Exploring Exit-to-Community strategies for a hypothetical worker-owned Cooperative Research Organization.
It is difficult, labor-intensive, and costly to maintain research tooling and infrastructure. Reliance on grant funding can also lead to dependence on certain funders, giving them an outsized influence on the development of the research tooling, and is subject to the financial capability and priorities of the grant-making organization, which can change depending on economic conditions, and their own desires for scale which may or may not be achievable for the research tooling.
As maintenance and development costs become harder to satisfy, and the user-base grows in size and has more demands, for a research infrastructure project to have long-term sustainability, it is important for developers of research tooling to develop an exit strategy early on. An exit strategy can align the founders or core team to think long-term with a clearly defined goal, develop near- and short-term strategies to make the exit strategy possible, and to develop the organization to run independently of the founders. For developers, there are the traditional exit routes of an Initial Public Offering (IPO) and Mergers and Acquisitions (M&A), but for founders who are steadfast to their mission, are community-oriented, or want to ensure their user-base has a say in the development of the infrastructure, an IPO and M&A seem to counter with the founder’s values and goals.
See the full list and meanings of acronyms in the appendix.
For these types of developers, Exit to Community (E2C) is an emerging exit strategy that may fulfill their goal of staying true to their mission and benefitting stakeholders, co-governing and -designing the research infrastructure with stakeholders, while satisfying the maintenance costs of research infrastructure. This is also were a Cooperative Research Organization (CRO) comes into play. CROs are more likely to experiment with E2C strategies because such strategies are more aligned with the organizational model.
Cooperatives, as defined by the International Cooperative Alliance, are “people-centred enterprises owned, controlled and run by and for their members to realise their common economic, social, and cultural needs and aspirations.” A research organization is an organization dedicated to conducting or fostering research (i.e., advancing understanding).
Putting them together, a Cooperative Research Organization (CRO) is a cooperative dedicated to advancing understanding for epistemic value, commercial value, and/or impact (e.g., environment, social, or governance (ESG)) value, as part of their mission.
Generally, the purpose for a CRO’s research will fall under one or more of these four categories:
Generally, a CRO is likely to be a worker cooperative, a type of cooperative where the workers (e.g., employees or contributors) are also the owners of the organization. Worker refers to individuals or organizations that provide labor to the organization.
Examples of CROs are described in the table below. This list is non-exhaustive.
Ethical Consumer Research Association
Multi-stakeholder (Investors and Workers)
Research for Action
Before we discuss Exit to Community (E2C) strategies, it is important to first discuss why an organization should have an exit strategy in the first place. An exit strategy is a plan developed by the founders or core team of a business to sell the business. Founders or the core team should think about an exit strategy early-on “because the choice of [an] exit plan has a significant influence on business development choices.”
Developing an exit strategy can be helpful to founders because it can align the founders or core team to think long-term with a clearly defined goal, develop near- and short-term strategies to make the exit strategy possible, and to develop the organization to run independently of the founders.
For startups that are community-oriented or are planning an E2C in the future, it is very important in the early stages to communicate this intent with investors, understand your ideal exit and your philosophy (mission, values, principles), and to preserve majority ownership. For example, Open Collective is currently planning an E2C to exit their crowdfunding platform to their user-base, but the founders of Open Collective have had a community orientation since the beginning, with founder and former CEO Xavier Damman taking in VC funding, but retaining majority ownership in Open Collective to the founders so that the founders could find an exit path beyond an IPO or M&A.
Xavier, CEO at the time, negotiated the round: he'd learned from a previous negative experience with VC and defended control of the company. We retained not only majority ownership, but also all the board seats. This is an uncommon and special thing to achieve in the startup world.
In the table below, common exit strategies for startups are described.
Initial Public Offering
the first sale of stocks issued by a company to the public
merge the organization with another organization to form a new organization
acquiring a majority stake in another organization
sell the company’s stock or assets to another company
Exit to Community (E2C), coined by Nathan Schneider in 2019, is an alternative exit strategy for startups beyond an Initial Public Offering (IPO) or engaging in a Merger or Acquisition (M&A). E2C advocates for startups or founders to exit (i.e., transfer ownership of the startup or product) to their community, or beyond simply investors. E2C seeks to instill a new or under-appreciated form of ownership, steward-ownership, into the tech sector.
In a conventional ownership structure, ownership in a business is structured to be sold or transferred, primarily for the purpose of profit-maximization for shareholders.
Steward-ownership, in contrast to conventional ownership, is when ownership in a business is “not structured to be sold or transferred, but instead is intended to be held in perpetuity for the benefit of some purpose.”
