Philanthropy and the Tech Entrepreneur:
3 Smart Ways to Use Your Wealth for Maximum Social Impact
BY ANTHONY GLOMSKI
• Tech entrepreneurs are embracing philanthropy to solve key global challenges.
• Private foundations and donor-advised funds are two smart, tax-efficient philanthropic tools for entrepreneurs wanting their wealth to have a lifelong social impact.
• The “Zuckerberg model” of funding both charities and for-profit companies via an LLC is a relatively new twist on traditional giving methods.
• Selecting the right approach to charitable giving requires careful consideration of the pros and cons of the various giving vehicles.
Philanthropy in the tech world made big headlines late last year when Facebook CEO Mark Zuckerberg announced his intention to give away 99 percent of his company stock during his lifetime to fund charities, private companies and other organizations aimed at creating social good.
Zuckerberg’s massive pledge (his shares were worth a whopping $45 billion at the time of the announcement) is the biggest yet in a growing movement among young tech entrepreneurs to use their wealth as a force for positive social impact. These industry leaders, many of them Millennials and Gen Xers, are looking to join the ranks of elder tech philanthropists like Bill Gates, Gordon Moore and Jeff Bezos in an effort to solve society’s key challenges.
While the Facebook CEO’s declaration was timed to coincide with the season of giving, tech entrepreneurs can pursue philanthropy at any time of year. Professionally, one of the greatest joys which I am most passionate about is when one of our tech entrepreneurial clients chooses to make a dent in the charitable universe, and we have the opportunity to help them determine which of the many charitable giving options is right for them.
Using wealth for good
When asked if capitalism is bad, the Dalai Lama responded simply and eloquently (I’m paraphrasing): The ability or talent to make money is a gift, and it’s what you do with that gift that determines good or bad.
One of the best illustrations of this is the well-known philanthropist John D. Rockefeller, whose catalyst for his giving is fascinating. In his 50s Rockefeller showed up at his doctor looking like a withered man near the end of his life. He stressed and obsessed over the smallest of costs. An extra charge of $50 (in today’s dollars) caused by something uncontrollable—like a delay in shipping due to weather—would lead to a restless night.
The physician gave Rockefeller an order: Stop working or you will die.
By that point Rockefeller had amassed a fortune to last many lifetimes, and he decided to start giving back. However, because of his not-so-nice (some would say tyrannical) reputation, his initial attempts at philanthropy were met with cold shoulders. He kept at it and, slowly over time, the community started to accept his generosity. Rockefeller lived out the remainder of his life giving away more than $530 million. Ultimately, that philanthropic focus restored Rockefeller’s health: He lived to age 97.
Charitable giving options for affluent tech entrepreneurs
Whether or not you are willing and able to give in a Rockefeller-esque manner, you need to select the right charitable vehicle. That requires a working knowledge of the key characteristics—the pros and cons—of various philanthropic tools at your disposal.
Most philanthropically-inclined tech entrepreneurs want to start making a difference as soon as possible. With that in mind, there are two main giving tools that are best suited to entrepreneurs looking to have a meaningful social and charitable impact during their lifetimes: Private foundations and donor advised funds.
1. Private foundations
Private foundations are independent organizations that offer philanthropists the most control and flexibility of any charitable vehicle over how the money earmarked for charity gets invested and donated.
Example: In general, donors who set up an IRS-approved private foundation can allocate money to the investments of their choice so the pool of assets can grow over time, and can choose any registered charity to receive donations—a level of freedom that’s unique among charitable vehicles.
What’s more, private foundations offer tax breaks that may be attractive to entrepreneurs—especially those looking to mitigate their tax burden in the wake of a liquidity event. Cash donations to private foundation are deductible up to 30 percent of the donor’s adjusted gross income, while gifts of stock or real property are deductible up to 20 percent.
Private foundations also can exist in perpetuity—they have no expiration date—thus making them ideal for entrepreneurs looking to create a family charitable legacy by involving children and other heirs in the giving process over many decades.
That said, the flexibility of a private foundation comes with costs and complexities. Private foundations are expensive to maintain because they require a board of directors, IRS filings and other extensive ongoing reporting and documentation duties. An initial contribution of at least $2 million is typically needed for a private foundation to make financial sense.
