The Bakery That’s Owned by an Idea — The Solutions Journalism Exchange

Feb 24

Feb 24 The Bakery That’s Owned by an Idea

By: Oscar Perry Abello, Next City, February 16, 2021

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It’s really hard to bake in a wood-fired brick oven, says Matt Kreutz, who has been working in bakeries since 1996, at age 14, and first baked in a wood-fired brick oven at age 17.

“You have to monitor it all the time. It’s a pain in the ass, it’s dirty, it’s really challenging to control, challenging to work with,” Kreutz says. “But the amount of thermal mass you can bring to bear to baking, it means you can manipulate the dough in different ways. It just allows you to get a level of caramelization you’re not going to get with a regular gas oven. You get unique characteristics for sure.”

Kreutz founded Firebrand Artisan Breads in 2008, with just four employees in a West Oakland warehouse, baking bread and pastries in a wood-fired brick oven. In 2017, Firebrand moved to a new, larger facility, jumping overnight from a dozen to 55 employees. It now has its own cafe and hundreds of retail partners across the Bay Area, from local coffee shops and delis to four Whole Foods locations.

It’s going to be another big year for Firebrand, which is building out a new, larger wood-fired brick oven bakery in Alameda. At least 40 more employees will join the company once it’s up and running as expected in April.

Anyone can already apply for one of those potential jobs. Firebrand has for years practiced an open hiring policy, with a focus on hiring people with high barriers to employment, such as people experiencing homelessness or were formerly incarcerated. The advertised starting wage is $16.50 an hour, with health and vision and dental insurance kicking in after 90 days of employment, paid time off up to 40 hours, and 72 hours paid sick leave. Are you a night owl? The bakery has been running 24/7 since 2012.

Food and beverage businesses like this one, on this kind of growth trajectory, would normally be a prime candidate for investment from a venture capital firm. It’s a unique, high-quality product flying off the shelves wherever it goes, a great story behind a brand that gives it a narrative edge that Millennials and younger consumers value. It’d be relatively easy to rope in a venture capital partner that would help finance the new bakery facility and then work on taking the brand national, eventually going public or selling the company for some ungodly amount to Amazon or Unilever or some other corporate giant. Either would mean a huge payday for Kreutz.

Industry analysts estimate food and beverage startups raised $9.5 billion in venture capital worldwide from 2013-2018, funding everything from regional restaurant chains to Beyond Meat — which went public in 2019. But if Firebrand went that route, what would happen to the workers in Oakland or Alameda, not to mention the families and the neighborhoods who they support? Would shareholders or corporate executives leave them behind to move production to somewhere far away for the sake of lower labor costs or land costs? How much wealth would that create for Kreutz, a white cis man, and venture capital investors, who are overwhelmingly white cis men, while simultaenously reducing wages and upward mobility for Firebrand’s workers, who are 80 percent people of color?

Firebrand instead worked with outside advisors and lawyers to incorporate something called a perpetual purpose trust to serve as a new parent company, and Kreutz donated 51 percent of his voting shares to the trust to hold in perpetuity. The governing body of the trust is a stewardship committee, consisting of Kreutz, Firebrand employees and external community members who work on issues affecting Firebrand’s employees.

Firebrand then sold $2.5 million in shares to private investors, which the company used to finance the buildout of the new bakery facility in Alameda — which includes a worker resource center to offer career development services and classes to Firebrand workers and others seeking assistance.

“I didn’t want that temptation, didn’t want people coming in with different motivations,” says Kreutz. “I just didn’t want that voice in the room. I wanted us to be able to control our destiny and sink or swim because we do what we do.”

Selling or transitioning a business into the ownership of a trust isn’t exactly new. It’s been common as part of estate planning for small business owners who have historically used it as a way to avoid estate taxes after the original owner passes away but wants the economic benefits of the business to stay within their family. There’s a whole universe of law firms, accountants, financial planners and other advisors who help business owners take advantage of trust ownership transitions. As 10,000 baby boomers retire every day, it’s becoming more and more popular for those who happen to own a business.

Perpetual purpose trusts are a subset of trusts where the legal beneficiary is a purpose, instead of a person or family. To set up its perpetual purpose trust, Firebrand worked with Stoel Rives, a Minneapolis-based law firm that is an industry leader in trust laws and administration.

Only five states currently — Delaware, New Hampshire, Maine, Oregon and Wyoming — have trust laws that allow for perpetual purpose trusts, according to Purpose US, a nonprofit founded in 2017 to advance steward-ownership and build the field for inclusive ownership, governance and finance. Purpose US also worked with Firebrand to help structure the bakery company’s perpetual purpose trust, which it incorporated in Delaware.

