The Open Equity Framework In conjunction with our regional network of assets and operating businesses in the Edmonton Region, Sparrow Capital has been advancing experiments in stakeholder ownership through an innovative partnership framework that we call Open Equity. Open Equity is a framework for equitable ownership and stakeholder engagement. It adapts nimbly to a broad range of assets and initiatives, diverse contingency scenarios, and various configurations of stakeholder groups. The Open Equity Framework draws on the precedents of the employee ownership movement, but emphasizes two particular distinctions. Open Equity provides for flexible configuration of stakeholder groups. Open Equity defines stakeholder groups more precisely than the standard ESOP model. It is not limited to employee stakeholders. Rather, it can define a broad range of stakeholder groups on the basis of the capacities and resources they contribute towards the value of an asset. These groups can include employees, managers, directors, investors, guarantors, customers, vendors, tenants, members, subscribers, sponsors, and strategic allies. This higher degree of resolution allows the Open Equity Partnership Framework to better cultivate leadership within each stakeholder group and to align incentives between them. Open Equity is not the first to do this. In fact, before the economist Louis Kelso introduced the concept of the ESOP to US congress in 1974, his first creation was a Consumer Stock Ownership Plan (CSOP): a trust that provided equity shares to a group of dairy farmers to become customer stakeholders in a nitrogen production company. In addition to ESOPs and CSOPs, Kelso created an array of ownership structures, including MUSOPs, ICOPs, COMCOPs, PUBCOPs, RECOPs, and more. In contrast to Kelso’s multiple specific structures, Open Equity is a singular open-ended framework that can be adapted to many purposes. Its stakeholder groups are flexibly defined and can therefore be configured to easily integrate with ESOPs and other established ownership models as needed. Open Equity allocates participation to stakeholder groups on the basis of the capacities they contribute to the asset. Open Equity accounts for the changing profile of value creation over time. In a given initiative, each stakeholder group generates a distinct profile of value creation over time. For example, originators and investors carry most of the risk and value creation at the outset of the deployment of an asset, whereas value creation over the lifecycle of an asset is primarily carried by other stakeholders such as employees and tenants. Open Equity accounts for these changing profiles of value creation and allocates ownership to each stakeholder accordingly over the lifecycle of the asset. This is achieved through stakeholder performance ratios and daily equity allocations. On a daily basis, Open Equity allocates ownership to each stakeholder in proportion to the value they generate through the fulfilment of their covenants. For example, after Capital Stakeholders have their investment repaid and have earned their preferred returns, they no longer have capital at risk. Their contribution to the initiative is now complete. They retain the equity they earned while their capital was at work, but receive no further allocations of stakeholder units from that time forward. Similarly, Tenant Stakeholders earn stakeholder units while they are active tenants and are performing their covenants. If they leave at the end of their lease term, they retain the equity they’ve earned but receive no further allocations of stakeholder units. Instead, the new tenant takes the previous tenant’s place and gradually receives the stakeholder units earned under that position from that time forward. Once a stakeholder has completed their contribution to the success of the initiative, they still retain the equity interest they’ve already earned. The remaining active stakeholders, meanwhile, are still incentivized to continue optimizing the asset and thereby continue to add value to the equity held in the asset. On a net basis, all stakeholders benefit mutually from this sustained alignment and optimization over time. The chart to the right represents a hypothetical scenario for a commercial asset showing the ownership allocations of six stakeholder groups over an 80-year lifecycle. A hypothetical scenario for a commercial asset showing ownership allocations for six stakeholder groups over an 80-year lifecycle The flexibility of Open Equity stakeholder groups allows the framework to adapt to diverse contexts and contingency scenarios. The allocation of equity in proportion to each stakeholder’s contributions over time incentivizes good leadership at all levels of the organization. Aside from these two distinctions, the Open Equity