Democracy at Work Institute

The Legacy Fund, started by Democracy at Work Institute (DAWI) (lead applicant) and Apis & Heritage Capital Partners (A&H), is a minority-led impact investment fund disrupting intergenerational poverty and closing asset gaps by putting business ownership into employees’ hands. 

We finance the transition of closely held private companies with meaningful workforces of color into employee-owned enterprises. The Fund acquires a control stake in legacy businesses, transfers those businesses to their employees, and enhances their operations and governance. The transition process generates higher enterprise value, creates significant retirement savings for the workforce, and builds ownership culture, while generating risk-adjusted returns for investors.

We utilize custom technology to monitor and pursue great companies in essential industries. 

With the business owner, we create a tax-advantaged ESOP or Employee Ownership Trust (EOT) and provide financing needed for the Trust’s acquisition of the business. A&H’s loan to the trust is repaid over time through profits; employees gain equity as debt is paid down. 

Three elements distinguish our approach: (1) We focus on industries with BIPOC workers and we understand these workers’ strengths and needs, (2) Mezzanine financing makes the ESOP attractive to selling owners, and (3) Our ELBO (Employee-Led Buy Out) model develops employees’ skills and leadership. 

We invest in building ownership culture in each company to maximize and measure worker benefit. DAWI supports implementation of Open Book Management, coaching approach to supervision, and governance training, and holds longitudinal impact data on job quality and employee well-being for the lifetime of the engagement.

The average white family in America has 10-40X the wealth of the average Black household. The majority of Black and Latinx workers will retire with zero savings. (The typical American household has just $17,000 in savings.) This lack of relative and absolute wealth plays a large role in the negative health, housing, educational and entrepreneurial outcomes in communities of color. 

Small businesses are productive assets: they continuously generate wealth. Yet most businesses are owned by white men, and while these have grown their owners’ wealth, workers of color have gotten relatively poorer as wage growth has slowed and stalled for black men and women. 

Moreover, businesses owned by people of color tend to be smaller, undercapitalized, and more vulnerable to downturns. Minority-owned business loss during COVID is projected to be as high as 90%. Lack of capital is both the cause and an effect of this small business vulnerability. Without assets and access to credit, entrepreneurs of color cannot start and grow businesses. Without business assets to leverage, they cannot grow additional assets that become intergenerational wealth. 

Employee ownership can narrow racial wealth gaps by making business ownership more broadly available. Employee-owners of color have 33% higher median income from wages overall, 79% greater net household wealth, and 36% longer median tenure in their current job than nonemployee owners of color (Source: NCEO). Low to moderate income workers in ESOPs have ESOP account values ranging from $15,000 to $6 million, with a median value of $165,000.

Our solution grows new entrepreneurs not by starting new businesses, but by transitioning ownership of established companies to their employees. Purchasing successful small businesses with large workforces of color and transitioning them to 100% employee-ownership dramatically increases access to this critical wealth-building tool. This strategy retains productive business assets in communities, provides pathways to wealth-building for workers, and creates quality jobs by transforming organizational culture and governance.

Until recently, the dots between Black business ownership, asset-building strategies, and employee ownership were not connected. The Legacy Fund connects these dots while strategically addressing capital and leadership gaps within the field of employee ownership itself. 

We will transfer millions of dollars of business assets to workers. More workers of color will have good employee-owned jobs that build wealth, skills and opportunity. Employee ownership of businesses at scale can be part of closing the racial wealth gap. 

On its own, the Legacy Fund would be an ambitious capital strategy to diversify ESOP ownership. But with DAWI’s participation as a nonprofit focused on systems change, it aims for transformation at all levels: 

• Workers:  building the skills and agency that change lives. 

• Business:  building an ownership culture that creates better jobs and stronger multiple bottom-line companies. 

• Employee ownership and small business fields: supporting broad uptake of the model by sharing tools and robust technical assistance.  

• Impact investing: incorporating ownership and job quality metrics and new tools.

• Philanthropy: demonstrating the power of an aligned strategy co-stewarded by the nonprofit and private sectors. 

The workers are the ultimate beneficiaries of the Legacy Fund, as they become business owners in high-quality companies. We seek businesses in essential service sectors such as manufacturing, maintenance, landscaping, and others with $1M-$5M+ EBITDA and at least 40 employees. There are roughly 81,000 firms of this size, with an average minority workforce of 47% and 67% women workers (Source: BLS). Most workers in these industries have a high school degree with little or no advanced education. Most are unable to access capital to own a business. They have low 401k balances if any retirement savings, few to no assets, and limited autonomy and decision making at work. We will target companies where 51% of workers are low income (less than 80% Area Median Income) and people of color at least one-third of the workforce.

