6 changed files with 30 additions and 18 deletions
@@ -104,16 +104,17 @@ That's intentional. It's what the lock is for. But it means a co-op member who h
 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.
+- A three-month probation, the standard bylaws' default ([When People Don't Stay Long](high-turnover.md#a-short-probation)), paid at the starting share. Then a profit share that grows from 20% to 100% over five years.
- 60% of profit goes to members.
+- 60% of profit goes to members, minus the founding share in the first ten years ([The Founder Problem](founder-problem.md#the-tools)). This member started in year three, so they get a small part of it too. The part of a share a newer member doesn't get yet goes to the reserve, not to other members, as tax law requires ([How a Locked Co-op Is Taxed](taxes.md#the-tenure-ramp)).
 - The workforce grows steadily to the size shown, as on the next page.
 - 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** |
+| Care work (home care, cleaning) | $3,000 | 40 people | about **$12,000** |
-| Main Street (trades, services) | $15,000 | 40 people | about **$68,000** |
+| Main Street (trades, services) | $15,000 | 40 people | about **$60,000** |
-| Strong (skilled services, light manufacturing) | $40,000 | 80 people | about **$200,000** |
+| Strong (skilled services, light manufacturing) | $40,000 | 80 people | about **$160,000** |
-| Very high margin (a firm like Conservice) | $150,000 | 200 people | about **$780,000** |
+| Very high margin (a firm like Conservice) | $150,000 | 200 people | about **$600,000** |
 In a conventional firm, all of that goes to the owners.
@@ -85,7 +85,7 @@ Whether co-ops can grow on those terms is exactly what [the test](the-test.md) i
 ## Who would have received less
-**The founders.** As members, they would have had a founding share, their accounts, and executive pay while they ran it. They would never have sold. In the model's 200-person example, a co-op founder ends up with about $2 million against $29 million to $38 million for a conventional owner ([The Founder Problem](founder-problem.md#the-numbers)). Conservice was valued at $2.66 billion in 2020, so at its scale the gap would be far wider. What the founders actually received hasn't been published.
+**The founders.** As members, they would have had a founding share, their accounts, and executive pay while they ran it. They would never have sold. In the model's 200-person example, a co-op founder ends up with about $980,000 against $29 million to $38 million for a conventional owner ([The Founder Problem](founder-problem.md#the-numbers)). Conservice was valued at $2.66 billion in 2020, so at its scale the gap would be far wider. What the founders actually received hasn't been published.
 The model's aim is for that value to stay with the people who keep producing it. But that raises the question the whole model rests on: **would these founders have started this company as a co-op?** Nobody knows. The founder problem isn't solved, and this example doesn't solve it.
@@ -24,22 +24,22 @@ Here's what **one founder** has received by year 15 if the business succeeds, on
 | 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 |
+| Care work | $3,000 | 40 people | about $19,000 | $140,000 to $180,000 |
-| Main Street | $15,000 | 40 people | about $150,000 | $710,000 to $880,000 |
+| Main Street | $15,000 | 40 people | about $96,000 | $710,000 to $880,000 |
-| Strong | $40,000 | 80 people | about $450,000 | $3.2 million to $4.2 million |
+| Strong | $40,000 | 80 people | about $260,000 | $3.2 million to $4.2 million |
-| Very high margin | $150,000 | 200 people | about $2 million | $29 million to $38 million |
+| Very high margin | $150,000 | 200 people | about $980,000 | $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.
+**In the success case, a co-op founder ends up with somewhere between about a seventh and a fortieth 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.
+- **They're a simple model, not a forecast.** Founders start at a full share. New hires join as members after three months and ramp up to a full share over five. The part of a share they don't get yet goes to the reserve, as tax law requires, not to the founders ([How a Locked Co-op Is Taxed](taxes.md#the-tenure-ramp)). An earlier version of this table let it go to the other members, and showed co-op founders with roughly twice as much. Payroll tax on the founding share is left out too. 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.
+In the very-high-margin case, a worker who joined in year three has received about $600,000 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.
@@ -62,7 +62,7 @@ So for a founder *without* family money, the co-op isn't simply a worse lottery
 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.
