By Rebecca Koenig. Originally published in the Chronicle of Philanthropy.
After years of sporadic interest, technology startups are embracing the practice of setting aside company stock before initial public offerings to endow new charitable ventures.
Tech entrepreneurs say they hope to place corporate giving, once a personal matter for executives or a peripheral project for shoring up community goodwill, at the heart of budding companies.
Venture-capital firms, once skeptical of mixing business with charity, are also testing the waters by adding philanthropic startups to their portfolios and earmarking their own equity in startups for charitable purposes. Just this month, for example, Fyrfly pledged to start a new foundation — believed to be a first for a venture-capital firm.
The momentum is such that charity set-asides could soon become the new normal, according to some philanthropists, venture capitalists, and entrepreneurs in the tech world. What remains unclear is exactly how they will play out for the nonprofit world and the populations they serve.
After all, “if the business doesn’t materialize, the money doesn’t materialize,” says Seth Levine, managing director at Foundry Group, a venture-capital firm.
If tech stock prices soar, it could mean a windfall. With $47.2 billion in venture capital invested in the first three quarters of 2015, according to the MoneyTree report, nonprofits could benefit significantly if they capture even a small fraction of those resources.
eBay Blazes a Trail
The equity set-aside movement started in 1998, the year eBay’s founders created the company’s eponymous foundation using stock reserved from before eBay went public.
The concept spread from there, according to Silicon Valley philanthropist Laura Arrillaga-Andreessen. Marc Benioff set aside 1 percent of the equity of his cloud-computing company, Salesforce.com, in 1999 to start the Salesforce foundation. And Mr. Benioff’s move helped guide Google’s 2004 decision to set aside 3 million shares of stock, worth more than $900 million, to support its for-profit charitable arm, Google.org, Ms. Arrillaga-Andreessen says.
Today, nearly 300 companies have pledged equity through Pledge 1%, a movement to encourage business leaders to build charity into the structure of their companies. The Silicon Valley Community Foundation is working with 20 companies that have agreements to donate equity or closely held stock to charitable vehicles.
The idea has caught on outside of Silicon Valley, too — sometimes in a big way.
In 2014, Chinese e-commerce giant Alibaba announced a 2 percent set-aside of the company’s pre-IPO shares — an amount worth billions of dollars — to support two charitable trusts that will benefit the environment, education, medicine, and culture in China.
Also last year, Australian software vendor Atlassian, valued at more than $3 billion, set aside 1 percent of its shares to create the Atlassian Foundation. The company, which co-founded Pledge 1%, filed its intent to go public in November.
And in December 2014, Seattle-based software company Tableau used shares it had set aside before going public in May 2013 to establish a donor-advised fund — called the Tableau Foundation — at the Seattle Foundation, worth more than $20 million.
“It is an obvious future to me that in 10 years the majority of startups will adopt a program like this,” says John Hering, co-founder and executive chairman of mobile-security firm Lookout.
The company, still privately held and valued at around $1 billion, recently pledged to set aside equity for charity through Pledge 1%.
“Once critical mass has taken hold, this is going to become the default,” Mr. Hering says.
Making a Commitment
By setting aside equity to endow new charitable institutions, company leaders hope to signal a long-term commitment to corporate philanthropy. Several have gone the route of opening corporate donor-advised funds at community foundations.
It’s an attractive option for startups, according to Fidelma McGinn, vice president for philanthropic services at Seattle Foundation. It saves time, affords more flexibility, doesn’t have annual payout requirements, and costs less in taxes.
It also allows them to outsource overhead expenses and administrative duties to community-foundation professionals. That’s important in part because startups prefer their own employees, many of whom lack philanthropy experience, to run the new giving vehicles, sometimes as volunteers, says Suzanne DiBianca, co-founder and president of Salesforce’s foundation.
It is a calculated move: Startups are betting that engaging employees directly in corporate giving will help them attract and retain talent.
For example, Tableau pays an employee, Neal Myrick, to oversee its donor-advised fund. He works with 15 other employees who volunteer their time to help guide Tableau’s grant making.
Mr. Myrick says staff members seem to appreciate the opportunities they have to determine how the company uses its equity fund. During the presentations he makes to all classes of new hires, “one or more people will raise a hand and say one of the reasons they picked Tableau over other organizations is they feel we’re having a positive impact in the world,” he says.
Appealing to Customers
In addition to scoring talent, start-up leaders say building philanthropy into their companies could attract consumers who support businesses they view as agents of positive social change.
For this kind of cause marketing to work, customers must perceive it as authentic, says Deborah Small, a marketing and psychology professor at the Wharton School at the University of Pennsylvania. Although that term is difficult to define, she says, it means that consumers look for an alignment between the brand and its charitable giving.
However, there’s a danger for companies if their charitable activities appear to be insincere or, worse, self-serving.
“Consumers quickly become cynical if there’s anything that smells of hypocrisy,” Ms. Small says.
Consumers also seem to favor brands that devise creative ways to give back, she adds: “If you’re a copycat, that doesn’t seem very authentic.”
That may be an obstacle to the proliferation of IPO set-asides.
“I think it will be a requirement for doing business, but businesses will have to use their creativity to find out ways to make it not just a requirement but to make it competitively advantageous,” Ms. Small says.
Persuading Venture Capitalists
There are signs that another obstacle — persuading investors to support the practice — is eroding. Proponents report that attitudes among venture capitalists are beginning to shift as they “recognize there’s actually a return from a business perspective” in setting aside equity for charity, Mr. Levine says. His venture-capital firm, Foundry Group, gives money raised when it exits investments through the Pledge 1% program to the Community Foundation of Boulder County’s general fund.
Still, skepticism endures. Swaying doubting investors will require evidence that IPO set-asides improve company success, and measuring that may prove difficult. Researchers say it’s nearly impossible to prove that an individual start-up that has set aside equity is doing better or worse for having made that decision, although it may be possible to assess the sector as a whole once enough companies have done it.
And movement leaders say they’re still puzzling over how to collect and measure evidence of employee engagement and customer approval. Pledge 1% asks participants to report the effects of their charitable programs.
There’s little experimental evidence about whether people actually prefer to work at philanthropic companies, says John List, economics professor at the University of Chicago. He’s testing the question by running a large-scale field experiment using job ads on Craig’s List; results should arrive in the spring.
Mr. Myrick says Tableau can measure employee engagement by checking how many staff members use the company’s online portal for logging personal volunteer hours. So far, 26 percent do.
But the company is not measuring the level of influence the foundation has over customer purchasing decisions, he says. Although he acknowledged that corporate foundations “have to return value to the company in some way or another,” he doesn’t want that mind-set to direct the foundation’s work.
“Our focus on a foundation is on the social impact,” Mr. Myrick says. “Any benefits to the company we see as collateral benefits, not part of the primary decision-making process. We don’t want to put them in the driver seat.”
Despite the doubters, start-up leaders and their venture-capital allies are forging ahead. Ms. DiBianca says it’s her dream that companies of the future won’t think twice before setting aside equity for charity. She wants the number of companies signing up through Pledge 1% to double.
“People are learning that this is how you build a great company today,” she says. “The new normal is our big vision.”
And proponents have one more rationale for setting aside equity for corporate giving, Mr. Hering says: “It’s also just the right thing to do.”
Correction: An earlier version of this story incorrectly referred to Suzanne DiBianca as co-founder and executive director of Salesforce’s foundation. She is co-founder and president.