To understand needs, A&H examines worker pay and retirement account access and models out the potential wealth and income benefits that could result from transition to an ESOP. We also look at the ownership culture and workday experience of workers. Working with management and the workforce, DAWI performs an extensive initial assessment of worker satisfaction, health and well-being that informs the design of the ownership culture training. 

The Legacy Fund meets needs for ownership and better jobs in the same solution. A&H finances the transfer of business ownership to employees as a tax-free retirement benefit. Our goal is to average, across the portfolio, wealth accumulation of $70-$120k in an employee’s ESOP account at retirement and also provide a 401(k) plan. DAWI invests in the ownership culture that makes ownership a lived experience. Together we develop a company culture of engagement, efficiency and empowerment that creates REAL employee-owned businesses that outperform their peers, are resilient and rooted in their communities.

Texas, Colorado - The first two companies in our portfolio are located in Texas and Colorado.

Washington, D.C. - A&H is headquartered in Washington, D.C. and is actively seeking opportunities in the DMV region.

DAWI’s mission is to expand worker ownership of businesses to communities locked out of good jobs and ownership opportunities, particularly recent immigrants, BIPOC, and low-wage workers. We undertake practical systems-change work, bringing together partners and testing innovations. As the think-and-do tank for the field of worker ownership, DAWI works in three core program areas that are distinct but interrelated to realize our mission: 

• Unlocking Ownership Capital

• Innovative Forms for Better Livelihoods

• Helping our Allies Succeed

Apis & Heritage Capital Partners (“A&H”) mission is to help workers of color own their futures, tackling the nation’s racial wealth gap by using the tools and best practices of employee ownership. A&H buys great small- and medium-sized businesses with significant workforces of color then converts those companies to 100% employee-owned, providing support and training. Legacy Fund I targets resilient, non-cyclical businesses in America’s Real Economy with strong cash flows, managers and operating histories.

The next 20 years will see a massive increase in high-quality businesses being sold by baby boomer owners. This will create a once-in-a-lifetime opportunity to transfer these engines of wealth creation over to workers and communities of color. A&H will provide the owners of these businesses with a graceful exit that transitions the firm to 100% employee-owned through an ESOP. Note that 100% ESOP Owned companies do not pay Federal, and oftentimes, State taxes, increasing cash flow. The transaction will be financed with a combination of senior bank financing and mezzanine notes from A&H. The A&H mezzanine notes provide investors with debt-like current income and equity-like exposure to growth through warrants. Post-investment, A&H will create value through traditional means, but will also install democratic governance practices to ensure that employees-owners have input in the operations of the businesses that they own, creating better business outcomes and increasing retention. The result of these efforts is outperformance for our companies, returns for our investors, and importantly, wealth creation for workers of color.

To get there, we will marshal capital and technical assistance to make successful transfers possible. We will invest in the assets, skills and leadership to build resilient businesses that demonstrate proof of concept. With a relatively small initial investment, we can generate the impact and returns that support scaling. Finally, we will work to catalyze a robust capital ecosystem that invests equity for equity. 

Our leverage point is this moment when the post-COVID economy needs to be rebuilt, and equity is front and center. Several trends converge to create a window of opportunity: 2+ million retirement-age business owners whose businesses are going to change hands; a $12 trillion impact investing industry conversation about real impact; greater awareness of the pernicious systemic effects of racism; and infrastructures of support for employee ownership built over decades. For those who aim to make shared business ownership a widespread tool of equitable development, the moment to act boldly is now.

A&H plans to buy at least eight closely held companies from owners who are retiring and is in the process of identifying additional candidates. 

Now: 2 businesses, 181 employee-owners: The Fund currently serves two small businesses, Company A and Company B [we are bound by confidentiality agreements not to disclose the names until the deals close, expected mid-May 2022]. Company A has workforce of 56 employees of which 94% are people of color; Company B has a workforce of 125 employees of which 70% are people of color. Both companies are expected to transition to employee ownership in May 2022. 

1 year: 4 businesses, 300+ employee-owners: Within one year, Legacy Fund will finance two more transitions serving at least 100 employees for a total of 4 businesses and 250+ employee-owners. 