Framework typically operates as a conventional partnership or corporate structure that will be familiar to legal counsel and other industry players. For a more detailed introduction to the dynamics of the Open Equity Framework, see https://sparrow.capital/open-equity-partnership-framework/. Prototypes in DevelopmentA Regional Network of Stakeholder Ownership Beginning in 2021, Sparrow Capital began deploying Open Equity prototypes within our regional network of assets. First, we deployed Open Equity Prototypes 1.0 & 2.0 through Westmount 107 and the Brighton Block. We are currently developing Prototype 3.0, which we will use to transition Sparrow’s entire portfolio of assets and operating businesses into a regional ecosystem of stakeholder ownership. Prototype 1.0 The Open Equity Partnership Framework has been established and deployed in its first prototype under the Westmount 107 Open Equity Limited Partnership, which owns the Westmount 107 building. In 2021, Westmount 107 was converted from a conventional ownership structure into the world’s first Open Equity partnership. RGE RD Restaurant became its first Open Equity Tenant Stakeholder. You can read a case study of RGE RD’s journey here. Prototype 2.0 The Brighton Block is the world’s second Open Equity partnership. Sparrow is currently in leasing discussions with several tenant groups to activate the building. These entrepreneurial leaders will be Tenant Stakeholders under the Open Equity Partnership Framework when construction is complete. Prototype 3.0 Sparrow Capital is preparing to gradually convert its entire portfolio in the Edmonton region to the Open Equity Partnership Framework. This network of Open Equity partnerships will constitute Prototype 3.0, a regional-scale deployment demonstrating the potential of a community of entrepreneurial leaders collaborating through an integrated ecosystem of stakeholder ownership. When this transition is complete, each commercial asset, residential asset, and operating business under Sparrow’s management will become an Open Equity instance and our employees, tenants, investors, and other stakeholders will earn equity in the shared assets and businesses they are engaged with. The Open Equity Foundation The Open Equity Foundation was registered in 2022 as a division of Sparrow Community Services. The Sparrow community is working to deploy the Open Equity Foundation as a charitable organization that can teach communities how to build and cultivate ecosystems of equitable stakeholder ownership. The efforts of the Open Equity Foundation in its current form are dedicated to developing the Open Equity Partnership Framework and stakeholder engagement programs through a series of prototypes deployed through Sparrow Capital and Sparrow’s network of assets and businesses in the Edmonton region. A Hypothesis: Community-Coordinated Economic Development What happens when we recognize the value and scarcity of entrepreneurial leaders? When we consider the infinite opportunity in the undeveloped capital that is sitting there, just waiting for our community to organize the leadership needed to realize its potential? What if a community can learn to gather its learning, talents, and best practices to build shared resources, services, and assets to support its entrepreneurial leaders? And how can incentives be best aligned to enable a community of stakeholders to participate equitably in the consequences and rewards of bringing undeveloped capital to life? These questions inform the working hypothesis behind Sparrow’s approach to community-coordinated economic development. Recognizing Leadership Entrepreneurial Leaders Are the Scarce ResourceAs owners and stewards of capital, we can start by simply acknowledging that the value of our capital is defined by the capacities of our entrepreneurial leaders. This is true of undeveloped capital as well as capital investment. Equipping Leaders Communities Can Equip Leaders With Shared Tools and ResourcesAs a community of stakeholders, we can learn to gather our talents and best practices, coordinate shared tools and resources, and build paths of capital apprenticeship to help equip our entrepreneurial leaders to work with capital. Rewarding Stakeholders Stakeholder Ownership Coordinates Capital WorkAs partners and investors in capital projects, we can develop ownership frameworks that align incentives and enable stakeholders to participate equitably in the consequences and rewards of bringing undeveloped capital to life. Cultivating Stakeholder Ownership Open Equity Is the Evolution of Stakeholder OwnershipOpen Equity is an innovative framework for equitable ownership and stakeholder engagement. It adapts nimbly to a broad range of assets and initiatives, diverse contingency scenarios, and various configurations of stakeholder groups.