Technology startups increasingly are embracing the practice of setting aside company stock before an initial public offering as a source of funds for future charitable ventures, the Chronicle of Philanthropy reports.
Entrepreneurs who have taken their companies public and adopted the practice say it is a way of signaling their long-term commitment to corporate philanthropy and embedding it into the company's culture — which, among other things, can help attract customers who support businesses they see as agents of social change. Once skeptical of mixing business with charity, venture capital firms also have gotten into the act and, in some cases, are adding philanthropic startups to their portfolios and allocating a portion of their own equity in startups for charitable purposes. Indeed, the momentum behind the trend is such that, according to some VCs and entrepreneurs, charity set-asides could become the new normal in Silicon Valley.
The equity set-aside movement emerged in 1998, when eBay founder Pierre Omidyar created the eBay Foundation using shares in the company reserved from its initial public offering. According to philanthropist Laura Arrillaga-Andreessen, the concept spread from there, with Salesforce.com founder Marc Benioff setting aside 1 percent of the company's equity in 1999 to start what is now the Salesforce.com Foundation. Benioff's tactic, in turn, helped guide Google's 2004 decision to set aside three million shares of stock — worth more than $900 million at the time — to support its for-profit charitable arm, Google.org. And today nearly three hundred companies have pledged equity through Pledge 1%, a movement aimed at encouraging business leaders to build charity into the structure of their companies. The idea has even caught on beyond Silicon Valley, with Chinese e-commerce giant Alibaba earlier this year announcing a 2 percent set-aside of the company's pre-IPO shares — worth billions of dollars — to fund two charitable trusts.
A donor-advised fund at a community foundation is another attractive option for startups, said Fidelma McGinn, vice president for philanthropic services at the Seattle Foundation, in that they are low-cost, provide an immediate tax benefit and flexibility, and allow companies to outsource overhead expenses and administrative duties to foundation professionals. Young companies also like the fact that their own employees, many of whom lack experience in philanthropy, can be enlisted to help run the fund -- a selling point when it comes to attracting and retaining talent, said Salesforce.com Foundation co-founder and executive director Suzanne DiBianca.
But even as entrepreneurs and venture capitalists begin to "recognize that there's actually a return from a business perspective" in setting aside equity for charity, what remains unclear is exactly how the trend will play out for nonprofits and the populations they serve. Evidence that IPO set-asides boost the likelihood of company success is nonexistent, and researchers told the Chronicle it's nearly impossible to prove that a startup that has set aside equity is doing better or worse for having made the decision.
Still, startup founders and their venture capital allies are forging ahead. "People are learning that this is how you build a great company today," said DiBianca. "The new normal is our big vision."