5 years: 6-7 businesses, 500+ employee-owners: In five years, The Fund estimates that it will serve at least 500 employees in all portfolio companies, fulfilling its goal of either acquiring the company and transferring it to employees simultaneously at close or transferring it to employees.

Employee owners are the community we serve. Our organizational strategy has a clear focus and is influenced by a complex set of stakeholders. The DAWI and A&H teams, along with the company workforce and management, are the key decision-makers.

• The low-income and BIPOC workforces at portfolio companies are primary stakeholders and beneficiaries. Workforce considerations guide our investments; support for employees becomes the focus at transition. Workers’ needs shape our technical assistance. 

• Business owners influence whether and how we invest in a company, and the owner often can support the implementation of an ownership culture.

• Investors observe an established charter. Critically, the Legacy Fund is not investor-driven; investors agreed to our terms and priorities for impact.   

• Our outer ring stakeholders are the broader employee ownership communities, philanthropic and advocacy partners, and government regulators. A well-developed ecosystem both provides support and is ready to hold us accountable.  

As a national initiative, we may not seem to be place-based, but our solution is rooted in the hyperlocal place of business – its people, history, culture, and relationship to its industry and place. Effectively implementing employee ownership and ownership culture in portfolio companies is a process that requires deep sensitivity to the specific conditions and realities of the workforce, the business and its larger ecosystem. 

From a business perspective, our due diligence process strives to understand the market, the local context, the business’s strengths and weaknesses, and the characteristics of the workforce, from wages to benefits to skills. We take all this information in, and working with the owners, managers and workers in the business, come up with a plan for the transition and seek continuous feedback from workers as we implement this plan. 

Our work is informed not only by the priorities of the company stakeholders (workers and managers) but also by our position as proximate leaders – Black and brown finance professionals, people from working-class backgrounds, former employee-owners and business developers. We also seek to identify and cultivate proximate leaders within the business. 

We bring in field partners who specialize in working with low-income workers, workers of color and employee-owners, including other employee-owners themselves. We invest in peer learning. The US Federation of Worker Cooperatives is a critical partner, providing a community of peers and shared identity for worker-owned businesses. Through USFWC’s “Legacy Business circle” for newly converted companies, employee-owners build their leadership skills, share practices and build power. The National Center for Employee Ownership is another critical partner, connecting us to companies and leaders that are willing to share their engagement tools and approaches. 

Finally, our deeply relational approach is also informed by data. We use tested survey mechanisms to gather baseline and year-over-year data from companies on impacts as wide-ranging as worker happiness, health outcomes, injury rate, and civic participation. These data build another dimension into the picture we are forming about the needs of employee-owners. Our “Data 360” approach invites shared analysis and uses data as another starting point for conversation.

We build trust between the Fund, DAWI and our stakeholders in many ways. First, we are candid and consistent about our role and interest with all parties: investors, company owners, and workers. We underpromise and overdeliver, something we learned from mentors in the field. We believe in the power of conversation – we show up, sit with them, eat meals together, share stories – and over time this builds the trust needed for deeper conversations. Trust is the essential currency of successful employee-owned businesses and the foundation of our ownership culture work.

Second, we implement information-sharing and measurement systems that create a common language. We share the impact with participants – including when results may not be what we had anticipated — and use this to plan together. We also lead with transparency when revealing financial data and company performance – data that workers previously have never had access to. 

Impact 1: 6-7 companies with majority POC and low-income workforces transition to employee ownership. 

• $50-60 million in business assets transferred to employees.
• Each employee’s ESOP account will have $70k-$120k at retirement.
• All companies will have 401(k) plans.

We will achieve these goals by buying companies, supporting short-term operational improvements, investing in growth, and exiting to employees. We have raised the capital to do this and our first two deals close mid-May 2022.

Impact 2: Improved job quality for 500+ workers, increasing wealth, health, skills and satisfaction. 

• All portfolio companies implement ownership culture training, best practices and employee participation in governance. 

• Workers build skills and improve career prospects. 

• Employee retention improves.

• Employee engagement and leadership increases.

• Worker well-being, health and satisfaction increases.

We will achieve these goals by co-designing training and technical assistance in participatory management and governance. Progress will be measured and adjusted regularly. 

Impact 3: Awareness and adoption of Legacy Fund will shift practice in private equity and employee ownership. 

