inside your own employer are exactly the kind that can vanish along with your job.
+
+## The basic idea
+
+Every member has a personal account on the co-op's books. It works like a savings account the business holds for you:
+
+- **Each year, part of your share of the profits goes into it** instead of being paid out as cash.
+- **It earns interest.**
+- **It's paid out to you**, when you leave or once it passes a set size, whichever comes first.
+
+Meanwhile, the co-op gets to use that money to grow. In effect it's a loan from the members to their own business. That's why Mondragon valued it: a firm that can't sell shares to outsiders can still keep its own earnings working ([Morris, *The Mondragón System*, 1992](https://www.ilsr.org/wp-content/uploads/2013/03/mondragon-3.pdf)).
+
+## Where each year's profit goes
+
+When the co-op makes a profit, it gets split. These are the defaults. Each co-op can change them in its bylaws, as long as it stays within the minimums.
+
+| Share of profit | Where it goes | Why |
+| --- | --- | --- |
+| **At least 30%** | The co-op's permanent reserve | Nobody can ever withdraw it (see [indivisible reserves](the-lock.md)). It's the firm's cushion and its own source of investment money. |
+| **Up to 10%** | The federation's shared fund, if the co-op belongs to one | Pools risk between co-ops (see [The Federation](federation.md)). |
+| **The rest, about 60%** | Members, divided by each member's share weight | This is the "profit share" from [Worker Ownership](worker-ownership.md). It ramps up with tenure, then caps. |
+
+Mondragon's original split was similar: 10% to education and the community, at least 20% to reserves, and up to 70% to members. It later raised the reserve minimum to 50% (Morris, 1992).
+
+The members' share is then split again, between cash now and the account:
+
+- **At least 20% of it is paid in cash right away.** Members owe income tax on their whole allocation in the year it's made, including the part that goes into the account. The cash is there so they can pay that tax. This is how US co-op tax law works ([Democracy at Work Institute guide](https://institute.coop/sites/default/files/resources/Internal-Capital-Accounts.pdf)). The default is half in cash.
+- **Lower-income members can take it all in cash.** For a low-wage worker, being taxed on money they can't touch can cost them tax credits and health-care subsidies. So any member whose household income is under twice the poverty line can take their whole share in cash.
+- **The rest goes into each member's account.**
+
+**A worked example.** A 40-person co-op makes $600,000 in profit after paying everyone's salaries. It puts $180,000 in its permanent reserve and $60,000 in the federation fund. The remaining $360,000 is divided among members by share weight. Say the members' share weights add up to 36. A member at full share then gets $10,000: $5,000 as a check and $5,000 added to their account.
+
+## How the account grows
+
+- **Interest is set by formula, not by vote**: the one-year Treasury rate. If current members voted on it, they could set it to zero on accounts that mostly belong to people who've left. Or senior members could set it high to pay themselves out of the firm. A formula stops both.
+- **Losses are shared.** In a year the co-op loses money, the loss is charged partly to the reserve and partly to members' accounts, in the same proportions as profits. Your account can go down, just like shares in any company.
+
+## How it's paid out
+
+- **When you leave**, your balance stops sharing in future losses and becomes a fixed amount the co-op owes you. It's paid in equal parts over up to five years, so one big departure can't drain the firm's cash. Balances under $10,000 are paid all at once.
+- **There's no penalty for leaving.** Mondragon used to cut the payout by up to 30% for people who quit. This model doesn't, because a core promise of [the tenure cap](worker-ownership.md) is that you can change jobs without losing what you've built.
+- **Accounts are capped at one year's pay.** Anything above that is paid out every year, in cash or into the member's own retirement account, where it can be invested in anything. Nobody should end up with most of their savings tied to the same company that pays their wages.
+- **On death, the account goes to your estate**, paid within two years. It's your property.
+- **In a divorce, a court can split the account.** The former spouse gets a separate account of their own, with no vote, paid out on the normal schedule.
+
+## Protecting the co-op, and the people who stay
+
+A payout system can also be used to strip a failing firm. People who see trouble coming leave first and get paid in full, while everyone who stays absorbs the loss. So:
+
+- **Every payout must pass a solvency test.** No payment may push the co-op below its loan requirements or a minimum cash level set in its bylaws when it's founded.
+- **If a payout fails the test, it's paused for at most two years.** Interest keeps building, and nobody's account is cancelled. While any former member's payout is paused, **current members get no cash profit share and no bonuses.** Nobody gets paid ahead of the people who are waiting.
+- **Payouts rank behind the co-op's lenders.** In a bankruptcy, members' accounts are paid only after the co-op's creditors. That's the honest cost of being an owner, and it's the main reason for the one-year-of-pay cap.
+- **The co-op doesn't lend to members against their accounts.** That would just be an early withdrawal by another name. Members can use their account as collateral with an outside lender.
+- **Federations can insure balances.** A [federation](federation.md) can use its shared fund to guarantee members' balances up to a modest limit, the way deposit insurance protects bank savers.
+
+**Why this much caution.** Fagor, Mondragon's appliance maker and once the world's largest industrial co-op, went bankrupt in 2013 with about €1.1 billion of debt, putting 5,600 jobs at risk. Savers who had bought its subordinated co-op bonds, which had been sold as safe deposits, ended up suing ([Wikipedia summary of the Mondragon record](https://en.wikipedia.org/wiki/Mondragon_Corporation)). Shortly before Enron collapsed in 2001, about 63% of its workers' 401(k) retirement savings were in Enron's own stock ([GAO-02-480T](https://www.gao.gov/assets/gao-02-480t.pdf)). It's the same lesson: savings concentrated in the company you work for are the savings most likely to disappear with your job.
+
+## What the account doesn't do
+
+This matters, because it's the core of [the founder problem](founder-problem.md).
+
+**The account holds the profits you earned. It doesn't hold the value of the firm's future profits.** When a conventional firm is sold, the buyer pays for years of its future earnings, and the seller keeps that money. A co-op member's account never includes that part. The future profits go to whoever works there in the future.
+
+That's intentional. It's what the lock is for. But it means a co-op member who helped build something valuable walks away with much less than a conventional owner would, and the model shouldn't pretend otherwise.
+
+## What it adds up to
+
+Here's what a member who joined a successful co-op in its third year has received by year 15, on top of their salary, in four kinds of business. The numbers come from a simple model with these assumptions:
+
+- A one-year probation, then a profit share that grows from 20% to 100% over five years.
+- 60% of profit goes to members.
+- Money received later counts for less than money received now. It's discounted at 5% a year, the rate used in the founder study on the [next page](founder-problem.md).
+
+| Kind of business | Profit per worker (after salaries) | Size at year 15 | **What the member received** |
+| --- | --- | --- | --- |
+| Care work (home care, cleaning) | $3,000 | 40 people | about **$14,000** |
+| Main Street (trades, services) | $15,000 | 40 people | about **$68,000** |
+| Strong (skilled services, light manufacturing) | $40,000 | 80 people | about **$200,000** |
+| Very high margin (a firm like Conservice) | $150,000 | 200 people | about **$780,000** |
+
+In a conventional firm, all of that goes to the owners.
+
+**Be honest about the first row.** Home care runs on thin margins. For a care worker, a co-op offers a real say in how the work is done, and very little wealth. That's why the model has a separate answer for low-margin work: [the floor](the-floor.md).
+
+These are all success cases. A co-op that struggles pays little or nothing. One that fails pays out only what's left after its debts.