+- **A founding share.** For the first ten years, 10% of the members' profit pool goes to the people who were there at the start. It's split by the hours each person worked in the first three years, counting everyone on the payroll, members or not, so the first hires share it with the founders and keeping early workers out of membership doesn't help. It's paid only to people still working at the co-op that year. When someone leaves, their part goes back to the pool. The reserve's and the federation's shares are figured before it, so it comes out of the members' side only, and nobody's founding share in a year can be more than the going-rate pay for their job. Because it goes to some workers and not others, it's paid as pay, not as a profit share ([How a Locked Co-op Is Taxed](taxes.md#the-founding-share)). So the reserve takes 30% of it, like any pay above the going rate ([Investing for the Long Run](the-long-run.md#the-rules)), and it counts in the pay ratio. In the table it's about a tenth of what a founder receives. It is a claim on the work of people hired later, which is what the thesis objects to. The limits keep it small: ten years, a fixed slice, and only while you still work there. A fixed slice means founders gain nothing from keeping the co-op small later on. They would gain a little from hiring late in the first three years, since fewer early hours means a bigger share of the slice for each.
 - **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. Pay can't go below the minimum wage once the co-op exists ([Owners Are Still Workers](labor-law.md#founders-unpaid-work)). 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.
@@ -88,7 +88,7 @@ Parent and spin-off can agree to pool part of their profits and split it per mem
 Some growth can't be spun off. More customers for the same service, or a cheaper product sold by the same team, can't easily become a separate company. There, the dilution stays. What softens it:
 - **The ramp.** A co-op can choose the long end, ten years. That comes at a cost to newer members, who are more often younger or outsiders, and to workers who don't stay long ([When People Don't Stay Long](high-turnover.md#the-ramp-when-people-leave-early)).
- **The founding share is a fixed slice.** Founders' extra reward is a set share of the pool, not extra weight per head, so founders gain nothing by keeping the co-op small ([The Founder Problem](founder-problem.md)).
+- **The founding share is a fixed slice.** Founders' extra reward is a set share of the pool, not extra weight per head, so founders gain nothing by keeping the co-op small once it's past its first three years ([The Founder Problem](founder-problem.md)).
 - **Growth that earns the average is free.** Adding workers to work that's as profitable as the rest doesn't dilute anyone. The problem is only lower-margin growth.
 - **Someone else can take it.** A line the members turn down can be offered to the federation, or to a group of workers, to start as a new co-op.
@@ -9,7 +9,7 @@ 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, 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 can at least tell how much of a result is down to founders: [Co-ops or Their Founders?](who-founds.md) measures founders on both sides from government records, and the verdict has to say how much their backgrounds explain. That doesn't change pass or fail, because if the lock keeps strong founders away, that's part of what the lock does. Still open: nothing yet makes the deal better for the founders the model most needs, and with about 400 co-ops, "too few to tell" is a likely answer.
+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 about a seventh and a fortieth 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 can at least tell how much of a result is down to founders: [Co-ops or Their Founders?](who-founds.md) measures founders on both sides from government records, and the verdict has to say how much their backgrounds explain. That doesn't change pass or fail, because if the lock keeps strong founders away, that's part of what the lock does. Still open: nothing yet makes the deal better for the founders the model most needs, and with about 400 co-ops, "too few to tell" is a likely answer.
 2. **The horizon problem.** *(Mostly answered.)* Members near retirement have little reason to vote for investments whose payoff arrives after they leave. The evidence from France and Italy finds no underinvestment where co-ops must keep a reserve, and [Investing for the Long Run](the-long-run.md) closes the main routes around this model's reserve: pay above the going rate, sales of assets, development spending, high pay that turns into losses, and worn-out equipment still in use. A warning light shows when a co-op stops replacing its equipment, and big bets get an independent opinion before members vote. Still open: nothing forces a co-op to maintain what it has, a bad bet that fails after its backers leave falls on the people who came after, and it's unsettled whether 30% is enough and whether the account rate is right. Members' accounts now pay back within three to seven years ([Member Capital Accounts](capital-accounts.md#why-not-pay-it-out-when-you-leave)), so they help less with long-lived investments than accounts held until members leave. Letting members sell their places to incoming workers was rejected, because that is how the plywood co-ops ended up sold.
