Why We Invested in Project Equity
Creating a path to business ownership for low-income workers and workers of color.
The Problem
Income and wealth inequality are at all-time highs across the US. The median White family has 9X more wealth than the median Black family and 5X more wealth than the median Latinx family.
Asset ownership is a powerful tool for wealth building, but the main pathway to this in the US, owning a house, is prohibitively expensive for many.
However, an opportunity is hiding in plain sight: there are some 2.9M small businesses in the US that will seek a sale in the next 10 years, of which only a small fraction will find a buyer. Currently, just 2.5% of these small businesses are owned by Black Americans, even though they account for 12.6% of the US population.
The Solution
Founded in 2014, Project Equity is a national nonprofit with a mission to foster economic resiliency within low-income communities by enabling employee ownership of small businesses. They seek to tackle all the of barriers preventing employee ownership from scaling, intervening on financing, but also awareness building, policy and advocacy, and technical assistance for small business owners.
Recognizing that lack of financing to underwrite these transactions was a key headwind, Project Equity launched the Employee Ownership Catalyst Fund in 2021 to help bring financing solutions to employees.
Project Equity works with small business owners looking to sell their company to their employee base. They help the employees to assess the opportunity, to negotiate sale price and terms, and by providing loans to the businesses.
The business (now owned by the employees) then pays off the loan through future profits. These loans are conservatively underwritten, are 5–7 years in duration, and are affordably priced. The selling owner gets meaningful immediate liquidity, and receives a portion of the sale price over time, which protects the employees and the lender, while leaving the seller with some skin in the game. Additionally, their business lives on, which is good for the community, and is often satisfying for the seller.
As a nonprofit, Project Equity can:
- Represent both the buyer and seller, working for a win-win scenario.
- Offer more affordable financing opportunities and services.
- Focus on smaller transactions — average size of ~$300K-$2M, which commercial players often find too small to be viable.
- Utilize a legal employee ownership structure that is beneficial to all parties.
While there are many possible permutations, the 3 most common types of employee ownership structures are employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), and cooperatives (coops). Each have pros and cons that make them better or worse placed depending on the transaction.
The Impact
Frontline workers, especially workers of color, need quality jobs that create economic resiliency for themselves and their families. With the aging era of small business owners (the “Silver Tsunami”), many of these jobs could be affected as these small businesses create the majority of jobs in our economy.
The impact of employee ownership is robust and growing. Workers:
- Earn 33% higher median wages.
- Achieve 92% higher wealth.
- Have 4X higher rates of access to childcare benefits.
- See higher retention in turbulent times.
While still early, Project Equity’s portfolio is thus far 87% low-moderate income workers, and ~50% person of color and ~50% female. This video helps show the power of employee ownership in action.
The Why
Finding creative solutions to close the racial wealth gap is imperative, and employee ownership is one such tool. The ability to help low-wage workers build assets / wealth and improve their overall wellbeing at work is a cause worth championing.
Project Equity is a leader in this space, with almost a decade of experience helping to shift the narrative on employee ownership. Beyond just the fund’s ability to finance these transactions, Project Equity’s commitment to working across all key verticals (marketing, TA, government, etc.) to spread employee ownership more broadly makes them a catalyst for good. As a nonprofit, they can prioritize impact, fund transactions that are sub-scale for commercial lenders, and be flexible in their structuring to meet small business owners where they are at.
Not only is the Project Equity team incredibly strong (led by Evan, Alison, Hilary, and Stacey), but they have brought on Mission Driven Finance (MDF) to co-manage the fund. As a nonprofit and a first-time fund manager like Project Equity, the back office and operational infrastructure required to do the work can be daunting. The MDF team brings that expertise to bear and helps take some of the work off of the Project Equity team, so they can focus on supporting the small business owners and their employees.
The How
Project Equity needs patient and affordable capital to do this work. They have set up an evergreen fund so they are not forced to liquidate their positions by the closing of a fund timeline, and they can bring on new investors on a rolling basis
With this model, there is a tradeoff between returns and impact. The higher the interest rate Project Equity must charge for their loan, the lower the net profits of the business will be during that loan repayment period, which ultimately means less money in the pockets of the low-wage employee-owners. By finding investors that are willing to offer more concessionary capital to Project Equity, they can in turn offer more affordable financing to these businesses, leading to more wealth creation for the employee owners.
A to Z is thrilled to be supporting Project Equity and supporting them to achieve their vision: that employee ownership evolves from the “best-kept secret” to “business as usual” — a preferred business model that strengthens small businesses and builds wealth for low-wage workers and communities of color across the US.