JoshHeaps.Net/Content/Socialism/founder-problem.md

@@ -2,19 +2,83 @@
 title: The Founder Problem
 section: The Co-op
 order: 40
-summary: Without the chance to sell the company, why would a strong founder start a co-op? The hardest part of the design.
+summary: Without the chance to sell the company, why would a strong founder start a co-op? The numbers, the tools, and the honest answer.
 ---
 
 # The Founder Problem
 
-This is the hardest part of the new design, and it needs to be said plainly.
+This is the hardest part of the design, and it needs to be said plainly.
 
-**Most of a founder's payoff in a conventional startup comes from the exit: selling the company.** The lock removes the exit permanently. So the obvious risk is adverse selection: the best entrepreneurs go conventional, and the bank's applicants are the people who couldn't raise money anywhere else. If that happens, the experiment is rigged to fail before it starts.
+**In a conventional business, a founder who succeeds gets paid in two ways: a share of the profits every year, and a big payday when the company is sold.** A co-op founder gets neither in full. The profits are shared with every member, and [the lock](the-lock.md) means the company can never be sold. So the obvious risk is *adverse selection*, meaning the pool you get is the one nobody else wanted: the best entrepreneurs go conventional, and the bank's applicants are the people who couldn't raise money anywhere else. If that happens, the experiment is rigged to fail before it starts.
 
-The model needs a reason to found a co-op that doesn't depend on selling it. Tools that exist:
+This page runs the numbers, lays out the tools, and says honestly what they can and can't fix.
 
-- **Internal capital accounts.** Each member has an individual account that accumulates their share of retained profits and pays out when they leave or retire. Mondragon built these precisely so that membership builds real wealth without making the firm tradeable. It is a way to cash out your *stake* without selling the *firm*.
-- **Founder salary premiums**, set in the founding bylaws and voted on by members as the firm grows.
-- **Patronage dividends:** profit distributed in proportion to contribution, not just headcount, during the founding years.
+## The numbers
 
