Our mission at Informal Systems is not just about distributed systems, it’s also about the organizations that grow along with them. Our vision is an open-source ecosystem of cooperatively owned and governed distributed organizations running on reliable distributed systems. To achieve this vision, we begin with ourselves, adopting a democratic structure that aims to rebalance the power dynamics between capital and labour towards something more sustainable and non-extractive; something that nurtures long term employment and real wealth creation through R&D, entrepreneurship, and innovation; something more like a Zebra than a Unicorn.
Informal Systems, at its core, is a full-suite Research & Development services business. While not massively scalable, service companies offer essential value in society, and highly specialized services can take home a healthy margin. But we’re also a product company, working to commercialize our R&D by incubating product-driven revenue streams in blockchain infrastructure, formal verification, and business operations.
We take inspiration for our company structure from three existing organizational forms – worker co-ops, ESOP-owned corporations, and incubators – and seek to find a replicable blend of the three. No one model seems to provide quite what we’re looking for, but each contributes a key tenet. Like a worker’s coop, we want democratic, one-person-one-vote governance by workers; but like an ESOP-owned company, we want workers to build equity that they can grow and realize over time; and like an incubator, we want to provide the opportunity for workers and capital to experiment with building startups. We’re also inspired by the growing Platform Cooperativism and Exit To Community movements, and hope that our more-product focused endeavours can evolve in their direction.
Of course, we are only at the beginning of this journey. Our current corporate structure, described below, is a minimum viable democratic organization that we plan to evolve together to meet our goals and establish a model and tools for others to do the same. For more about the different organizational forms we’ve been inspired by, see the Background Research section at the end.
MVP Corporate Structure
Given the tremendous landscape of corporate forms and the need to navigate complex dynamics of corporate law, labour law, and taxation in multiple jurisdictions (Canada, Switzerland, Germany, Austria, and more), we began with the most minimal and flexible corporate form available to us, a private Canadian corporation. We customized the Articles of Incorporation, Shareholders Agreements, and By-Laws to “simulate” the requisite component of each organizational form. We partitioned the governance and economic rights across three classes of shares:
Informal Shares - The democratic “Membership” shares that control the corporation, issued to employees on a 1-person-1-vote basis. Informal shares allow holders to elect the board, approve changes to the company structure, and sign off on major corporate decisions.
Uncommon Shares - “Common” shares without voting rights. This is an economic share that represents the equity stake of a worker in the corporation.
Deference Shares - “Preference” shares for investors, so named because the alliance between capital and labour should be about humility and respect.
An important goal with our company structure is to preserve flexibility so we can continue to experiment. While there are statutory worker coops in Canada, they are stricter and more inflexible than regular corporations, with an outdated and less well understood regulatory framework. Hence at present, we are effectively simulating an international workers cooperative through a private Canadian corporation.
The Uncommon and Deference shares currently have minimal rights, and no one owns a Deference share yet. We intend to evolve the Uncommon Shares to function more like an ESOP, where employees can realize the value they helped create for years after they leave, and to evolve the Deference Shares to function more like LP units in an incubator. We hope the parent worker coop can function as a nurturing safety net for spinning out new entrepreneurial ventures.
Of course, there’s still quite a bit to figure out here. If you’re interested in alternative organizational structures and would like to discuss ways to reimagine the relationship between capital and labour in for-profit worker cooperatives, we’d love to chat. DM us on twitter or email us at firstname.lastname@example.org.
We have much more to explore and have only begun working to create a structure to achieve our goals. We hope that once we do, we can share this structure with the community at large so others who align with our values can easily and cost-effectively replicate our model. We are working on tools like Themis Contract that will help make this vision a reality by reducing the operational overhead of managing a corporation and interpreting the validity of its state. We hope these tools can better support new organizational structures, and together help reduce the barriers to entrepreneurship and sustainable cooperatives, enabling both social and economic upside for our greater community.
If you’re interested in joining Informal Systems and becoming part of our iterative cooperative organization, check out our open roles.
In determining the right structure to meet our goals, we researched a variety of existing companies and organizational forms, including worker coops, ESOPs, and funds/incubators. Here we provide some detail on each.
Worker co-ops function a lot like regular companies; they have a board of directors responsible for strategic vision and planning and they have a management team, appointed by the board, that executes day-to-day on the vision. The major difference is that the board of directors is elected by member-employees on a one-person-one-vote basis, rather than by shareholders according to their equity stake. Certain important decisions may also require approval from the member employees. Further, profit sharing is done in a fair manner, typically according to how much work each member does on behalf of the co-op, tracked in terms of time, or proportionately to their salary.
Coops can also raise capital using preference shares: non-voting shares with a liquidity preference that function like a mix of debt and equity. Debt because it is paid back preferentially over other shareholders (e.g. members), it often comes with an interest rate, it retains a stable value (i.e. “par value”), and it is eventually redeemable for the par value (i.e. the investor gets their cash back, plus interest). It’s equity-like because, even if it doesn’t have the right to vote on important business matters, it affords the holder certain other rights (e.g., pro-rata rights, rights of first refusal, etc.). The interest is more like a dividend since it’s only paid if and when the co-op can afford it (otherwise, it just accrues).
