Legal Case Study: Loconomics Conversion to a Freelancer-Owned Cooperative

Background

Loconomics¹ is a company that some would place in the realm of the “sharing economy” or “peer economy.” Along with Airbnb, Handy, Uber, and Task Rabbit, Loconomics is an online platform where people may offer their services to strangers who use the platform to book, pay for, and review the services. The service providers who use the platform include babysitters, dog walkers, house cleaners, massage therapists, psychotherapists, and handy people. They are also part of the “freelancer economy,” which is made up of a growing number of people who operate independent businesses, do temporary work, moonlight, and generally work on an independent contractor basis. Organizations like the Freelancers Union have recently been calling attention to the need to create greater income security and better working conditions for this growing sector of society, which, by some estimates, currently encompasses more than one third of the workforce.

A Freelancer-Owned Cooperative

Loconomics offers a solution to this need. In contrast companies like Airbnb and Uber, which take a large cut of freelancers’ earnings and which operate primarily for the benefit of their shareholders, Loconomics is now what founder, Josh Danielson, describes as a “freelancer-owned cooperative,” a company that is owned and democratically governed primarily by the freelance workers that benefit from the company’s service. Some of the ways in which a freelancer-owned cooperative would likely differ from a conventionally-structured company in the sharing economy is that it is more likely to:

• Work to ensure predictable work for freelancer members,
• Keep fees low,
• Distribute dividends to freelancers,
• Offer benefits and supports services to the service providers,
• Bargain on behalf of freelancers (for insurance and other benefits),
• Create rules and culture that benefit freelancers and help maintain freelancer independence and mobility, and
• Empower freelancers to propose and carry out initiatives within the company.

Loconomics as a Conventional Shareholder-Owned Corporation

Loconomics was previously a for-profit company structured as a California Benefit Corporation with eleven individuals holding stock and/or stock options. Each of these eleven shareholders contributed time, and – in some cases – money, to the founding of the company and the creation of the platform. In 2014, the platform was nearing completion and was already in use by a handful of service providers. Josh Danielson approached the Sustainable Economies Law Center (SELC) to seek legal assistance with converting the company to a cooperative.

Documents Required in the Conversion

SELC assisted by helping to prepare:

• A letter to the shareholders to explain the thinking behind and process of cooperative conversion,
• A Stock Redemption Agreement,
• A Promissory Note,
• Amended and Restated Articles of Incorporation,
• Amended Bylaws, and
• Amended Terms of Use for the platform.

Redemption of Stock and Stock Options

To convert the Benefit Corporation into a California Consumer Cooperative Corporation, Loconomics first redeemed all outstanding stock shares and stock options in exchange for promissory notes. Loconomics was fortunate to have all shareholders agree to forego the potential for profit maximization, in exchange for locking in a fixed return based on the agreed-upon valuation of the company. Had even one shareholder refused to voluntarily redeem stock for a promissory note, the conversion process would have had to be different (a Type C conversion), since the only way to force redemption of the stock would be to create a second entity and merge the original Loconomics entity with the new entity. Fortunately, since everyone consented, the process was simpler, and Loconomics needed only to amend its Articles and Bylaws to become a cooperative.

Valuation and Promissory Notes

There was no clear way to value the company, given that very few people were using the platform at the time. Appraising tech start-ups is difficult, because Loconomics could have become huge and worth billions, or it could have fizzled out and been abandoned. Josh proposed and everyone agreed that the company be valued at approximately $750,000, based on a decision to compensate each of the eleven people at a rate of $75 per hour for the time they put into the creation of the platform and the risk they took in building the company. Thus, Loconomics now has $750,000 in outstanding promissory notes. These promissory notes accumulate interest at a rate of 5%, and are repayable over the term of 5-10 years, with repayment beginning two years after executing the notes. Each shareholder signed a Stock Redemption Agreement in which they relinquished their interest in the company in exchange for promissory notes that outlined the terms of repayment.

Amending Articles and Bylaws

After redeeming all stock, Loconomics filed Amended and Restated Articles of Incorporation that officially converted the company into a cooperative corporation. The Board had the power to adopt and file the amended Articles, because the corporation, at the time, had no shareholders, and had not yet admitted members. After filing the Articles, the Board appointed a new Board to serve on behalf of the cooperative. At the time of this writing, members have not yet been admitted into the corporation.

Membership Structure

Ultimately, Loconomics adopted Bylaws that made it a multi-stakeholder cooperative, allowing the following to be members:

1. Individual freelance service providers (who would make up the vast majority of members),
2. Worker-owned cooperative service providers,
3. Nonprofit service providers filling unmet needs in the community,
4. Loconomics employees, and
5. Loconomics independent contractors.

Each member, regardless of the above category that they fall into, receives one vote in the election of the Board of Directors. When there is surplus income, each member would receive a patronage dividend on the basis of how many hours of services they booked using the Loconomics platform, or, in the case of the company’s workers and independent contractors, how many hours they worked for the company.