-None of these fully replace a nine-figure exit. That's honest. The model is betting that enough people value what the co-op offers (control, stability, a firm they can't be sold out of) to make up the difference. That bet is part of what's being tested.
+Take the same business, with five founders who all draw normal salaries, built two ways:
+
+- **As a conventional firm:** the five founders own it outright, financed by a bank loan. Each year they pay out 60% of profit to themselves and keep 40% in the business to fund growth. At year 15 they sell it for three to six years' profit.
+- **As a co-op:** the five founders are the first members. The profit split is the same (60% to members, 40% kept in the reserve and the federation fund), but it's shared by everyone who joins, and nobody sells. (See [Member Capital Accounts](capital-accounts.md) for how the money flows.)
+
+Here's what **one founder** has received by year 15 if the business succeeds, on top of salary. Money received later counts for less than money now. It's discounted at 5% a year, the rate used in the founder study below.
+
+| Kind of business | Profit per worker (after salaries) | Size at year 15 | **Co-op founder** | **Conventional founder** (one-fifth owner) |
+| --- | --- | --- | --- | --- |
+| Care work | $3,000 | 40 people | about $30,000 | $140,000 to $180,000 |
+| Main Street | $15,000 | 40 people | about $150,000 | $710,000 to $880,000 |
+| Strong | $40,000 | 80 people | about $450,000 | $3.2 million to $4.2 million |
+| Very high margin | $150,000 | 200 people | about $2 million | $29 million to $38 million |
+
+**In the success case, a co-op founder ends up with somewhere between a fifth and a twentieth of what the owner of the same firm would.** The bigger and more profitable the firm, the wider the gap. Nothing on this page makes it go away.
+
+Three caveats about these numbers:
+
+- **They assume the firm exists and works equally well either way.** That's the big assumption. If co-op ownership makes firms less productive, or if the firm would never have been founded as a co-op, the comparison is moot. The first is exactly what [the pilot](pilot-spec.md) measures. The second is the founder problem itself.
+- **They're a simple model, not a forecast.** New hires join as members after a year and ramp up to a full share over five. The workforce grows steadily to the size shown. Change the growth rate or the sale price and the ratios move, but the gap never comes close to closing.
+- **Taxes are left out on both sides.**
+
+## Where the money went
+
+In the very-high-margin case, a worker who joined in year three has received about $780,000 by year 15 (see [Member Capital Accounts](capital-accounts.md#what-it-adds-up-to)). The people hired after them have less, because they've had fewer years at full share, but all 200 are building a share of what the business earns.
+
+**If the firm exists either way, the founder's "missing" money isn't lost. It went to the people who did the work.** That's the whole model. A version of the co-op that paid founders like owners would just be a conventional firm with extra steps.
+
+So the real question isn't "can a co-op match a conventional exit?" It can't. The question is: **are there enough good founders for whom the co-op deal is good enough?**
+
+## Why it's less lopsided for most founders
+
+The table compares a co-op with a conventional firm *that succeeds*. Most don't. And for a founder without much money, a big risky payoff is worth far less than its average.
+
+- **Most venture-backed founders get nothing from the exit.** Robert Hall and Susan Woodward studied nearly every venture-capital-backed US startup from 1987 to 2008, about 22,000 companies. The average founder got $5.8 million at exit, but **almost three-quarters got nothing at all**. A few enormous wins drive the average. For a founder with $100,000 in savings and an ordinary aversion to risk, they calculated that the chance to found a venture-backed startup was worth *slightly less than nothing* compared with a salaried job ([Hall and Woodward, *American Economic Review*, 2010](https://web.stanford.edu/~rehall/HallWoodward6.pdf)). That study covers tech and biotech startups, not the small businesses the bank would fund, but the logic carries over. A long-shot payday is worth much less than its average to someone who can't afford to lose.
+- **Most small-business owners earn less than they would as employees.** Barton Hamilton found that after ten years in business, the median self-employed person earned 35% less than in a paid job. That counts the growth in value of their business ([Hamilton, *Journal of Political Economy*, 2000](https://www.journals.uchicago.edu/doi/abs/10.1086/262131)). The median small business that does sell goes for about $345,000 ([BizBuySell, 2024](https://smallbiztrends.com/bizbuysell-insights-report-q4-2024/)). Hamilton read the gap as people paying to be their own boss, and co-op founders give up some of that, since a co-op founder is one vote among many.
