Legal Case Study: Real Pickles

Background

Normally food business founders dream of an exit strategy that involves selling the business to a large player in the food chain. Think Odwalla or Naked Juice. For Real Pickles owners Dan Rosenberg and Addie Holland, however, selling their business to a large corporation would have compromised their business’ social mission “to promote human and ecological health by providing people with delicious, nourishing food and by working toward a regional, organic food system.”¹ Converting to an employee-owned business was a way for the owners to preserve Real Pickles’ social mission long after selling their ownership stake. In 2012 they formed a cooperative with their employees. And in 2013, after owning the business for twelve years, they sold Real Pickles to the new cooperatives, Real Pickles Cooperative, Inc.

The Deal

The founders landed on a sales price of $524,000 for the business and entered into an MOU with their three employees to sell the business to the new coop. The founders stayed on in the business and, alongside their three employees, became worker-owners of the coop. The buy-in for each work-owner, including the two founders, was $6,000—which was a total of $30,000 in member capital invested in the cooperative. The plan was to raise the bulk of funds to purchase the business from the direct public offering. The owners agreed to extend a loan, at 4% simple interest rate, for the balance of whatever was not raised by the direct public offering.

The breakdown of the deal was that the new cooperative would purchase all of the assets and liabilities of Real Pickles, the partnership. Included in that purchase was $400,000 of goodwill. In addition, the cooperative assumed about $145,000 in debts. The owners owned the property out of which Real Pickles operated and agreed to a long-term lease at an annual rent of $67,500 and granting a right of first refusal to the Cooperative upon sale of the property.

The Financing Strategy

Real Pickles used a direct public offering of preferred shares to finance the majority of the sale of the business to the cooperative. The preferred share program was similar to that used by Equal Exchange, a large Massachusetts-based coffee roaster. In determining the preferred share offering terms and sale price, the founders sought financial expertise from PVGrows, a local organization that provides financial and technical advice to area food businesses. For the actual legal involved in doing the direct public offering, Real Pickles hired Cutting Edge Capital (CEC), a consulting firm that specializes in providing legal and technical assistance for direct public offerings.

Real Pickles started the crowdfunding campaign in March 2013 and amazingly, finished it in two months. They were able to get seventy-seven community investors, including other cooperatives, to purchase the minimum share amount, and raise the entire $500,000 offering amount.

Each share cost $25, and investors were required to purchase a minimum of 100 shares, which meant the minimum investment was $2,500. Rosenberg described this minimum investment amount as “low enough to allow for relatively broad participation, while high enough to keep our investment pool a manageable size.”²

Preferred share terms

The terms of the offering were laid out in the articles of incorporation, the offering prospectus and the investment flier. The cooperative had two classes of shares- membership shares and preferred shares. Membership shares are reserved for the worker-owners, and are the only voting shares in the cooperative. The preferred shares carried no voting rights, but had a target dividend rate, set at 4% annually. The preferred shares were non-cumulative and the board reserved the right not to declare them in a given year. The preferred shares were non-transferable, except to the Cooperative. Preferred shareholders were able to redeem their shares after five years, if the Cooperative had sufficient funds to repay them. The Cooperative could redeem the shares (i.e. buy out the shareholders) at any time. The offering prospectus clearly laid out the risk for preferred share investors- that they were not guaranteed a dividend, and were not guaranteed that their preferred shares would be redeemed when they requested it. The prospectus further explained that preferred shareholders had no voting rights, beyond the minimum voting rights guaranteed by Massachusetts law. Election of the board of directors was the sole power of the membership shares.