While incorporating a co-op, and planning to raise money, words like ‘shares’, ‘capital’, and ‘share capital’ get used a lot. Building a sound business and raising funds requires an understanding of what these terms are and why they’re important for co-ops. This resource is meant to explain how to handle share capital in the context of a co-op.
Simply put, share capital is the money a business raises in exchange for ownership in the company. For co-ops, this usually refers to the money an individual pays to become a member.
What are Shares?
Let’s complicate things a little. The way you become a member of a co-op depends on the process set out in the co-op’s bylaws. Usually this involves completing an application form and committing to use the services provided by the co-op. Another important step most co-ops use is requiring that members purchase shares in the co-op. Shares are individual units of ownership. Co-ops can issue two types of shares:
Membership shares: These shares give their purchasers ownership in a co-op, the right to vote at members’ meetings, and the right to receive a share of the co-op’s profits. Each membership share is usually assigned a par value (i.e. the value doesn’t change) of $1 and members purchase a set number of shares (e.g. 10 membership shares for $10). Most co-ops issue unlimited membership shares.
Investment shares: These shares are used to raise money and they do not give their purchasers the same rights as membership shares. Investment shares are usually worth more than membership shares (e.g. $1000), but they come with financial perks, rather than ownership and control. If the co-op declares a profit, the co-op must prioritize paying a dividend to investment shareholders and if the co-op dissolves, investment shareholders get their money back before members. Co-ops that issue investment shares should have a financial and strategic goal in mind. For example, if you want to raise $100,000 from investors, you might issue 100 $1000 investment shares.
Wait, why $1 shares?
While this isn’t required, many co-ops assign their membership shares a $1 value. There are three important benefits that come with this decision:
It allows members to easily purchase their membership in installments. For example, a co-op that requires $1,000 to become a member could allow its members to purchase $100 worth of membership shares each month until they reach the required amount. The co-op’s treasurer would keep track of things in the co-op’s member registry, and the membership would become active once they are paid up.
It gives the co-op more flexibility when members withdraw from the co-op. When a member wants to end their membership, the co-op must redeem (buy back) their membership shares. This can be a big problem if the co-op has limited funds and multiple members want their money back. When shares are worth $1, the co-op can redeem shares in installments to better manage their cash flow.
It allows the co-op to easily adjust the price of membership. Whether you want to reduce the cost of membership to encourage new people to join or you want to increase the cost of membership to keep things exclusive, $1 membership shares make things easier. A co-op’s articles of incorporation set the cost of membership shares and are much harder to change. If you set the price of your membership shares at $1, you can determine how many membership shares are needed in the co-op’s bylaws, which are much easier to change. Not sure of the difference between bylaws and articles? Check out this video.
No shares, no problem
Some co-ops incorporate without share capital – community service co-ops or co-ops that want to obtain charitable status, for example. In these cases, membership in the co-op may be free or there may be a membership fee. Membership fees can be required one time or annually. And, unlike shares, they don’t have to be repaid. Some co-ops use annual membership fees to help offset regular capital costs or weed out inactive members.
Where do we start?
To get started, estimate how much money the co-op needs to raise. From there, determine how much members should pay for a membership and how many people could be involved. Starting on a business plan at this point is a good idea. A business plan provides good cost estimates and a solid understanding of what the co-op is going to do. Be sure to explore all the financing options available to a co-op to identify what will work best in your case.