Share Wealth by Giving Shares
William Bock, President and CEO, Dazel
As an entrepreneur helping to start and grow companies and overseeing their acquisition, I found that giving back to the community is not easy for start-ups. The investors' money is being spent to build a business, and during this phase almost all such companies are losing large sums as measured by their income statements. It seems inconceivable to the entrepreneur (or the board of directors) to be giving away funds during this process. Even after an IPO, the pressure for earnings performance makes it difficult to allocate significant sums to charity. Also, employees are often working ridiculously long hours, with little time for philanthropic activity.
In my three years as executive vice-president and COO at Tivoli Systems, I participated in the management and direction of our community investment program. Tivoli completed a successful IPO in 1995; however, the company's annual corporate giving budget was relatively insignificant, compared to its volume of requests we received. I hated saying "no" to worthy requests from the community and, especially, from my employees for causes they believed in.
Saying no to deserving nonprofit organizations was frustrating to my high-tech executive colleagues as well. In fact there is a real sense of community and a desire to contribute within this group. But, most of them concluded that they were trapped by the system and would get involved--as individuals--after the grind of corporate life was over, a process that could take decades.
On the start-up road once again as CEO of Dazel, now the industry's leading provider of information delivery solutions, I was faced with the same constraints: little time or money for volunteerism or community investment. One day, speaking with my good friend Libby Malone, then Chair of the Austin Community Foundation, who has lived in Austin and been involved much longer than I have, we discussed this dilemma about giving back. It didn't take us long to see the solution. