David Cummings on Startups

Charitable Donations of Startup Equity

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David Cummings

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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?

Comments

One response to “Charitable Donations of Startup Equity”

  1. Sanford Avatar
    Sanford

    David,
    I’m not a tax expert either. so i have reservations about “talking” about taxes below. nevertheless, i think the example below is tracking with your blog and may or may not open up more insights:
    1) Basis in stock at beginning of company: 10,000 shares at $1.00 per share = $10,000.
    2) Private company is sold for 10x and to a public company. So, 10,000 shares at $10.00 per share now = $100,000.
    3) If you donate those 10,000 shares (rather than liquidate the shares), then the donor will avoid paying 20% capital gains tax, or $18,000 tax bill.
    4) The non-profit receives $100,000 in stock and can sell the stock without any tax consequences.
    5) the donor will get to deduct (itemize) the $100,000 gift on his / her tax return. So the donor saves an additional 23.8 – 35% on his / her tax bill. (this tax deduction savings would not have been available had the donor contributed the stock at the start-up phase).
    6) All told, the donor is saving as much as 50 cents on his / her donated dollars: $18,000 in avoiding capital gains and $23,800 to $35,000 in reduced tax bill.

    lastly, the donor can create an online “charitable giving trust” with Fidelity or other similar brokerage companies. You can transfer the stock to the trust and immediately qualify for having made a donation. Fidelity, or whoever, will immediately sell the stock and you’ll have $100,000 to give out whenever and to whoever you please. You can actually donate the money years later down the road. As you instruct your giving, you can make the gifts anonymously if you like.

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