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

title, section, order, summary

title	section	order	summary
The Founder Problem	The Co-op	40	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 design, and it needs to be said plainly.

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 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.

This page runs the numbers, lays out the tools, and says honestly what they can and can't fix.

The numbers

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 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 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). 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). 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). The median small business that does sell goes for about $345,000 (BizBuySell, 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, 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.
• 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. 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 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 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.