+- **The co-op's downside is smaller.** A co-op that fails costs its members their jobs and what's left in their accounts. Under [the pilot's loan terms](pilot-spec.md#loan-terms), members give no personal guarantees, while SBA loans require one from every owner of 20% or more. That's a feature of how the bank lends, not of co-ops as such. It still matters to the founder deciding which to start.
+
+So for a founder *without* family money, the co-op isn't simply a worse lottery ticket. It's a different bet: a much smaller top prize, a lower chance of losing everything, and a salary throughout.
+
+**Where the co-op really does lose is at the top:** the founder who is confident, wealthy enough to absorb a failure, and building something with very high profit per worker. That founder will usually go conventional, and the model should expect them to.
+
+## The tools
+
+These are the ways a co-op can reward founders without selling the firm. Each is limited so it can't turn a founder back into an owner, or let founders pay themselves ahead of the bank.
+
+- **Member capital accounts.** A founder builds up an account like every other member, from year one. See [Member Capital Accounts](capital-accounts.md).
+- **A founding share.** For the first ten years, 10% of the members' profit pool is set aside for the founding members. It's split among everyone who was a member in the first three years, in proportion to how much of that time they were there. So the people who took the early risk get paid for it, including the first hires, not only the people named in the paperwork. And because it's a fixed slice of the pool, not extra votes or weight per head, founders gain nothing by keeping the co-op small.
+- **Back pay for unpaid early work.** If founders take reduced pay before the business has revenue, the difference is recorded as a debt the co-op owes them. The limits:
+  - It's valued at no more than the pay the co-op sets for the same job once it has revenue.
+  - It earns interest at the Treasury rate.
+  - It ranks behind the bank, can't be repaid from the bank's loan money, and isn't repaid while any bank payment is late.
+- **Founder money.** Cash a founder puts in comes in one of two forms. It can be a loan at no more than the Treasury rate plus three points. Or it can be the same voteless, expiring investment any outside investor could make under [Capital, After](capital.md). Either way it ranks behind the bank. A founder who remortgaged their house to start the co-op can take the investor's terms, which reward that risk.
+- **Founder salary premiums.** A founder who is also the chief executive can be paid like one. The founding bylaws can set that pay for at most the first five years. After that, the members set it, like every other salary.
+- **No founder vetoes.** Founding bylaws can't give founders extra votes, vetoes, or rules requiring a supermajority to remove them. Founders write the first bylaws before any other worker exists, so this is the one place the model protects future members from them.
+
+**What's deliberately not here: a founder's tail.** One idea considered was letting founders keep a voteless share of profits for some years after they leave, as a stand-in for the sale price. It was left out. It would be a claim on the work of people the founder no longer works alongside, which is exactly what [the thesis](thesis.md) says this kind of firm exists to prevent. In the largest case it would also have paid each departed founder several times what a working member earns.
+
+## The honest bottom line
+
+None of this replaces a large exit. The model is betting on three kinds of founders:
+
+1. **People without wealth** who would never risk a conventional startup. For them, a salaried, lower-risk path to building something may be the best deal available.
+2. **Groups of workers founding together.** When the "founders" are the first ten employees, the gap between founder and worker mostly disappears.
+3. **People who value what the co-op offers**: control, stability, and a firm that can't be sold out from under them.
+
+Whether there are enough of them is an empirical question. [The pilot](pilot-spec.md) publishes the founders' backgrounds, including their previous earnings where the data allows, so that if the strongest founders stay away, it shows. If the portfolio fails, the first question will be "was it co-ops, or was it who applied?", and the data should be able to answer it.