Steward-ownership can take many forms, of which three are explored in this article. For more examples of steward-ownership structures, refer to STEWARD OWNERSHIP, ILLUSTRATED by Alternative Ownership Advisors.
In Exit To Community: Strategies for Multi-Stakeholder Ownership in the Platform Economy, Nathan Schneider and Morshed Mannan investigate three possible strategies for an E2C for a hypothetical company, CoSocial, that operates a social network.
The E2C strategies described in the article include a:
stockholding trust (where the company establishes a trust and transfers the company’s voting stock to the trust via a buyout),
federation (where the company scales horizontally by either open sourcing technology and allowing separate legal entities to operate the technology),1 and
tokenization (where the company creates a Decentralized Autonomous Organization (DAO) to steward the product, and tokenizes the governance and/or economic rights of the DAO).2
An example of a stockholding trust is Patagonia. Patagonia recently transitioned to stockholding trust structure were 100% of Patagonia’s voting stock was transferred to the Patagonia Purpose Trust, a Perpetual Purpose Trust (PPT) created to protect the company’s values. All of the nonvoting stock was transferred to the Holdfast Collective, “a nonprofit dedicated to fighting the environmental crisis and defending nature.”
Two examples of federation are Mastodon and CoopCycle. Mastodon is a federated social network for micro-blogging, akin to Twitter. Mastodon is an example of technical federation, where each Mastodon instance (on a server) is individually managed by a group or organization, but each server can federate with other servers so that users can communicate across servers.
CoopCycle is a shared services cooperative or cooperative federation for bicycle courier cooperatives, providing bike delivery software to members. CoopCycle is an example of a member-owned technology network (or cooperative federation) where each member-cooperative independently manages their own deliveries, but relies on a common software to save costs, improve operations, collectively bargain, and increase their reach.
A tokenization example is Gitcoin Labs’s exit of Gitcoin Grants, a crowdfunding and grants platform for open source software and Web3 projects, to the Gitcoin DAO. Accompanying the Gitcoin DAO, Gitcoin Labs also issued the $GTC token, a token representing governance rights and power in Gitcoin DAO. Through tokenization, Gitcoin Labs was able to satisfy their goal of community-oriented governance of the Gitcoin Grants platform and preserve their mission while paying back investors and rewarding past users.
E2C is a relatively new strategy, coined only a few years ago in 2019, and the Purpose Foundation, a major proponent for steward-ownership in the USA, being founded in 2015. The recent emergence of E2C means that there is a need for experimentation around E2C strategies to develop precedents and examples for others to follow, especially strategies that could counter the barriers to an E2C, such as a lack of information and narratives, the complexity of its legal implementation, and a lack of aligned capital. As such, there is a lack of precedent and examples for others to follow in developing their own E2C strategy.
This is where cooperatives come into play. Cooperatives are very familiar with the difficulties faced by this new emergence of steward-ownership and E2C initiatives, having faced them themselves in the past.
Cooperatives in the past and present have worked on developing alternative strategies to get around these same barriers. Though an incomplete list, cooperatives (including CROs) and people who are involved in the cooperative and solidarity movement are primed to experiment with E2C strategies for one or more of the following reasons:
a desire to foster and promote co-ownership and democratic governance among a product’s user-base;
understand that Mergers and Acquisitions (M&A) usually leads to product development that harms or ruins the user experience
ensure the CRO can stay focused on its own mission to develop research tooling and infrastructure, rather than product maintenance and adjudicating stakeholder concerns
raise funds for research and development (R&D) and maintenance of the product without compromising on cooperative values and structure;
remove reliance on grant funding as main source of income for R&D and maintenance;
no desire or realistic expectation of exponential returns (especially in the short- to mid-term) without comprising on value provided to users;
mission of the organization is a long-term (>10 -15 years) project;
the need to measure impact beyond simply profit;
CROs already have a desire for, and awareness of, steward-ownership early-on in the development of the organization;
CROs generally do not have a class of investors with governance rights who could stop an E2C from occurring;
CRO members or founders lack of desire to sell to a third party or to avoid a traditional exit; and
By experimenting with E2C strategies, cooperatives will also support other organizations interested in steward-ownership and E2C by sharing findings and resources from E2C experiments.
We will explore this further in the next section on a case study on Liberate Science, a worker cooperative developing Research Equals, a publishing platform.
Liberate Science (LibScie) is a for-profit worker cooperative, founded in October 2019, to develop sustainable alternatives for research tooling. LibScie seeks to foster a self-sustaining research commons in ten to fifteen years. LibScie has developed Research Equals (RE), an open source publishing platform for modular research articles.
