At Founders Pledge, we help entrepreneurs turn an intention to give into a commitment to do so. We invite founders, investors and early employees of fast-growth startups to pledge a portion of their eventual proceeds from an exit or liquidity event to social impact.
After five years of working with entrepreneurs, we’ve learned some of the ways individuals, families and their advisors think about optimizing their pledge percentage according to their values, while also maximizing the amount of good their resources can do. We share our learnings in this blog for individuals thinking about joining Founders Pledge as well as those in our community who might consider increasing their pledge.
Why give at all?
Most members of our community join us already knowing giving is important and simply seek support in figuring out how much to give, what impact infrastructure to use, and how to maximize the impact of their donations.
Long before having liquidity, our members are often active volunteers, leaders of socially conscious businesses, engaged members of their communities, and donors to causes they care about. Research shows three-quarters of entrepreneurs say charitable giving is a critical part of who they are. For many, giving brings joy and meaning. As Sara Blakely, founder of Spanx, has said: “it's so much fun to make money. It's fun to spend, it's fun to give away." We’re here to partner with entrepreneurs who want to do immense good - finding meaning and purpose in philanthropy, supported by a community of like-minded and similarly committed individuals.
How much will I need?
One of the first questions individuals facing wealth events will consider is “how much is enough?”
We’ve seen our members address this question from two main angles: either taking a quantitative approach to calculating how much money they’re likely to need to fund the lifestyle they intend for themselves and their families (often in consultation with a wealth advisor), or a more philosophical approach to determining what level of wealth is “enough.”
We know it’s a subjective measure, and very personal. For some members, thinking about “enough” provokes deeper, intergenerational questions: what level of wealth would ensure they and their children have comfortable lives, but not so much that they become complacent? Is preserving intergenerational wealth important, or is there an opportunity to distribute more to causes today? Is legacy important? Often these conversations can be difficult to have with a wealth adviser - mandated to help you preserve your capital, rather than to support you in strategically giving to impactful causes. We can work with you and your advisors to think through some of the esoteric questions that others in our community have grappled with.
Giving more by understanding tax benefits
Our members are rarely motivated to give solely by tax relief. However, it can be helpful to understand how advantageous it is to donate appreciated shares in some jurisdictions instead of cash, as most of our members will generate wealth through appreciated company assets. Governments provide a tax incentive to give to charity to recognize the contributions to society made by non-profits.
Understanding the tax consequences of donating appreciated shares often results in our members choosing to pledge a much higher percentage to charity than they would have otherwise, meaning substantially more money ends up reaching charities.
Donating shares instead of cash has a couple of main benefits:
- Capital gains tax relief: In the UK and US, you won't pay capital gains tax on some types of shares you donate.
- Income tax relief: In the US and UK, you’ll also be able to claim the fair market value of certain types of donated shares as a tax deduction against your income, up to the overall limit allowed.
To understand just how much this can impact a pledger’s ability to give to charity, we’ll present a single example of a United States-based entrepreneur, Jessica, who resides in California. Jessica anticipates making $50 million from the sale of her company next year. She is considering pledging 10 percent of her proceeds through Founders Pledge, or $5 million. She has requested the assistance of her accountant to help her maximize her total controllable assets, meaning the total cash she has to spend, including on philanthropy.
By donating appreciated shares before her exit, a $5 million charitable donation will cost Jessica much less - in fact, about four times less - than a donation of cash! Below is an approximation of the cost Jessica would bear across three examples: (1) donating nothing, (2) donating $5 million in cash and (3) donating $5 million in privately-held stock. The effective cost of a $5 million donation of shares to Jessica is about $600k.
Note: Actual figures are highly dependent on individual circumstances. This model is meant to be illustrative of the incentive to give appreciated shares, but is not to be taken as individual tax advice. Please seek the counsel of a tax advisor to understand your personal situation.
When thinking about her pledge percentage, Jessica was comfortable parting with $5 million of her total $50 million in gross proceeds. Therefore, if she decides she’ll donate appreciated shares ahead of her company’s sale, she can actually give a substantially higher percentage of her proceeds while effectively parting with $5 million in value. The table below illustrates how she can do this with a 32 percent pledge, giving $16 million to charity with an effective cost to her of $5 million.
Note: Actual figures are highly dependent on individual circumstances. This model is meant to be illustrative of the incentive to give appreciated shares, but is not to be construed as individual tax advice. Please seek the counsel of a tax advisor to understand your personal situation.
You’ll see in the above example that the efficiency of Jessica’s stock donation has declined, with the percent of the donation she now will pay being 31 percent versus 50 percent for a cash donation. If she wanted to maintain the highest marginal efficiency of her donation of shares, while still giving more away, her optimal pledge percentage would be about 22 percent, or roughly $11m given to charity. At this level, the cost of her donation would be about $1.4m, or 13 percent post-tax, and would result in a donation four times more efficient than cash.
How our pledge can help
Our pledge helps entrepreneurs transform their desire to give into a commitment to do so. Pledging often involves planning for the future, and thinking about not only the kind of life one wants to lead, but legacy too.
We offer a variety of pledges, including our:
- Standard pledge: commit a flat amount of your exit proceeds to charity, for example 20 percent
- Progressive pledge: set different pledge amounts for different hypothetical scenarios, for example, pledging 15 percent of the first $50 million earned, and 80 percent of anything beyond $50 million
- Venture pledge: pledge a portion of your carried interest
Our community is incredibly generous. The average percentage pledged by new members joining Founders Pledge in 2020 is 12.3 percent, and some members have pledged as much as 100 percent of an exit. Together, our members have pledged an incredible $2.7 billion - and counting - to charitable causes!
If you’re interested in learning more about how we can support your philanthropic plans, or if you’d like to discuss increasing your pledge, please be in touch.
This blog is not intended to provide tax advice. Tax effects vary depending on individual circumstances and the relevant tax jurisdictions to which an individual is subject. You should consult with your own tax advisor before taking any actions that may affect your tax position.