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title: Co-ops or Their Founders?
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section: Growing the Sector
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order: 65
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summary: If the pilot fails, the first question will be whether co-ops failed or the people who started them had less going for them, so founders on both sides are measured from government records and the verdict has to say how much that explains.
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---
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# Co-ops or Their Founders?
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[The Founder Problem](founder-problem.md) says the lock costs a successful founder most of what they'd get from selling the business. So the strongest founders may go conventional, and the bank would be lending to the ones who were left. If the pilot then fails, nobody will know whether co-ops failed or the people who started them did.
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The pilot can't stop that from happening. It can make sure the answer isn't a matter of opinion. This page is how.
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## Why it's worth measuring
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The worry isn't just theory.
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- **In equal-sharing organizations, the best-paid people leave most.** In Uruguay, co-op members paid above their co-op's median were about 3.7 times as likely to quit as members paid below it, and the gap was smaller in co-ops that paid more unequally ([Burdín, *Economic Journal*, 2016](https://doi.org/10.1111/ecoj.12272); [free copy](https://gwern.net/doc/economics/2016-burdin.pdf)). In Israel's kibbutzim, which shared income equally, members with more education and more skilled jobs were the most likely to leave during a financial crisis in the late 1980s ([Abramitzky, *Quarterly Journal of Economics*, 2008](https://doi.org/10.1162/qjec.2008.123.3.1111); [free copy](https://ranabr.people.stanford.edu/sites/g/files/sbiybj26066/files/media/file/abramitzky_qje_2008.pdf)). If talented people walk out of equal-sharing firms, some will also never walk in.
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- **Founders who believe in it stay.** The same Uruguayan study found founding members were less likely to quit, and the best-paid founders much less so than other best-paid members. That's the kind of founder [the founder page](founder-problem.md#the-honest-bottom-line) is betting on.
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- **A founder's background predicts how the business does.** Using Census records that link founders to their past jobs, one study found that founders with three or more years in their start-up's industry were about twice as likely to build one of the very fastest-growing firms (the top 1 in 1,000) as founders with no experience in it ([Azoulay, Jones, Kim and Miranda, NBER working paper 2018, published 2020](https://www.nber.org/papers/w24489)).
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- **That background isn't handed out fairly.** A study of why Black-owned businesses did worse than white-owned ones found that a large part of the gap came from Black owners having had less chance to work in a family business, or in a business like the one they started, first ([Fairlie and Robb, 2004](https://docs.iza.org/dp1292.pdf)). So "less experience" often means "fewer chances," not "less able." That shapes how the results are worded below.
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It could also go the other way. The bank screens every plan, and co-ops always have at least three founders, so co-op founders could turn out to have *more* going for them than the firms they're compared with. Then a pass would flatter co-ops. The measurement below catches either.
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## Who counts as a founder
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The same rule on both sides: the co-ops and the matched conventional firms that got SBA loans ([Who co-ops are compared against](pilot-spec.md#who-co-ops-are-compared-against)).
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- **A founder is someone who owned part of the business at the start and did real work in it.** For a co-op, that's a founding member named in the loan application. For an SBA firm, it's an owner of 20% or more, since those are the owners the SBA names on the loan. On both sides, they count only if payroll records show them working at least a set number of hours in the first two years. Someone added to the application for their résumé, who never works there, doesn't count, and the report lists how many such people there were.
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- **The two sides aren't the same in one way.** SBA owners personally guarantee the loan. Co-op members don't ([The Pilot, in Numbers](pilot-spec.md#loan-terms)). So the founders on the two sides didn't carry the same risk, and the report says so.
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- **Team size is handled openly.** Co-ops have three or more founders; most SBA firms have one or two owners at 20%. So the team's average is weighted by hours worked, and the "strongest founder" is compared only between teams of the same size, because the best of five people will usually beat the best of two just by numbers. The report says how many co-ops found matches at each size. SBA firms with nobody at 20% are counted and reported, not quietly dropped. As a second version, the analysis also counts the officers who run each SBA firm.
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## What gets measured
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Each item comes from government records, so nobody can talk their way up or down.