JoshHeaps.Net/Content/Socialism/index.md

@@ -13,7 +13,7 @@ summary: A working model for building an economy where the people who do the wor
 
 This model doesn't buy, seize or convert anyone's company. Instead it builds new worker-owned companies alongside existing ones, then lets customers and workers choose between them.
 
-- **Workers own their company.** Every member gets one vote. A share of the profits grows with tenure until long-time members split them equally. Salaries still exist, and hard jobs still pay more. [Worker Ownership](worker-ownership.md)
+- **Workers own their company.** Every member gets one vote. A share of the profits grows with tenure until long-time members split them equally. Salaries still exist, and hard jobs still pay more. Part of each year's profit builds up in a personal account that's paid out when you leave. [Worker Ownership](worker-ownership.md) and [Member Capital Accounts](capital-accounts.md)
 - **A small public bank lends to worker co-ops.** It charges market rates, so it only succeeds if co-ops can really compete. Its whole job is to be willing to lend to a kind of company other banks won't. [The Bank](the-bank.md)
 - **Co-ops funded this way stay co-ops forever.** They can't be sold to conventional owners, and members can't vote to cash out what earlier members built. [The Lock](the-lock.md)
 - **It runs as an honest experiment.** A one-time $350 million pilot aims to fund about 400 new co-ops. The success measures are published before the first loan. If, after twelve years, co-ops stay open about as well as similar conventional firms while paying their members fairly, and the bank earned at least what Treasury bonds would have, Congress votes on growing it. If not, it shuts down automatically. [The Test](the-test.md) and [The Pilot, in Numbers](pilot-spec.md)
@@ -36,4 +36,4 @@ This isn't mainly about money. **People deserve a say in governing the place whe
 
 ## Honest about what's unsolved
 
-This is a working model, not a finished one. The biggest open question is whether strong founders will start companies they can never sell ([The Founder Problem](founder-problem.md)). The full list of what isn't solved yet is kept in the open. [Open Problems](open-problems.md)
+This is a working model, not a finished one. The biggest open question is whether strong founders will start companies they can never sell. In the success case, a co-op founder ends up with a fraction of what a conventional owner would, because the rest goes to the people who work there ([The Founder Problem](founder-problem.md)). The full list of what isn't solved yet is kept in the open. [Open Problems](open-problems.md)

JoshHeaps.Net/Content/Socialism/open-problems.md

@@ -9,26 +9,28 @@ summary: An honest list of what isn't solved yet.
 