Many jurisdictions have statutory recognition for worker co-ops, with specific rules they must follow to qualify, for example, 75% of members must be employees, and 75% of employees must be members.
The world’s largest worker cooperative is the Mondragon Corporation, which is itself a federation of cooperatives in diverse industries. With ~75,000 employees and billions in annual revenue, it’s also one of the largest industrial groups in Spain.
Worker cooperatives are a fantastic organizational form for folks coming together to start new ventures. They’ve seen significant success, have proven themselves viable over both space and time, and are known to last longer on average than shareholder based corporations, and to have less turnover. That said, with respect to our particular circumstances, we identified some difficulties:
Statutory rules tend to be inflexible and afford little room for experimentation in structures and processes.
Preference shares tend not to have any upside (i.e. they retain fixed value).
Worker co-ops are a relatively underutilized corporate vehicle, so they are difficult to learn about, set up, and get sound advice on.
Past employees tend not to be compensated for the value they helped create that may only materialize after they’ve left.
The final point is especially crucial for an R&D entity, where the work an employee does may not pay off until years after they’ve left. We want to structure an organization where employees can realize the upside from their work even after leaving the company, whether due to retirement, a new job, or otherwise.
Employee Stock Ownership Plans (ESOPs) are a common way to incentivize employees in many companies, especially tech startups. However, ESOPs are typically restricted to a small portion of the total equity and usually take the form of options, which tend to be more tax favourable but which don’t have equity rights until they are actually exercised.
An alternative way to create an ESOP is with a trust fund that owns and controls a major stake in the company on behalf of employees. Employees are granted fractional ownership in the ESOP fund, which holds the value of the equity in trust for them until they leave and cash out - similar to a pension plan.
In the US especially, ESOP-owned-S-corporations seem to be particularly friendly structures for employee ownership, as S-corps are flow through entities and ESOP-trust funds can substantially defer taxes until payout. Employees can be issued some new/additional shares in the ESOP every year with limited tax liability, and the company’s profits pool tax-free in the ESOP until an employee leaves and cashes out their shares.
An ESOP with a majority stake in the S-Corp would enable employees to effectively control the company, voting proportionately on board members and any major decisions.
Galois, a successful R&D firm specializing in formal verification, is structured as an ESOP-owned S-corporation. They also have a unique internal management and compensation structure documented in their paper on the Collaborative Web, and they regularly commercialize their R&D work by spinning out new startups.
ESOP-owned-S-corps are a growing movement in the US - they’re a remarkably friendly and profitable structure for employee ownership! That said, there are a few drawbacks:
The S-corp-like flow-through entity and the favourable ESOP tax treatment (i.e., the ability to issue equity to employees every year tax-free) appear to be US-specific. It’s not clear if similar vehicles exist in other countries.
They don’t readily admit external investors (S-corps cannot have corporate owners, and flow-through structure means investors have tax liability every year).
They don’t have truly democratic voting (i.e., voting is weighted by ownership in the ESOP, it’s not one-person-one-vote)
Funds and Incubators
Entrepreneurship is a risky endeavour, and the probability of failure early on is very high. The traditional entrepreneurial model of working alone in your garage for no pay can discriminate against those who can’t take on the economic risk of no cash flow in the short to medium term. Incubators and seed funds provide a financial safety net to get a business off the grounds and give the entrepreneurs employment prospects and the ability to work for themselves.
Notable new types of funds and incubators are challenging the traditional venture capital (VC) and private equity (PE) investment models. For example, Tiny Capital is a fund that buys, and invests in internet businesses. Unlike VC or traditional PE funds, Tiny focuses on investing quickly in sustainably profitable companies and prioritizes founder well-being. They don’t try to optimize the business to exit it in 3-5 years, grow it to be 100x, or impose complex deal terms. They let founders or executives run the businesses as they see fit, and provide help when needed.
Indie VC is designed to fund and support founders on a path to profitability. Through their Intro program, they offer entrepreneurs a variety of different funding options through various debt vehicles. Intro allows entrepreneurs to quickly access non-dilutive funding, which is often not accessible for small startups, so they can focus on growing their businesses in a sustainable way.
Finally, Start.Coop is an incubator program that supports companies building sustainable businesses, not ones seeking big exit events. The incubator also offers equity to graduates, so all graduates become shareholders, creating a long-term symbiotic relationship with the incubated companies.
While these incubators and alternative funds are promising, they function primarily as a source of capital and operational support for companies, rather than offering their own products and services to the market. We intend for Informal itself to be a profitable R&D entity that will continue to provide services to the market while commercializing its work by spinning out new startups.
Disclaimer: Our company structure is highly experimental and should not be considered advice of any kind. If you’re interested in experimenting with your own company structure you should consult with your own tax, legal, and financial advisors.