How a small, local food business in western Massachusetts preserved its social mission through transitioning to a worker-owned cooperative and using an innovative financing strategy.

*Updated from a Case Study by Community Involved in Sustainable Agriculture (CISA) by Greg Brodsky and Shahzaib Azhar based on interviews with Real Pickles employees and publicly available documents for the benefit of Start.coop accelerator participants and the broader co-op community.

Location: Greenfield, MA

Introduction

How does a 24-year old from northern New Jersey get into the business of making pickles? For Dan Rosenberg, it started with his interests in social change, ecology, and the food system.  During his experience as a recent college graduate apprenticing on an organic farm, he attended a workshop at a farming conference which inspired him to try lactic acid fermentation ( considered the original pickling method). In 1999, excited about the benefits of locally grown food, Rosenberg started pickling cabbage, turnips, greens, and other vegetables as a way to eat locally throughout the winter. Rosenberg quickly became devoted to the craft of traditional pickling and, two years later, decided to form his own business, called Real Pickles.

Real Pickles sold its first jar of organic dills in 2001. Rosenberg purchased a thousand pounds of cucumbers from a family farm in western Massachusetts, pickled them, and convinced a number of local stores to make space for them on their shelves. In 2004, Addie Rose Holland joined Rosenberg as his life and business partner. Since then, she has contributed a lot as a co-owner, especially by adding products like Organic Sauerkraut and Organic Ginger Carrots and leading the marketing of Real Pickles.

Today, Real Pickles buys hundreds of thousands of pounds of certified organic vegetables from local farms, and offers eleven fermented products, running the gamut from their award-winning garlic dills to kimchi, sauerkraut, and tomatillo hot sauce.

Unique Selling Point

Rosenberg didn’t go into business just to make a living.  Indeed, he saw Real Pickles as a way to contribute to the growth of a healthy regional food system, opting to the only source and sell in the northeastern United States.  In addition to sourcing regionally grown and organic ingredients, and limiting sales to the northeast, Real Pickles’ commitments extend to producing food with high integrity, using the ancient process of lactic-acid fermentation, remaining a small business, and providing good jobs and opportunities for its employees.

Values Alignment = Becoming a Cooperative

For Rosenberg and Holland, Real Pickles has always been about more than just their fascination with things fermented. It is a company formed out of respect for good food, people, and the planet.  In 2012, Rosenberg and Holland, decided to do some long-term thinking about how to set up a structure that would support the business and help sustain its social mission should they ever decide to leave. And, if that meant altering the ownership structure of the business, this would also be the time for Rosenberg and Holland to receive compensation for the value that they had put into the business over the years.

It was important to them to keep Real Pickles small, locally owned, and mission-driven.  They saw this in opposition to selling their growing company to a large industrial-food corporation that can happen so often with successful natural products businesses (think: Odwalla, Naked Juice, Tom’s of Maine, Stonyfield, and so on).

Therefore, in 2012, they began to find the answers.  Along with Real Pickles’ staff, Rosenberg and Holland made the decision to restructure as a worker-owned cooperative based on three main reasons. Firstly, now a group of worker-owners would share in decision-making for the business, instead of just Rosenberg and Holland, helping Real Pickles to be less dependent on its founders in the long run. After being with the company for a year, Real Pickles employees could apply to become worker-owners. Profit-sharing and a role in decision-making would give employees an incentive to stay on for the long term, building a staff of committed, knowledgeable worker-owners. Secondly, doing business as a worker-owned cooperative also would help to keep the company’s strong social mission and community roots intact. These principles would now be inscribed in the organization’s bylaws and articles of organization, requiring a unanimous vote of the worker-owners to change. Thirdly, the cooperative’s owners would continue to be local residents involved in the company’s day-to-day operations, making it highly unlikely that Real Pickles will ever relocate out of the community.

In order to fund the co-op’s purchase of the business, they created a community investment campaign that raised a half-million dollars. 

How to Raise a Half-Million Dollars

Forming a worker cooperative was only the beginning of this story. The worker-owners still faced the daunting task of raising over $500,000 to buy Real Pickles from Rosenberg and Holland and to have the operating capital necessary to run the pickle business.

While each of the five new worker-owners bought a $6,000 membership share to join the co-op, $30,000 was hardly enough. Sure, the price tag on a membership share could have been much larger — conceivably up to one-fifth of the total capital amount needed — but this was a worker co-op after all, and so share prices needed to be modest so that they were reasonably accessible to all employees. With hundreds of thousands of dollars still to be raised, the worker-owners looked at a number of options for financing. The shortlist seemed to be:

• Subordinated debt: Taking out a loan with one or more lenders who would be willing to sign a subordination agreement with the existing lenders who already hold collateral in the business, thus taking 2nd or 3rd place on repayment priorities in any payout scenario. The business would be responsible for payments on interest — likely 8% to 12% — and principal for a fixed term.