 An honest list of what the model hasn't solved yet, most dangerous first.
 
-1. **Adverse selection on founders.** *(The most dangerous.)* The lock removes the exit. If the strongest founders go conventional, the bank's portfolio is the rejected pool, and the test fails for reasons that say nothing about co-ops. Internal capital accounts and founder premiums help; whether they're enough is unknown.
+1. **Adverse selection on founders.** *(The most dangerous.)* The lock removes the exit, and profits are shared with every member. In the success case a co-op founder ends up with somewhere between a fifth and a twentieth of what a conventional owner of the same firm would ([The Founder Problem](founder-problem.md)). For founders without wealth the gap in what the bet is *worth* is smaller, but at the top it's decisive. If the strongest founders go conventional, the bank's portfolio is the rejected pool, and the test fails for reasons that say nothing about co-ops. The pilot publishes founders' backgrounds so this can at least be seen.
 
-2. **The horizon problem.** Members near retirement have little reason to vote for long-lived investments whose payoff arrives after they leave. Internal capital accounts that credit members for retained earnings are the standard answer. It needs to be designed carefully, not assumed.
+2. **The horizon problem.** Members near retirement have little reason to vote for long-lived investments whose payoff arrives after they leave. [Member capital accounts](capital-accounts.md) credit members for the profits they earned, but not for the future value those investments create. Options include crediting accounts for growth in the firm's value, or letting departing members sell their stake to incoming members (never to outsiders). Neither is designed here yet.
 
-3. **Is the lock too rigid?** A co-op that should be sold (a better operator exists, the members want out) can only go to another co-op. If the co-op sector is small, that buyer pool is tiny, and viable firms may be liquidated instead of rescued. The federation as buyer of last resort is a partial answer. Critics on the right add a sharper version: a lock that outlasts a repaid loan by generations is a permanent restriction on selling property, bought with one loan, and it binds members who never agreed to it.
+3. **Members' savings sit inside their employer.** [Member capital accounts](capital-accounts.md) are capped at a year's pay and protected by a solvency test, but they rank behind the co-op's creditors. Fagor's 2013 bankruptcy shows what that can mean. Federation-backed insurance is an option, not yet a design.
 
-4. **Scale.** Even a total success at pilot scale leaves most workers in conventional firms. The labor-market effect needs a sector large enough to move wages, and nobody knows how long growth to that size takes, if it happens at all. That's the price of not forcing it.
+4. **Is the lock too rigid?** A co-op that should be sold (a better operator exists, the members want out) can only go to another co-op. If the co-op sector is small, that buyer pool is tiny, and viable firms may be liquidated instead of rescued. The federation as buyer of last resort is a partial answer. Critics on the right add a sharper version: a lock that outlasts a repaid loan by generations is a permanent restriction on selling property, bought with one loan, and it binds members who never agreed to it.
 
-5. **Political durability.** See [The Constitution](constitution.md). Gradual construction invites gradual repeal.
+5. **Scale.** Even a total success at pilot scale leaves most workers in conventional firms. The labor-market effect needs a sector large enough to move wages, and nobody knows how long growth to that size takes, if it happens at all. That's the price of not forcing it.
 
-6. **Growth and dilution.** Softened by the tenure ramp, not eliminated. In steady state, an equal split per head still means a marginal hire must generate the average surplus to break even for incumbents. Capital-intensive expansion into lower-margin lines will face internal resistance conventional firms don't have.
+6. **Political durability.** See [The Constitution](constitution.md). Gradual construction invites gradual repeal.
 
-7. **Who decides which sectors are "essential"?** Subsidy authority is price-setting power over a large chunk of the labor market, and every low-margin industry will suddenly discover it is Essential.
+7. **Growth and dilution.** Softened by the tenure ramp, not eliminated. In steady state, an equal split per head still means a marginal hire must generate the average surplus to break even for incumbents. Capital-intensive expansion into lower-margin lines will face internal resistance conventional firms don't have.
 
