When the assets of a worker cooperative can not be covered by member investments, a worker cooperatives will require external financing. External financing refers to capital investments from individuals or entities without cooperative membership. Worker cooperatives in this situation must attract capital without giving up management control and retaining profits (or losses) for the members. This generally limits investments to a fixed return that is independent of the profits or revenue of the cooperative. The investments have no voting rights in governance matters.
Debt and non-voting preferred equity are currently two sources of external cooperative financing. Debt can consist of loans or lines of credit from individuals or other financial entities (credit unions, banks, or loan funds), or bonds that it issues. With the exception of lines of credit, debt usually requires the full repayment of interest and principal with a specified payment schedule. Debt can be secured or unsecured by assets of the cooperative.
Most coops do not issue preferred equity, as the costs associated with issuing preferred equity can be substantial. Preferred equity consists of non-voting shares, issued at face value, that pay a capped dividend. Usually the shares do not have to be repurchased by the cooperative, and dividends are paid at the discretion of the board. However, dividends must be paid before profits are distributed to the members, which is what makes the shard preferred. As the name suggests, preferred shares are considered equity by the cooperative. Preferred shares can be held by anyone, whether or not they are members of the cooperative. They confer no voting rights, and no profit rights, aside from the capped dividend payments. Unlike preferred equity from a typical corporation, preferred equity from a worker cooperative is not convertible to common shares.
Debt and equity securities (that are registered with the SEC) are freely tradable between third parties, the price being determined by market conditions rather than the face value of the security. For practical purposes, an active market for worker cooperative securities does not exist as high fees tend to discourage registration. Most unregistered securities transactions can only take place with the coop.
Typically a fixed return security that pay interest above current market rates will trade above face value. The yield of a security is the annualized return based on the current price. The yield and price of a fixed return security are inversely correlated.
Debt or preferred shares of a cooperative may trade below face value, due to an elevated risk of default. Investors may make potentially unlimited profits by purchasing coop securities significantly below face value during periods of distress, and selling them after they appreciate. This does not violate the principle of profits going exclusively to members of a cooperative, as the payout by the cooperative are still a fixed rate based on the face value of the security. Unlimited profits by investors in worker coops are not prohibited. It is an unbounded return that a coop pays on its investments which is not allowed.