On February 26, 2004, a new breed of company was formed in Minnesota. On that date, Best Buy Co., Inc., Josten’s, Inc., and Born Information Services, Inc. became the founding members of “Avalanche Corporate Technology Cooperative.” Integral Business Solutions has since joined the cooperative. Approximately a year in the making, Avalanche is a technology sharing cooperative operated for the benefit of its members.
Working with Dorsey attorneys, Avalanche was formed as a result of a merger of Avalanche Software LLC, a Delaware limited liability company, into Avalanche Corporate Technology Cooperative, a new entity formed under Minnesota Statute Chapter 308B.
The Business Model of Avalanche Corporate Technology Cooperative
For years companies have been paying huge dollars to develop their own software and technology systems. The founders of Avalanche saw an opportunity to share the technology developed by their companies with other companies. According to Jay Hansen, the President of Avalanche, “There is a huge opportunity for our members to reduce costs and increase control of mission critical software through collaboration and shared risk. We will work closely with our members to help them identify, develop, and manage software that is specific to their business at a much lower cost than historic levels.” The current initiatives that Avalanche is undertaking on behalf of its members include:
Application Integration Tools and Methodologies
IT Management and Operation Tools
Performance Projects for Application Servers
The basic business model followed by Avalanche is that members of the cooperative are encouraged to collaborate in the development of software and other technology that is utilized internally within the member companies. When a member contributes software to the cooperative, other members will have access to the contributed software. All of the members will have access to the shared technology and the ability to modify the technology to fit their own particular business needs.
What is Open Source?
Open Source and Collaborative Source are models that have been used by developers for years. They have served as the foundation for many of technology’s greatest achievements, including the Internet, World Wide Web, Linux Operating System and the Apache HTTP Web server. Although there are variations in licensing, the principle behind each one is to promote collaboration among developers and corporations in order to create the most viable and cost effective solution for a specific community or organization. The collaborative model allows organizations to reuse, extend, enhance, and leverage community skills, which ultimately ensures the preservation of information systems and protects existing investments in business applications.
History of Open Source
The Open Source model has been actively used by various organizations since the mid-1980’s. It is estimated that $55 Billion of hardware was shipped with Open Source software last year and that $68 Billion will be shipped in 2005.
Given the growth of Open Source software and the benefits of collaboration, Avalanche serves a niche for its members by serving as a central location for the sharing of ideas, concepts, and technology.
Avalanche Is Member Controlled
Another unique feature of Avalanche, is that as a Chapter 308B cooperative, the cooperative is member-owned and can have multiple membership categories. As Hansen puts it: “I work for the members of Avalanche. My number one goal is to deliver results for the members, which translates into saving them money and delivering business opportunities over the long haul.”
Avalanche anticipates having members in several categories, including corporate users, vendors, and service providers. Members who utilize the services of the cooperative are classified as Patron Members. Patron Members are required to execute a Subscriber Agreement with Avalanche and have the right to elect the Board of Directors of Avalanche. According to Hansen: “This business is truly a cooperative. It is memberowned and member-controlled. It is our members who establish the goals for this business, and my job is to achieve those goals.”
Although Avalanche is member-controlled, as a 308B cooperative, the new statute does allow Avalanche the opportunity to bring in outside equity, if necessary. In addition, the statute allows Avalanche considerable flexibility in designing incentive compensation programs for management, a flexibility not generally available under most state cooperative statutes. As Hansen puts it: “We have tremendous flexibility going forward and strongly believe that this platform provides us with the opportunity to significantly grow the company.”
The New 308B Cooperative Model
In 2003, the Minnesota Legislature adopted the Minnesota Cooperative Association Act, codified as Minnesota Statutes Chapter 308B. The theory behind the new Chapter 308B is that the existing Cooperative Law found in Chapter 308A does not allow for sufficient flexibility in obtaining outside equity investment in a cooperative. Thus, the purpose of the new Chapter 308B is to dramatically change the permissible equity structures of a cooperative. Here are a few additional highlights of the new statute:
Tax Treatment. A cooperative formed under Chapter 308B can elect to be taxed as: (1) a partnership under Subchapter K of the Internal Revenue Code and receive pass-through tax treatment, (2) a cooperative under Subchapter T, or (3) a corporation under Subchapter C. A potential benefit of electing tax treatment under Subchapter K is that the profits from non-member business would receive pass-through tax treatment and avoid the “double tax” on non-member business under Subchapter T.
Outside Investor-Members Permitted. A cooperative formed under Chapter 308B can have outside Investor-Members who own equity in the cooperative and who do not patronize the cooperative. Investor-Members may receive up to 85% of the profits from the cooperative. Thus, as a practical matter, the cooperative may be 85% owned by an Investor-Member who does not patronize the cooperative (although the Investor-Member could in theory own 99.99% of the equity).
Governance. The statute allows for flexibility in governance and financial rights.
- Bloc Voting. Chapter 308B provides that the members may agree to “bloc” voting, meaning that the Patron-Member(s) vote as a group and the Investor-Member(s) vote as a group. This bloc voting can apply to votes by the Board of Directors and/or votes by the Members.
- Board of Directors. Chapter 308B provides that the Patron-Member directors shall hold at least 50% of the voting power “on general matters of the cooperative” (emphasis added).
- Audit Committee. Chapter 308B requires that the cooperative establish an Audit Committee. Rather than establishing a sub-committee, Chapter 308B cooperatives may instead elect to have the Board as a whole serve as the Audit Committee.
- Members. The Bylaws may not reduce the collective Patron-Member vote to less than 15%. Thus, the Investor-Member may hold up to 85% of the member voting rights. The basic purpose of the new statute is to allow an entity to be formed under Minnesota law that has significant flexibility with regard to its equity structure, tax treatment, and governance structure.
The Future of Avalanche
So what will be the future of Avalanche? The cooperative expects its membership base to continue to grow. Already, a number of other “blue chip” companies have expressed interest in membership in the cooperative. According to Jay Hansen: “Companies see the value in the concept of Avalanche. Because of our existing membership and new members that have committed to join, we believe that not only will Avalanche be a benefit to our members, the cooperative will eventually become an indispensable part of the operations of our members.” Only time will tell, but with the support of members like Best Buy, Josten’s, Born and Integral Business Solutions, the new cooperative seems destined for success.