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- **Past pay.** Pay per quarter actually worked, averaged over the best three of the eight years before founding. Using quarters worked and the best years means a parent who took time out for caregiving isn't marked down for the years away. Missing records count as missing, not as zero. It's ranked two ways, and both are reported:
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- **against everyone of the same age nationally,** which shows whether the co-ops drew people from the lower-paid end of the whole economy;
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- **against people of the same age, state and industry,** which shows whether they drew the lower-paid people *within* their line of work. Co-ops in lower-paid work are part of the design ([Who the Bank Lends To](who-gets-loans.md)), and a home care founder shouldn't count as having less going for them for earning less than an engineer.
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- **Experience in the industry.** Years worked in the co-op's industry before founding.
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- **Owned a business before.** From tax records of past business income.
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- **Age**, as a background fact, not as a score.
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The report also shows the co-ops' industry mix against all new firms, since staying out of whole industries is one way strong founders could avoid co-ops without it showing in any one founder's record.
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## Getting the data
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**The charter sets it up before the first loan.** It directs the bank, the SBA, the IRS and the Census Bureau to set up the linking, with every approval in hand before lending starts. That matters because research on tax records needs IRS approval project by project, and the Census Bureau's researchers can't count on getting it. Past studies show it can be done: Brown and Earle linked SBA loans to Census business records ([*Journal of Finance*, 2017](https://papers.ssrn.com/abstract=2641184)), and Azoulay and his coauthors linked founders to their past jobs.
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- **Co-op founders consent when they apply,** on the standard IRS form that lets the reviewers see their tax records. So the co-op side can be done even if the Census linking falls through. The records are linked after the loan decision and never go to the people deciding loans.
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- **Comparison founders aren't contacted.** Their records are linked inside the Census Bureau's secure research labs, where names and Social Security numbers are replaced with internal codes. Census law allows the data to be used only for statistics, never against the people in it, including for tax or immigration enforcement. Only totals leave the lab, after the Census Bureau's own privacy review.
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- **State wage records are voluntary.** Years of experience come partly from state unemployment-insurance records, and each state decides whether to share them. Coverage is reported state by state, and results are shown using only the states that took part.
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- **The cost comes from the pilot's budget**, so it counts against the bank in the money test.
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**If the data never arrives,** the verdict says so in one fixed sentence that names which approval was missing and who withheld it. A missing founder analysis never delays or changes the pass or fail.
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## How it's used
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The analysis is filed in advance, with its code, the same as the rest of [the test](pilot-spec.md#what-gets-measured). It has three steps.
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**1. Who came.** The report shows how co-op founders compare with the comparison founders on each measure, with both pay rankings. It shows the same comparison with first-time owners without much wealth set aside, since the bank seeks them out on purpose. And it shows how the founder measures differ by race, gender and whether founders are recent immigrants, so that a gap caused by who gets paid less for the same work is visible as that.
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**2. How much of the result do founders explain?** The survival comparison is run a second time, also matching on the founders' measures. It isn't a second pass/fail test. The report gives **how far the result moved**, with its range of uncertainty. If co-ops were 30% more likely to fail in the main comparison and 10% more likely against firms with similar founders, founders explain about two-thirds of the gap. If the range around that change is too wide to tell whether it's zero or the whole gap, the report says "too few to tell," and that's decided by a rule filed in advance, not by the reviewers' judgment.
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**3. How big a hidden difference would it take?** Records don't capture everything about a founder. So the report also says how strong a difference the records *can't* see would have to be to change the verdict, using a standard method for this question (the "E-value" of [VanderWeele and Ding, *Annals of Internal Medicine*, 2017](https://doi.org/10.7326/M16-2607)), measured against the pilot's actual pass line, not against "no difference at all." What counts as fragile is fixed in advance: a result is fragile if a hidden difference no stronger than the measured ones already turned out to be would change it.
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## The verdict still stands
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**The founder analysis doesn't change pass or fail.** The decision still rests on the [main comparison](pilot-spec.md#the-decision-rule).
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That's on purpose. If the lock keeps the strongest founders away, that's part of what the lock *does*. It isn't an excuse for the co-ops, and a bigger program would face it too. And a second, adjusted test that could turn a fail into a pass would be the easiest way to rescue a failing pilot.