“When we started in 2017, the first conversion into one of these [alternative ownership structures] cost over $1 million in legal fees,” says Camille Canon, executive director at Purpose US. “Since then, we’ve gotten the average cost of one of these transactions down to $25,000. We’ve made it so by the time the folks we work with actually get to legal counsel, they’ve already made all the key decisions about the trust. Lawyers don’t always like us because we take away a lot of their $800-an-hour billable hours.”

The key decisions for a perpetual purpose trust start with defining the purpose of the trust and codifying that in the trust’s charter. Firebrand’s perpetual purpose trust charter contains 11 “purposes” that cover everything from maintaining a profit-sharing program for workers to engaging workers in management and governance to prioritizing the hiring of people who are formerly incarcerated, homeless, or otherwise have high barriers to entering the workforce. It even requires the underlying company’s supply chain to be used to promote equitable business opportunities and fair labor practices.

“We have this document of 11 principles that we have to uphold,” says Allison Hill, one of the two employee representatives on Firebrand’s stewardship committee. “So we have to start thinking about fleshing them out and figuring out what that means for Firebrand. For me, I do all the procurement so it’s all about making sure our vendors are aligned, thinking about what it would it mean to assess our vendors according to those principles and maybe there vendors we want to work with but can’t yet produce the quantity that we need, but maybe there’s a way we can support their growth.”

Then there’s the key decision about who sits on the stewardship committee and how they are selected. Since Firebrand is still taking time to educate employees and create a culture around its new ownership structure, Kreutz handpicked the first set of stewardship committee members, including himself. Going forward, the trust stewardship committee will elect its own replacements as terms expire.

“I was kind of iffy about it at first, like are you selling us out? But, no,” says Xevion Vega, the other Firebrand employee on the trust stewardship committee. “I was honored that he brought me into this. It’s not everyone for themselves. We’ve been having open meetings to figure out things together.”

And finally, there’s the key decision about profit sharing under the new trust-ownership arrangement. For Firebrand, to start out, employees split up 10 percent of the profits among themselves and investors split up a 90 percent share among themselves until each investor gets back twice what they originally invested. After that point, the arrangement flips so employees split 90 percent of profits and investors split the remaining ten percent.

There are other ways to incorporate and structure a business so that it has a social purpose embedded in its ownership structure — like worker-owned cooperatives. Or benefit corporations, for which 37 states have laws on the books. Kreutz thought about all of them, and even looked into employee stock-ownership programs, or ESOPs, which are very popular across the country as a way to share the fruits of a successful business more inclusively.

But none of the other options really addressed everything that Kreutz had in mind when it came to the future long-term ownership of the business.

Under the prevailing ESOP model, employees accrue shares in the business over time, and eventually those shares can amount to a majority stake in the business. But there’s a catch — if the employees collectively have a majority-share and they receive an offer from investors or larger firms to buy the business at a share price that is higher than the currently appraised value of the business, the employees can approve the offer and sell the company.

That’s exactly what happened not too long ago to two famously employee-owned firms in the food and beverage industry — Full Sail Brewery, acquired by a private equity firm in 2015; and New Belgium Brewery, which accepted an offer to be acquired by a multinational craft brewing company in 2019. The employees at Full Sail and New Belgium did benefit financially from cashing out their shares under the terms of each company’s acquisition, with some employees netting six-figure checks for their shares.

Kreutz didn’t want to find himself in that position nor ever put the employees at Firebrand in the position to have to make the decision between owning and controlling the company and cashing out a windfall the likes of which would be nearly impossible to refuse.

“This made it so none of those options would ever be on the table,” says Kreutz. “There’s no liquidation in this model.”

Liquidation is another way of referring to going public or being acquired by a larger company, and ruling it out also rules out a lot of investors who would need that to happen — which is largely the point. “There’s not a lot of people out there who will hear that and then be like, ‘That sounds amazing,’” says Kreutz.

But there are a growing number of investors out there who are now actively looking for ways to invest their money in ways that will proactively address environmental injustice or structural racism.

Some are already investing money in ways designed to push back against over-policing and over-budgeting for police departments. Some of those investors are also looking at those other alternative ownership structures like worker-owned cooperatives or real estate cooperatives, because they’re seeing Black, indigenous and other communities of color turning to those models as more worthwhile or accessible alternatives to traditional ownership models.

A lot of those investors are in the Bay Area, where of course there’s a lot of money that’s been made off of tech booms driven by the conventional founder-venture capital-going public model. By the time Firebrand went out to raise $2.5 million last year, it found more than enough investors who were more than happy to invest in something that would never give them the chance to make billions.

Firebrand’s employees are optimistic about the future. “It’s all still fairly new,” says Hill. “It’s hard to say exactly how it’s going to play out. It does feel comforting that we have a legal structure that requires us to do this. It’s not just something we can give up on.”

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