So, you find yourself on the precipice of the moment every startup employee dreams of: an IPO. First off, congratulations! The experience of growing a startup into a highly valued company is something only those who have lived it can really understand. Second, take a deep breath in and out...we know you have a lot on your mind, and we’re here to help check one item off your list: how to think about optimizing your giving around the IPO.
At this point, I’ll pause to say that if you’re a company leader looking for educational resources for your employees about planned giving around an exit, please contact us as we can get into more detail when we understand a specific company’s circumstances. If you’re an employee of a company headed towards an exit seeking general guidance, this resource is for you, so read on!
This blog serves as a practical guide for pre-IPO giving for the shareholding employees and alumni of a company in the process of going public. We cover the essential considerations that arise as part of the process and offer strategies for maximizing the potential impact of your giving.
One point to underscore is that while the weeks pre-IPO can be manic, they’re an important time to consider developing a giving plan. The good news is that a little planning can go a very long way and set you up to give far more to the causes you care about at a lower effective “cost” to you. Let’s dive right in!
What can I give?
The first step is to take an exhaustive look under the proverbial hood and understand the full extent of your income and assets. It is generally beneficial to make donations in high-income years - doing so maximizes the possibility of offsetting taxes across all of your wealth, and some assets you hold (even beyond equity compensation) may be more tax-advantaged than others.
When it comes to accounting for your equity compensation: know what assets you hold, including what type (e.g. RSUs, NSOs, ISOs, etc), how much, and the relevant grant and vesting dates. All of this can be found in your stock grant documents, usually available online if your company utilizes a cap table manager. Understanding the structure of your equity compensation will give you a better idea of how much you have to give away in the first place and how that giving will work.
Once you’ve established the types of assets you hold, it's important to determine which are the most tax-advantageous assets to donate. Donating highly appreciated securities (which can be private [pre-IPO] or publicly traded stock) can be particularly tax-advantageous. This is because you don’t have to pay capital gains tax on the gains you made on the shares and you can claim an income tax deduction (as you would with any cash donation) equivalent to the fair market value of the stock. This means you could make a bigger donation to charity, as any capital gain is protected, and a bigger donation means a higher tax deduction, which leads to greater tax savings.
Which brings us to our next frequently asked question…
When should I give?
Typically, companies will go public two to three months after an S-1 filing occurs. Once the IPO actually happens, there’s often a lockup period (usually about six months) during which employees are barred from trading their equity. Shareholders are able to sell shares once that lockup period expires.
As mentioned above, you should try to make donations in high-income tax years, like the year you realize your gain, so that you can offset the tax deduction from your donation against your income/gain. Please bear in mind that December 31 is the end of the tax year in the United States – because everyone seems to remember the deadline on December 1, the holidays are an exceptionally busy time for Donor Advised Funds and charities in general. Beat the madness by planning as far ahead as possible.
How much should I give?
A windfall from an IPO can be a once in a lifetime opportunity to be exceptionally generous. Think about it: you normally manage your expenses relative to your income, and you now have an unexpected source of additional wealth. It’s kind of like winning the lottery: you made a bet on working hard at this particular company, and your bet is about to pay off. That’s amazing! And since this is compensation above and beyond what you’ve become used to, it could be an excellent time to give more than you would in an ordinary year or from other types of income.
The decision of how much to give away comes down to a confluence of factors guided by your values. In our experience, people consider this question from two angles:
- How much do I need to live a “good” life?
Plan and anticipate what this might look like for you personally and prepare to give what remains away.
- What’s my optimal giving level from a tax perspective?
In the best of cases, a final decision will take the answers to both of these questions into account. If you’re interested in a deeper dive into what the questions above mean in your particular case, feel free to check out this resource which focuses entirely on the subject. We understand that this is ultimately a deeply personal decision, but it might be helpful to know, as reference, that Founders Pledge members who’ve joined in 2020 have generously pledged to give an average 12% of their exit proceeds to charity!
How should I give?
Once you know the amount and type of assets you hold and have decided how much of them to give away, you’re in a position to consider how you’ll be effectuating your donation. The most important bit to decide at this stage is whether you want to donate directly to the charities you’ve chosen to support or donate via a giving vehicle like a Donor Advised Fund (DAF) or private foundation.
A DAF is a terrific option for most individuals facing an exit, and in fact, our DAF is used by more than 80% of Founders Pledge members who have reached liquidity. A DAF is essentially a charitable savings account, with less overhead, improved tax deductions and increased grant flexibility than a private foundation. It can be especially handy if you don’t yet know which charities you want to support – you can transfer your donation to a DAF, claim any tax deductions possible in the tax year of a windfall and take your time to evaluate and decide on the ultimate recipient(s) of your donation. You’re also able to invest assets deposited in a DAF, allowing your charitable pot to grow. Keep in mind, however, that most DAFs have minimum set-up requirements of $10k-$25k and charge fees on assets under management. At Founders Pledge, we operate a zero-fee global DAF to facilitate our members’ giving.
Gaining insights into these four broad questions will likely go a long way in maximizing the size and impact of your donation at the lowest financial cost to you. In summary, you should first set out to have a clear understanding of all the assets you currently hold – whether they relate to your equity from the IPO in question or not. Consider donating appreciated stock if you have any and remember that it most likely will be tax-advantageous to give more in tax years when you have the highest income or gains (don’t forget the December 31 deadline!). If the end of the tax year is coming up and you haven’t yet landed on the charities you want to support, you can use a DAF to buy yourself some more time without missing out on the tax benefits of donating. Ultimately, how much you decide to give is largely based on your personal circumstances and values – a windfall can be a unique opportunity to be especially generous! As always, we recommend contacting a tax or financial advisor to figure out what’s best for you.
The next step would be to decide what organizations your donation(s) will be going to and, as you may have guessed, we have a ton of resources to help you navigate this part of the giving process as well. This blog on how to think about giving during COVID could be of particular interest at this time and highlights some of our top recommended charities which have been vetted and designated as High Impact Giving Opportunities. We also offer tailored giving advice to individuals who join our community.
Hopefully by now it’s become self-evident that taking the time to become a smart and informed donor will not only help you help others more effectively and stretch the impact of the funds you’re giving away, it could also mean lower financial costs altogether over the long run.