-8. **The 1/N problem.** *(Mostly answered.)* Peer monitoring works at 30 people; at 10,000 your extra effort raises the pool by a rounding error. The answer is culture and structure: co-ops really do push out free riders, and the federation model keeps units small enough for monitoring to bite while pooling risk above them.
+8. **Who decides which sectors are "essential"?** Subsidy authority is price-setting power over a large chunk of the labor market, and every low-margin industry will suddenly discover it is Essential.
 
-9. **The pilot's own weak points.** [The pilot](pilot-spec.md) puts the burden of proof on the co-ops, which means roughly a 1-in-10 chance of shutting down a pilot that was actually working. It tests individual co-ops, not the [federation](federation.md) support network Mondragon relied on. Its comparison group (small businesses with government-backed loans) is biased in directions that partly cancel out, by amounts nobody knows. And market-rate lending based on collateral may mostly reach founders who already have some wealth. Approval rates by race, gender and wealth are published so that shows up, but publishing a gap doesn't close it.
+9. **The 1/N problem.** *(Mostly answered.)* Peer monitoring works at 30 people; at 10,000 your extra effort raises the pool by a rounding error. The answer is culture and structure: co-ops really do push out free riders, and the federation model keeps units small enough for monitoring to bite while pooling risk above them.
 
-10. **Federal or state?** A federal bank is the cleanest single experiment. But a few state-chartered lenders running one shared, pre-registered plan would fail smaller, fit the fact that co-op law is state law, and might be harder to repeal all at once. That trade-off hasn't been worked through.
+10. **The pilot's own weak points.** [The pilot](pilot-spec.md) puts the burden of proof on the co-ops, which means roughly a 1-in-10 chance of shutting down a pilot that was actually working. It tests individual co-ops, not the [federation](federation.md) support network Mondragon relied on. Its comparison group (small businesses with government-backed loans) is biased in directions that partly cancel out, by amounts nobody knows. And market-rate lending based on collateral may mostly reach founders who already have some wealth. Approval rates by race, gender and wealth are published so that shows up, but publishing a gap doesn't close it.
 
-11. **Voluntary buyouts: in or out?** *(Open question.)* Should the bank also finance existing owners who *choose* to sell to their workers at market price, the way the UK's employee-ownership trusts work? It would grow the sector faster without forcing anyone. But it would mix two different experiments, and conversions carry different risks than startups.
+11. **Federal or state?** A federal bank is the cleanest single experiment. But a few state-chartered lenders running one shared, pre-registered plan would fail smaller, fit the fact that co-op law is state law, and might be harder to repeal all at once. That trade-off hasn't been worked through.
+
+12. **Voluntary buyouts: in or out?** *(Open question.)* Should the bank also finance existing owners who *choose* to sell to their workers at market price, the way the UK's employee-ownership trusts work? It would grow the sector faster without forcing anyone. But it would mix two different experiments, and conversions carry different risks than startups.
 
 *Not problems here, because nobody's company is forcibly bought:* valuing every firm in the economy, owners stripping value before a takeover, foreign capital flight, and years of payouts to former owners. The contractor boundary isn't an economy-wide problem either. Its co-op version, hiring non-members to dodge membership, is handled by [the lock](the-lock.md)'s membership requirement.

JoshHeaps.Net/Content/Socialism/pilot-safeguards.md

@@ -13,7 +13,7 @@ This page lists the ways someone could cheat [the pilot](pilot-spec.md), or sabo
 
 ## The hidden boss
 
-**The trick.** A founder keeps the building, equipment, brand and software in a separate company he owns. He signs up three friendly "members" and gives the co-op a management contract or franchise deal with his company. The co-op borrows $3 million, and the money flows back to him as rent, fees and royalties. On paper it's a co-op. In practice it's his business, funded by the public.
+**The trick.** A founder keeps the building, equipment, brand and software in a separate company they own. They sign up three friendly "members" and give the co-op a management contract or franchise deal with that company. The co-op borrows $3 million, and the money flows back to the founder as rent, fees and royalties. On paper it's a co-op. In practice it's the founder's business, funded by the public.
 