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What changes is what the verdict says. It has to use one of these sentences, fixed in advance, and the fast-track bill after a pass has to print the whole sentence:
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| Main comparison | Once founders are matched | The verdict says |
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| --- | --- | --- |
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| Passes | The gap barely moves | Passed. Founders' backgrounds don't explain it. |
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| Passes | Co-ops fall behind | Passed, but co-op founders had more past pay or experience than the comparison firms'. Co-ops with similar founders haven't been shown to hold their own. |
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| Fails | Most of the gap closes | Failed. Under this lock, co-ops drew founders with less past pay or industry experience, and that accounts for most of the gap. That's part of the result, not an excuse for it. |
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| Fails | The gap barely moves | Failed, and founders' backgrounds don't explain it. |
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| Either | Too few to tell | The main result, and "whether founders explain it couldn't be told." |
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**A fail is a fail in every row.** The shutdown happens by itself. Nothing on this page is grounds to restart the bank. Trying again would take a new law and a new pilot held to the same decision rule. What the wording does is keep anyone from quoting one row as another: "co-ops don't work" and "co-ops under this lock don't attract founders with experience" are different findings, and a future design would need to fix different things.
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## Watching the founders who stay
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Founders who leave early can also sink a co-op. The pilot already publishes how often higher-paid members leave ([Who Sets the Pay](pay.md)). It now also publishes:
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- **how often founders leave** in each of the first five years, against owners of the comparison firms who leave *without* a sale, since co-op founders can't sell their way out. A founder whose hours fall below the set level counts as having left, even if still on the books;
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- **how often the best-paid members leave**, with the comparison firms' best-paid employees as the yardstick;
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- **what founders who leave earn next,** against both the comparison owners and their own pay before founding. Earning more after a co-op could mean the brain drain the Uruguayan study found, or skills learned there. The report can't tell those apart, and says so.
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The yearly audit of rejected applications ([Making It Last](durability.md#rigging-the-result)) also checks whether founders' past pay predicts approval once the business plan's numbers are held fixed. A bank trying to make step 1 look good would show up there.
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## Asking the ones who didn't come
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Records only cover founders who applied. The ones who went conventional, and the workers who never started anything, are invisible to the bank. So, once, in year 3, a federal statistical agency, not the bank, runs a voluntary survey with confidential answers. It samples new SBA borrowers in the same industries and workers in those industries who haven't started a business, in several languages.
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- **Both deals are described side by side,** including the SBA's personal guarantee and the co-op's smaller downside as well as the lock.
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- **The wording is written by the reviewers, filed at year 0 and tested in advance.** Each person is randomly shown one of two framings, and both results are published, so the wording's effect is visible instead of hidden.
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- **The response rate is published,** with who didn't answer. No names go to the bank.
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A survey answer isn't a decision made with real money, and people say things they wouldn't do. So it's published as background, and nothing in the verdict depends on it.
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## What this doesn't solve
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- **It measures the founder problem. It doesn't fix it.** If the analysis shows the strongest founders stayed away, the pilot has an answer, not a cure. The cure is in the founder deal ([The Founder Problem](founder-problem.md#the-tools)), and it may not be enough.
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- **Records measure chances as much as ability.** Past pay reflects discrimination, bargaining power and who you know, not only skill. The report breaks the founder gap down by race, gender and immigrant status and uses careful wording, but "less past pay" is still partly "fewer chances."
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- **Records miss people.** Recent immigrants may have little US record. Cash work and some self-employment never show up. The report says how many founders on each side couldn't be matched and shows them separately.
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- **It's a lot of statistics on a small sample.** With about 400 co-ops, "too few to tell" is a likely answer for step 2, and the page says so in advance rather than after.
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- **Worker groups muddy the comparison.** When the founders are ten workers from the same shop, the "strongest founder" is often a lead worker, not an entrepreneur. Those co-ops are reported separately.
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- **It can't see the founders who never considered co-ops.** The survey is the only window on them, and it's a weak one.
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Claude Opus 5.5