One of the great things about being an entrepreneur and building a successful company is the ability to support charities and other non-profits through gifts of time, money, and equity. Donating equity is an interesting issue as there are considerations around doing it early when the business has little value vs doing it later when the company is valuable.
Here are some considerations around charitable donations of startup equity:
- When donating equity at the beginning of a new startup, there’s less drama and concern about giving up a ton of value. From a tax perspective, there isn’t much charitable deduction since there isn’t value but you also don’t have to pay taxes on that percentage when you sell the business such that the charity will receive more money
- Here’s an example: donate 1% of the business to charity at a value of $10, sell the business for $10M, that 1% is worth $100,000, and the charity gets all $100,000 with no taxes vs not donating the 1% initially, paying 23.8% – 35% long term capital gains on the sale of the business, and then donate the equivalent of 1%, which is roughly $76,200, and then getting a limited tax deduction from that donation)
- When donating equity just before selling a startup, you get the full deduction of the valuable business, the charity (including potentially your own charitable private family foundation) get 100% of the proceeds, and you don’t pay taxes on that equity donated (e.g. right before you sell your business for $10M you donate 1% to charity and take a deduction on the then business value, the charity gets the full donation, and you don’t pay any taxes on that piece you donated)
My personal lesson learned from my experience selling Pardot, and desire to donate to non-profits, is that I would have paid fewer taxes and the charity would have received more money if I had donated equity just prior to the transaction. If you’re thinking of selling your startup, or are about to sell it, go see a good tax and estate attorney.
What else? What are your thoughts on charitable donations of startup equity?