What is a Co-op, exactly?

“Co-op” is shorthand for “workers’ cooperative”, meaning a business owned and democratically controlled by its workers. That usually amounts to shared profits, shared management, and in theory, improved work conditions by virtue of that representation at the management level.

Practically speaking, a workers’ cooperative can be formed under various legal entity structures like limited liability companies or corporations. What makes an entity a workers’ cooperative has more to do with its governance and profit share structures in the “guts” of the legal entity, like the entity’s operating agreements, bylaws, or shareholders agreements, as opposed to the form of the legal entity itself. Different legal entity forms come with their own pros and cons even for cooperatives.

Whether organized as an LLC or a C-Corporation, cooperatives face some unique challenges.

Why the Co-op Model is Complicated, even for Indie Game Studios

There’s a certain romance to the idea of a co-op: A group of talented developers, artists, and designers coming together as equals, building a passion project while sharing ownership and decision-making democratically. It sounds particularly attractive against the backdrop of a tumultuous industry where every week’s headlines seem dominated by the news of yet another mass layoff.

Unfortunately, there is an uncomfortable truth here: while great in the right setting, this model carries with it significant drawbacks and practical problems that can derail an unprepared studio.

Challenge One: Governance

The most immediate challenge is decision-making. Game development requires a legion of decisions to be made, from technical architecture choices to art direction to scope management. In a traditional startup pyramid, there’s a clear chain of decision-making authority. Founders can move quickly, pivot when needed, and make tough calls without convening a committee.

In a cooperative, every significant decision can become a  negotiation. Do you need unanimous consent? Simple majority? What constitutes a “significant” decision versus a day-to-day operational one within an individual or group’s domain? These are key questions that demand clear answers, and each answer presents potential friction, whether it be chipping away at that fully democratic structure or introducing bureaucratic structures to ensure all voices are heard.

Once they reach a certain scale, many co-ops choose to alleviate this issue by choosing to adopt a Board of Directors or Managers structure, where the Directors or Managers serving in those roles must be workers themselves. That mitigates the governance challenge, but at the cost of that ability of the average worker to participate in management becoming a little more attenuated. The co-op also loses the ability (whether it adopts a board or not) to appoint non-worker experts, advisors, and consultants to assist in running the company where they may be able to add value.

Challenge Two: Equity

The bedrock value of workers’ cooperatives, generally, is democratic management. That means every worker (or qualifying worker) receives equity, and with it, the right to participate in management.

However, the right to participate in management can also appear as an obligation to participate in management. Many cooperatives require all workers to attend management meetings and assist in the decision-making process, or at a minimum, appoint a proxy to do so in their state. That requirement introduces political obligations that individuals who merely want to create art or program are less interested in.

To address that concern, other “default” corporate structures like LLCs or C-Corporations give shareholders relatively little say in the company and sometimes impose various kinds of shareholder agreements or create multiple classes of equity, including non-voting classes. These frameworks can allow for equity recipients to receive the economic value of ownership without the associated management obligations. That allows the company to better delineate the value of representatives who can handle day-to-day operations in addition to their normal responsibilities from those who are less suited or less interested in those obligations. In short, co-ops trade mandated democracy for flexibility.

Challenge Three: Capital

Most workers’ cooperatives make this decision with eyes wide open, but it still bears repeating: If a studio is interested in taking on equity investment, that studio probably does not want to be a co-op.

Most of the time, equity investors “invest” through buying a “Preferred” class of equity in a company. While that “Preferred” equity class may not carry with it day-to-day operational decision-making rights, it typically does grant the investor certain rights over large-scale company decisions like electing to sell the company to a third-party. Those rights are fundamentally incompatible with a workers’ cooperative model. The same is true if those investors are entitled to representation on the company’s board of directors or managers, which compounds the problem.

In other words, that limits outside capital raising opportunities somewhat, likely to more traditional publishing deals, loans, or crowdfunding channels. All can work, but in a climate where raising outside funding is difficult no matter which channel is being targeted, limiting those options for a studio that needs that outside funding can prove fatal.

So What Should You Do Instead?

This post is not meant to discourage anyone from building a fair, equitable workplace where everyone feels valued and heard. Those are worthy goals, and the game industry desperately needs more studios that treat their workers well. Those goals can often be achieved without committing wholesale to a co-op structure.

For example, founding teams might consider forming as a traditional C-corporation or LLC and then building cooperative principles into how the company will operate. Such as:

• Granting equity to team members, particularly through a dedicated equity incentive plan;
• Creating profit-sharing arrangements that reward everyone for the studio’s success;
• Establishing a culture of consultation and consensus-building for major creative decisions, even if ultimate authority rests with founders;
• Implementing transparent salary bands and decision-making processes; and
• Adopting employee-friendly policies around work-life balance, creative freedom, and ownership of side projects.

These approaches may go a long way toward giving founding teams the cultural benefits they are looking for while maintaining the legal flexibility they need to build and fund their fledgling studio.

As an alternative, for founding teams absolutely committed to democratic ownership, consider growing into it rather than starting with it. Build a studio as a traditional entity, prove the concept, and then transition to a cooperative structure once the culture has been established (and ideally revenue has supplanted the need for outside capital).

Final Thoughts

Ultimately, creating a sustainable workers’ cooperative is a difficult thing. The cooperative model imposes constraints that can be particularly problematic for game studios: slow decision-making, diluted incentives, and funding barriers. None of those are impossible hurdles, but founders setting out on the co-op path should be aware of them to plan for and mitigate them, alongside the legal advice to make that possible.