 **The rules:**
 
@@ -43,6 +43,17 @@ This page lists the ways someone could cheat [the pilot](pilot-spec.md), or sabo
 - **Caps on middlemen.** No single promoter, consultant or referral source can bring in loans totalling more than 3% of the fund.
 - **Money arrives in stages**, as the business hits milestones, so a sham can't take the full amount and disappear.
 
+## Founders paying themselves first
+
+**The trick.** A founder puts in $300,000 as a "loan" and books two years of "unpaid work" at an inflated salary. When the bank's loan arrives, the co-op pays the founder back first, with generous interest. The founder's money is out and safe, and public money has replaced it.
+
+**The rules** (details in [The Founder Problem](founder-problem.md#the-tools)):
+
+- **Founders' loans and back pay rank behind the bank.** They can't be repaid from the bank's loan money, or while any payment to the bank is late.
+- **Back pay is valued at no more than the co-op's own pay for that job** once it has revenue. Founder loans earn at most the Treasury rate plus three points.
+- **Salaries can't be used to skip the profit split.** Founders can set their own pay in the founding bylaws for at most five years. After that, the members set all salaries. Pay for every role is disclosed to the bank each year, and the gap between the highest and lowest pay is published.
+- **Payouts from members' accounts pass a solvency test**, so insiders who see trouble coming can't cash out first (see [Member Capital Accounts](capital-accounts.md#protecting-the-co-op-and-the-people-who-stay)).
+
 ## Relabeling an old business as "new"
 
 **The trick.** A failing conventional business re-registers as a co-op to get a loan. That brings back the FONDES rescue problem through the side door. It would also flatter the survival numbers, because the business has already made it through its riskiest early years.

JoshHeaps.Net/Content/Socialism/pilot-spec.md

@@ -117,6 +117,8 @@ A useful yardstick: among the SBA's mature loan groups from 1992 to 2004, loans
 **Measures that are published but don't decide:** jobs created, wages at the bottom and top and the gap between them, revenue per worker (a rough measure of productivity), how long members stay, injury rates, and the bank's default and recovery rates. Also:
 
 - **Who got loans.** Approval rates and loan terms by the founders' race, gender and personal wealth. If collateral-based lending quietly shuts out the people co-ops mostly serve, it should show.
+- **Who gets the profits inside each co-op.** Profit shares, founding shares and membership approvals by race and gender, so that an in-group of early members can't quietly take most of the pool.
+- **Who founded them.** Founders' previous earnings and work histories, using linked government records where they're available, compared with the founders of the matched firms. If the strongest founders stay away ([The Founder Problem](founder-problem.md)), this is where it shows.
 - **Local effects.** Business openings and closures in the counties where co-ops were funded, so any damage to existing local businesses is visible.
 - **Results by industry**, including care work like home health and cleaning, where most US co-op members work today.
 

JoshHeaps.Net/Content/Socialism/worker-ownership.md

@@ -15,6 +15,10 @@ A worker co-op under this model means two things, and they are not the same thin
 
 Why the ramp: it kills the dilution panic. Under flat equal shares, every new hire immediately eats everyone's slice, and cooperatives empirically under-hire for exactly that reason. With a ramp, hiring decisions move toward "does this person grow the pie" during precisely the window when their value is most uncertain.
 
+Protected leave (parental, medical, caregiving) counts as tenure, so taking time off to care for someone doesn't set your share back.
+
+Where does the profit share actually go? Part is paid in cash each year, and part builds up in a personal account that's paid out when you leave. See [Member Capital Accounts](capital-accounts.md).
+
 Why the cap: uncapped tenure weighting builds a gerontocracy of shares and chains people to their first employer. Capped at a career-fraction, people can change companies, move cities, start over, and still reach a full share with plenty of career left.
 
 - **Base salaries still exist**, set by the company. A brain surgeon won't work somewhere without a high salary, and shouldn't have to. Hard jobs and in-demand jobs still pay more. The incentive to do difficult work survives intact.