@@ -84,6 +84,17 @@ That changes what the ramp does. The founding plan's reason for it was to stop e
 - **Pay the ramp as a wage for years of service.** Everyone gets the per-hour profit share at the starting rate. Senior members get the rest as a pay supplement for years of service, which employers can pay and deduct. That keeps the founding plan's shield for senior members, but it costs payroll tax, about 15% split between the co-op and the member, on most of the profit share. And wages can't be held in capital accounts, so the accounts, and the money the co-op can reinvest from them, shrink.
 - **Ask the IRS to accept the old result.** The unpaid part could count toward the reserve's 30% minimum, which lets the co-op put that much more into the members' pool, so senior members get what they did before. But then senior members gain exactly what new members give up, and the IRS could fairly say it's the old formula by another route. It's only an option if the IRS rules that it's allowed.
 ### The founding share
 [The Founder Problem](founder-problem.md#the-tools) sets aside 10% of the members' pool for the first ten years for the people who worked there in the first three years. Paid as a profit share, it would likely fail the patronage test. The rules exclude amounts paid out of other patrons' earnings to people doing "substantially identical transactions" ([Treas. Reg. § 1.1388-1(a)(2)(ii)](https://www.law.cornell.edu/cfr/text/26/1.1388-1)), and a founder and a later hire working the same hours in the same year are doing much the same business with the co-op. Some worker co-ops measure patronage by wages instead of hours, which could change that. This model uses hours ([One rate per hour](#one-rate-per-hour-for-everyone-who-works)).
 **So it's paid as pay,** in the year it's earned, and only to people still working there that year.
 - **Deferred-pay rules.** Pay that vests by working the year and is paid soon after that year ends is generally not "deferred" under the rules for deferred pay ([26 C.F.R. § 1.409A-1(b)(4)](https://www.law.cornell.edu/cfr/text/26/1.409A-1)). Paying it only to people still there, each year, is meant to fit that. The standard bylaws still need a tax lawyer's review.
 - **Reasonable pay.** It's pay set as a share of profit, and the IRS can treat unreasonable pay to owners as a disguised dividend ([26 U.S.C. § 162(a)(1)](https://www.law.cornell.edu/uscode/text/26/162)). The cap, no more than the going-rate pay for the person's job each year, keeps a founder's total at most about double the going rate. The first pilot co-ops include it in their ruling request (below).
 - **Overtime.** For hourly workers it's a bonus they're owed, so it counts in their overtime rate for the year it's paid.
 - **It costs payroll tax,** paid by the co-op and the person, and it's paid in cash, since wages can't be held in capital accounts.
 ### Capital accounts
 - **The usual way.** Members agree to be taxed now on what's credited to their accounts, and at least 20% is paid in cash. The model's default is half in cash, which covers the tax for most members.
@@ -131,7 +142,7 @@ The model doesn't shrink the benefit cliffs themselves. A low-paid member on sev
 The IRS gives binding answers on specific facts, called private letter rulings, but only to the taxpayer who asks, only about its own real transactions, and never as precedent for anyone else ([26 U.S.C. § 6110(k)(3)](https://www.law.cornell.edu/uscode/text/26/6110)). A ruling costs a fee and often takes months, and the IRS can decline to give one. So:
- **The first pilot co-ops ask, and the bank pays.** They ask whether the co-op operates on a cooperative basis with the lock and the reserve, whether the per-hour profit shares and the ramp count as patronage dividends, whether profit shares carry payroll tax when wages meet the going rate, and how charges moved back to the reserve are taxed.
+- **The first pilot co-ops ask, and the bank pays.** They ask whether the co-op operates on a cooperative basis with the lock and the reserve, whether the per-hour profit shares and the ramp count as patronage dividends, whether the founding share is deductible as pay, whether profit shares carry payroll tax when wages meet the going rate, and how charges moved back to the reserve are taxed.
 - **Until then, every co-op uses the rules on this page, and gets a tax lawyer's opinion on its bylaws.** None of them depends on a ruling to work.
 - **Congress settles it.** The bank's own law needs Congress anyway, and so does [the bankruptcy amendment](bankruptcy.md). That law also says a locked co-op that meets these rules operates on a cooperative basis, and that its profit shares aren't wages for members paid at least the going rate. That's a statement of how existing law applies, not a lower tax rate.