• Royalty financing: Receiving an investment in exchange for monthly payments to the investor at a fixed percentage of gross revenue. Real Pickles was told that the potential return for the investor could be as high as 15% or more annually in exchange for the risk that is taken with this type of financing. Royalty financing is also known as revenue-based financing or a revenue share.

• Non-voting equity investment: Selling non-voting preferred shares in the company either through a private or public offering. Shareholders would likely receive an annual dividend, depending on the business’ financial health and at the discretion of the Real Pickles Board of Directors, plus the ability to redeem their shares at a later date.

Direct Public Offering

In the end, the worker-owners decided that the best way for them to raise $500,000 was to sell non-voting preferred stock through a direct public offering. Direct public offerings are primarily utilized by small to medium size companies and nonprofits who want to raise capital directly from their own community rather than from financial institutions like banks and venture capital firms that are used for Initial Public Offerings (IPO). Still, holding an equity offering, especially one seeking investment directly from the community, would create additional hurdles for the worker-owners. 

There are two significant  challenges associated with a DPO.  Firstly, the process has a significant cost which may significantly reduce the effective capital raised.  Secondly, there may be ongoing financial and legal reporting requirements. Fortunately, the federal securities law does, however, include a few exemptions that allow for community investment. Companies that comply with the requirements of Rule 504 do not have to register their offering of securities with the SEC, but they must file what is known as a "Form D" electronically with the SEC after they first sell their securities. Rule 504 of Regulation D — the exemption that Real Pickles, in the end, chose to follow — allows companies to raise up to one million dollars from any type of investor, wealthy or not, so long as they provide substantial documentation to assist investors in their understanding of the terms of the investment — particularly the risks — and register with each state’s Securities Division.

A Community Investment Campaign

The offering was termed a “community investment campaign” in order to underscore the community aspect of this initiative, and also to avoid the perception of Real Pickles becoming a publicly-traded company. Real Pickles decided to sell shares of preferred, non-voting stock for $25 each, with a minimum purchase of 100 shares. “Looking back, the $2,500 minimum investment was a key decision,” says Rosenberg. “It was a figure low enough to allow for relatively broad participation, while high enough to keep our investment pool a manageable size.” The worker-owners also decided on a 4% target annual dividend, paid only if the board chose to declare one for the year. It would also be a non-cumulative, meaning that if a dividend was not declared for a given year that no dividend for that year and investors are not entitled to reap any missed dividends in the future.

Was 4% the right number? “Some people thought it was high. Some thought it was low. So, we figured it was just right!” says Holland. “It also felt like a reasonable return these days given the state of other investment options, like the stock market.” More importantly, it was a number that the worker-owners felt that the business could reasonably declare year after year, given recent sales growth and conservative projections.

Real Pickles officially launched a community investment campaign, also referred to as Direct Public Offering (DPO), in March 2013. Within two months, the campaign was over. Seventy-seven investors — a mix of individuals, customers and suppliers, even a number of other co-ops — together invested $500,000, which allowed Real Pickles to fully transition to worker-ownership.

Lessons Learned

Perhaps the right execution of marketing campaigns, to leverage the support in the community and deliver the message clearly, allowed Real Pickles to take a leap. Marketing campaigns included digital communications, a series of public events, investor briefings, tours, store demonstrations, press releases to the media, articles on the front page of three local newspapers, and a story on the regional public radio station. The word was out, and, fortunately,this unique proposition resonated well with the community.

Apart from marketing and personal connections, the credibility and reputation of the business seeking capital are likely to be major determinants of a DPO’s success or failure. Asked about key factors in their success, the worker-owners are quick to point to strong support in the Pioneer Valley — ultimately the source of 75% of their investment dollars — for local food and agriculture, as well as for local business in general.

“Fortunately,” says Rosenberg, “It’s a time in our society when increasing numbers of people are very excited for an opportunity to move their money away from Wall Street  and into something they believe in.” 

Real Pickles was able to build on the strong recognition of the ‘buy local’ concept that exists thereby appealing to some in the community to ‘invest local’ as the next step. Clearly, the time is ripe for community investment. The days of Slow Money, “nurture capital,” patient investors and community investment are upon us, and those investors need more viable opportunities to place their investments. The strategy described here offers one innovative model to connect those committed investors to the local economy, they seek to nurture. While more and more of us enjoy eating local food, some of us can, and should, do more. Said simply, we can begin to put our money where our mouths already are.

With interest growing in scaling up local food systems, the story of Real Pickles’ co-op transition and community investment campaign offers important lessons. Communities need businesses that can model ways to stay small, vibrant, and locally owned. 

References & Additional Resources

• Original CISA case study

• Project Equity case study on Real Pickles

• Financing the Inclusive Economy (including Real Pickles case study)

• Case Study - Businesses converting to Worker Ownership

Exhibit 1: Financing the Worker Buyout of Real Pickles