LibScie is running a semi-E2C (granting governance and stewardship rights to the user-base, but retaining ownership of the underlying product or asset without offering an exclusive license) by offering supporting membership to institutional and individual users, thereby giving users governance rights over RE for an annual fee.4 By offering supporting membership, LibScie seeks to co-design RE with its community of users, and enable users to hold LibScie accountable for any missteps. The governance system operates on a democratic principle of one-person, one-vote, rather than a tiered system of voting power,5 reflecting the cooperative nature of LibScie itself.
LibScie conducts a quasi-E2C by offering supporting membership to institutional and individual users, thereby giving users governance rights over RE for an annual fee.6 By offering supporting membership, LibScie seeks to co-design RE with its community of users, and enable users to hold LibScie accountable for any missteps. The governance system operates on a democratic principle of one-person, one-vote, rather than a tiered system of voting power,7 reflecting the cooperative nature of LibScie itself.
LibScie is engaging in a semi-E2C because:
LibScie has no intention of selling the organization to Venture Capitalists (VCs) or third-parties;
LibScie recognizes that funding grant from Shuttleworth Foundation will run out in two years, thus pushing the need for sustained funding so that LibScie can continue to work on its mission to foster a self-sustaining research commons, which will take at least ten to fifteen years to actualize;
LibScie has no intention of becoming a quasi-monopoly like Mendeley or Elsevier; and
LibScie seeks to enfranchise RE’s user-base as the key stakeholders to design for (i.e., defining a clear boundary for membership), and to engage in collective action (e.g., participatory economics or collectively allocating resources and profit).8
Through the process, LibScie is also making their findings and resources publicly available (e.g., the poison pill agreement) on their blog and the RE platform. Thus, allowing others to learn and build on from their approach.
Want to run through a hypothetical example to understand the process of choosing which type of strategy (or combination of strategies) would be best for your organization?
Check out this supplementary pub going through a scenario with a hypothetical CRO, One Knowledge:
E2C can be a transformative exit strategy for founders to give their product’s user-base governance rights over the product, but it is not without its own issues.
In addition to the aforementioned issues, E2C strategies also face six challenges. First, finding investors who are willing to experiment with E2C as an exit option or who will not take majority control of the organization. Second, regulatory restrictions on securities transfers impedes transferring stock ownership to users. Third, there is a lack of policy support to encourage organizations to undertake E2C strategies. Fourth, there is a need to develop mechanisms to counteract collective action problems such as voter apathy. Fifth, there are a small number of professional service providers who are knowledgeable about E2C strategies. Lastly, the transition period may take longer than five years.
Despite these challenges, it is still worth it to consider an E2C if the strategy fits with your organization’s mission or your desire to empower your product’s user-base. Especially for developers of research infrastructure and tooling, as a vehicle to community-ownership E2C can empower users and other stakeholders to participate in the maintenance of the research infrastructure. Community-based funding can provide a sustainable means to support research infrastructure beyond an initial grant award for three reasons. First, grant funding is sparse or limited for maintenance and support of research software, in contrast to funding for R&D of novel research software. Community-based funding can aid in making up for the loss in grant-based funding for the maintenance and future development of the research infrastructure. Second, by co-governing and -designing with users, users will feel empowered to participate in the maintenance and growth of the project by offering informative feedback, increase the visibility of the research infrastructure, using the research infrastructure, and contributing in other ways. Third, community-funding, in contrast to an IPO or M&A, can ensure that the the product’s future growth is aligned with the organization’s purpose for the long-term, while meeting the needs of users and other stakeholders.
If you are interested in an E2C, here are some helpful tips to consider: 1) work with a transition advisor to develop an E2C strategy, 2) expect the transition to occur over a mid- to long-term timeline, and 3) read through case studies, such as ShareTribe’s E2C to a stockholding trust.
A set of preliminary questions for an organization to consider for an E2C include:
Does the organization have a philosophy (mission, values, principles) or is it mission-driven and/or value-oriented?
Is the mission not achievable in the short-term?
is the organization centered on purpose (or is driven more by purpose than by profit)?
Has the organization inculcated “a culture of strong community empowerment?”
Is the organization over-leveraged?
Can the product achieve financial sustainability without relying on large amounts of investments or VC funding?
Are you uninterested in a traditional exit?
Has the company reached the break-even point or become profitable for the past 2 years?
Is authority (access to information and decision-making) distributed in the organization (or product)?
Research for All
Cooperative Research Organization
Exit to Community
Perpetual Purpose Trust
Decentralized Autonomous Organization
Ethical Consumer Research Association
Environment, Social, or Governance
Research for All Trust
Research for All Holdings
Research and Development
Mergers and Acquisitions
Board of Directors
Research for All Cooperative
Transition Facilitation Team
Trust Protector Committee
Annual General Meeting