Perhaps most important is the rule that private foundations must pay out at least 5 percent of their assets in grants and administrative fees annually. In other words, the assets can’t remain idle. That means donors need to have a strong philanthropic vision and mission in place before they start, and be actively involved in the giving process for a private foundation to work. Given these complexities, it’s not surprising that setting up and running a private foundation so it’s both effective and compliant with the regulations takes the right team—which might include consultants on grantmaking and back office personnel to handle paperwork.
2. Donor Advised Funds
At the other end of the charitable giving spectrum is the donor advised fund (DAF).
A much simpler and streamlined approach to philanthropy, a DAF is essentially a charitable investment account available through a number of “sponsoring organizations”—including community foundations, public charities and the philanthropic arms of major investment firms such as Fidelity, Schwab and Vanguard. A DAF also takes less capital to get started than a private foundation: The required minimum initial contribution may be as low as $5,000.
Donors can set up and fund a DAF in no time. Because it’s run through a sponsoring organization, a DAF doesn’t require donors to deal with much paperwork—nor any of the administration and reporting duties inherent in a private foundation. That makes DAFs a potentially good option for donors who want to take a relatively hands-off approach to philanthropy.
What’s more, DAFs’ tax benefits are even better than those of private foundations. Generally, cash donations to a DAF can be deducted up to 50 percent of the donor's AGI (and 30% for gifts of stock and real property).
Perhaps most intriguing: Unlike private foundations, DAFs have no rules about the timing or the amount of donations. Donors can take years if they want to decide which charities to support. This feature makes the DAF especially appealing to donors and families that want to fund a charitable vehicle right away to get an immediately tax benefit, but who haven’t figured out where they want that money to go.
The cons? DAF donors have far less control over the money they donate than they would with a foundation. Technically, they can only advise the firm sponsoring the DAF to send money to the charity or charities they wish to support. In practice, most requests are accepted—but the bottom line is that the sponsoring organization has final say.
Donors also have less control over how the money in their DAFs is invested. The options might include just a limited number of mutual funds and ETFs, for example, and the sponsoring organization makes the big picture investment decisions about asset allocation, rebalancing and the like.
In addition, DAFs don’t enable families to build long-term charitable legacies involving multiple generations. That’s because the sponsoring organizations tend to restrict or limit the ability of donors’ heirs to make recommendations about how the funds’ assets should be donated.
At the end of the day, the decision about which vehicle to use rests largely on how involved a donor wants to be in the giving process as well as the latitude and ability to gift. Oftentimes families will opt to fund both types of vehicles—or start with a DAF to “dip their toes in the water” and later set up a more involved private foundation after they have more experience and a clearer philanthropic vision for their wealth.
An alternative approach to philanthropy with tremendous benefits
There also are options that aren’t entirely philanthropy-based, but which still are designed to support causes and interests about which people are passionate.
For example, you can do what Zuckerberg (and Ebay’s Pierre Omidyar before him) did: Set up a Limited Liability Company (LLC). This approach comes with no tax deductions—none at all—because it’s technically a corporate structure and not a charitable tool.
So why do it? Tremendous freedom and social impact. A sort-of “private foundation 2.0,” the LLC structure allows philanthropists to use their money just about any way they see fit—including as investments in for-profit companies that are trying to solve societal challenges. In contrast, foundations and DAFs only allow donors to make grants to tax-exempt nonprofits. Likewise, an LLC is allowed to spend its assets on lobbying and political donations—actions that strictly charitable vehicles can’t take.
As Zuck himself posted on Facebook: “By using an LLC instead of a traditional foundation, we receive no tax benefit from transferring our shares…but we gain flexibility to execute our mission more effectively.”
Clearly, choosing the right giving mechanism is not a decision that can be made quickly or rashly, given the complexities and details of the various charitable tools. Entrepreneurs should always consult with their financial and tax advisors before deciding how philanthropic values can fit in with the larger wealth picture. The right approach can help set up entrepreneurs to maximize their social impact on the causes they care about most—while also ensuring that they remain well-positioned to achieve their full range of financial goals for themselves and their families.
Anthony Glomski is the founder of AG Asset Advisory, a Los Angeles-based investment advisory firm that helps successful tech and business entrepreneurs who are approaching a liquidity event make smart decisions about their wealth.