• Dozens of funders and partners develop a deeper understanding of opportunities, challenges, impact and needs of an LF project.

• LF tools and approaches will be accessed and used by numerous organizations. 

• Public conversations about impact investing, wealth-building and job quality will include our model as an example.

We will achieve these goals through rigorous collection and sharing of impact metrics, communications campaigns to message our learnings, and by building relationships, engaging with key institutions, and hosting and mentoring an early career Fellow on the Fund staff.

A&H is uniquely positioned to bring the power of employee ownership to communities of color. Our founders come from the same communities as the companies’ workforces – these are their parents, families, and friends. Todd grew up in Northeast Ohio’s Steel Valley, where he watched entire communities’ futures be determined by their number of shifts at local auto plants. In Charlotte, NC, the hardest city in America to climb the economic ladder, Phil experienced the power of ownership in his family and community. He believes everyone should have the opportunity to build something without breaking every single odd in the world. 

Todd Leverette worked directly with business owners and workers as DAWI’s Legacy Business Program Lead. Philip Reeves has direct experience in scaling small business, and relationships within the minority business community. See below for our larger team’s qualifications and commitments. 

A&H is the only firm with a partnership with the Democracy at Work Institute (DAWI), which has direct experience supporting organizational change processes. DAWI’s staff is multi-racial, multi-lingual and class-diverse, with lived experience in employee-owned workplaces. Cultural competency is a core competency of DAWI staff and a primary value add in our technical assistance and training. DAWI’s lead on this project, Melissa Hoover, has experience on the shop floor in finance departments in worker-owned companies and as a cooperative business developer. Trainer Yarissa Soriano grew up in the South Bronx, where she built her career training home care workers in the coaching approach to supervision. 

We are applying to Truist Foundation Inspire Awards to change the way business works -- and who it benefits -- at its core. This is a tall order, and we will need partners throughout the ecosystem. 

Partnership with Truist Foundation/MIT Solve means so much more than money to our team. The partnership itself would help us accomplish our core goals of raising awareness of this model and embedding support in institutions with influence and reach. 

We identified three barriers: being first-time fund managers of color, MWBE certification for employee-owned companies, and risks of scaling using a modified private equity model combined with a racial equity logic. The most important non-financial support we can get from Truist/MIT Solve is the testing, refining and legitimation of our model within influential institutions. 

The needs assessment, model refinement, peer network, and wraparound services will help make us stronger and more visible (barrier 1) which will in turn help mitigate the risks of being seen as a lesser private equity model (barrier/risk 3). In addition, support with refining our impact measurement practice can address not only the first and third barriers, but it may also help us make headway on the second, MWBE certification for employee-owned businesses.

We are not just transitioning ownership of companies. We are aiming to:

•  develop a pipeline of talented young professionals in impact investing, small business support, and management that want to grow employee-owned companies as a racial equity strategy. 
• create standard impact metrics that connect shared business ownership to job quality, worker health and family well-being in communities of color.
• change impact investing, small business finance, and private equity approaches for that matter. 

In order to do this, we need to marshal not just values-aligned capital, not just skilled technical assistance, not just impact data, but support from trusted institutions in the business community and academia. This partnership can add ballast to a strong concept in so many ways that strengthen it from the inside out. What we're trying to do is complex and multifaceted; it requires an ecosystem approach. We believe Truist/MIT Solve are critical ecosystem partners who bring not just resources but networks, experience, intellectual heft, tools and wisdom that can help our solution thrive. 

One longer term goal is derisking the investment model by increasing the amount of capital available to finance legacy businesses. This means developing partnerships with banks with ESOP lending practices. 

Secondly, we are always seeking pipeline partners, who can help us locate great businesses with our priority workforces, and partners who can strengthen the portfolio businesses once transitioned. To this end, in addition to the national partnerships we already hold, we anticipate building similar partnerships locally and at the industry level around portfolio companies, including chambers of commerce near large populations of workers of color.

More broadly, we want to amplify the learnings and increase uptake of the investment model. Business schools and Historically Black Colleges and Universities, such as Columbia, Morehouse, Spelman, Howard, are ideal partners. In fact, any school with students who want to go into finance is a likely partner. Our Fellowship program is already attempting to use this pipeline to connect with early-career professionals. We also want to partner with organizations such as Inroads, an organization that prepares underrepresented youth for corporate careers through leadership development training and paid internships. Generally, any organization that interacts with the Black and Brown business community is a potential partner.