4. Recruit Members and Raise Equity

Most collaborative marketing ideas start with the dreams of one or two individuals. As ideas are explored and developed, first informally and then more formally, the number of people involved (and the number of ideas) is likely to grow. In some cases, the core group that develops an idea may be large enough to put it into operation, but often more people are needed. After having evaluated the technical and market feasibility of your group’s idea for collaborative marketing, developed a detailed business plan, and, if necessary, successfully presented a debt financing proposal to a lender, you are ready to put your idea to the test of a membership recruitment and equity drive. The key question at this point is whether membership and equity will be large enough to permit a successful start-up.

Table 1. Alternative Organized Forms for Collaborative Marketing Groups

Organizational Form	Liability	Membership Restrictions	Pass-through Tax Treatment
General Partnership	Unlimited liability for general partners - i.e. personal assets are at risk if the partnership cannot pay its debts.	No limits on number or type of investors. As a practical matter, this form is not well suited for large groups. All partners should be actively involved in the business.	Yes
Limited Partnership	Unlimited liability for general partners. Limited partners are liable only for their investment in the partnership.	No limits on number or type of investors. At least one general partner must be personally liable for obligations. Limited partners cannot actively participate in management.	Yes
Limited Liability Company (LLC)	Limited liability - investors are liable only for their investment in the company.	No limits on number or type of investors. As a practical matter, this form may not be well suited for large groups.	Yes
C Corporation	Limited liability - investors are liable only for their investment in the corporation.	No limits on number or type of investors. This form is well suited for large groups.	Yes
S Corportation	Limited liability - investors are liable only for their investment in the corporation.	Number of investors is limited to 75 and there can only be one class of stock.	Yes
Cooperative	Limited liability - investors are liable only for their investment in the cooperative.	Number of investors is not limited, but all investors must be agricultural producers. This form is well suited for small or large groups.	Yes

This phase in the development of a CMG can be a relatively easy point of transition from planning to opera tions or it can be a long, difficult process of attracting the critical mass of people and money needed to turn an idea into a reality.

Initial capital requirements for the Whole Farm Cooperative were low, and members are asked only to contribute $5 annually and 15 percent of receipts from sales through the cooperative. Members pooled resources and expertise to meet industry standards and their own marketing goals. Tim King’s wife, Janice, developed a bookkeeping system for the Cooperative, while he and other board members undertook a lengthy filing process for the food handlers license required by the Minnesota Department of Agriculture to market meat and processed products. One of the Cooperative’s members made a building available that is now used as a drop-off and distribution site for all of the Cooperative members’ products. Next, the Cooperative purchased freezers to store meat cuts and other perishable products. Members, who take turns delivering to Twin Cities drop points each month, are reimbursed by the Cooperative for mileage. Grants provided by SARE and the MDA have provided financial "breathing room" for necessary equipment purchases and operating expenses, such as freezers, building renovation, and delivery expenses.

The Coulee Region Organic Produce Pool (CROPP) was established in 1988. It is now the largest farmer-owned organic cooperative in North America, shipping organic dairy, beef, poultry, vegetable, and egg products across the country under its "Organic Valley" label. Like most businesses that process a product, CROPP faces cash-flow problems caused by the long turnaround time between raw commodity pick up and payment from the retailer after a product is delivered. CROPP addresses this cash-flow problem through an equity-building strategy developed by early cooperative founders. Members contribute the equivalent of one month’s worth of production in the form of a certificate of deposit at a local bank. The certificate, owned jointly by the farmer and the Cooperative, is pledged as an equity guarantee when the bank issues loans to finance cash flows needed for CROPP’s operations.

The organizers of the Minnesota Agro-Forestry Cooperative originally hoped that agro-forestry would appeal to family farmers who operated on marginal or low-yielding land. But they gradually learned that the farmers they were targeting operated on an annual cash basis and couldn’t afford to plant a crop that takes ten years to mature. After two years of active recruitment, the Cooperative has only 33 members - far short of the original goal of adding at least 50 members annually. As a result, the Cooperative’s board has decided to target a broader pool of potential members, including absentee land owners and recreation enthusiasts.

After a long, difficult search for a processing plant site, Prairie Farmers Cooperative is ready to build a facility in Dawson, Minnesota and begin a membership campaign. Farmers who join will contribute equity by purchasing a minimum of 400 shares. Each share represents both the right and the obligation to deliver one hog per year. This guarantees a market for the farmer-members and an adequate supply of hogs for the new plant. Interest in the Cooperative is high due to the record-low hog prices in late 1998 and early 1999, but these same conditions make it difficult for many farmers to gain access to the funds they need to buy shares.

Determine equity requirements

When start-up investments will be small and members are not asked to make a contractual commitment to sell a specified quantity through the CMG, the organization usually establishes an initial working capital fund by charging a one-time or an annual membership fee. In most cases your group will have already established the organization as a legal entity and there may not be any need to change that organizational structure or even recruit new members. Continuing operations can then be financed by charging user fees or by retaining a portion of receipts for sales made through the organization. New members can be added with relative ease if the operation is successful.

On the other hand, if your group needs to raise a significant amount of equity, you will need to work with your attorney to develop an investment prospectus based on your business plan. This must identify the potential risks, as well as the possible rewards, from investing in the organization, and your organization’s board can be held liable for risks that are misrepresented. Also, when members agree to market a specified quantity through the organization, a marketing agreement will need to be developed with the help of your attorney. This spells out the details of the contractual relationship between a member and the organization. In cases where a significant amount of equity must be raised, it is crucial that your attorney be knowledgeable about securities law. This area of the law is complex and penalties for violating the law, no matter how good your intentions are, can be severe.

Schedule informational meetings

Organizations that conduct a membership/equity campaign usually schedule and conduct public informational meetings in which they present the prospectus to potential members/investors. Groups that choose to organize as a cooperative will need to take steps to ensure that members are farmers since cooperative statutes require that membership in a farmer cooperative be limited to farmers. In some cases, individuals who conduct these informational meetings and make follow-up visits to interested individuals may need to register as securities sales agents, but this requirement is often waived for cooperatives.

Don’t lower your equity targets

CMGs that raise significant amounts of equity need to establish clear targets for a go/no-go decision before the process starts. Starting operations without an adequate capital base can doom even an excellent idea to failure. Often it is tempting to lower equity targets when the membership/equity campaign stalls, but experienced experts caution against this. "Don’t bend your business plan variables because you want to market a product," says Rosemary Mahoney of CDS. "Stick with your business plan and don’t ignore signals to stop the process just because you want your idea to work."

Outcomes

Regardless of the size and capital requirements for your organization, when this phase is successful it will usually end with a general membership meeting in which a board of directors is elected. The board’s primary responsibility will be to take the steps necessary to begin operations. This phase in the development of a CMG is not always successful. In some cases when membership and equity requirements are not met, the project is abandoned. In other cases, after another round of research and planning, the group may revise the business plan and/or the membership and equity drive are extended.

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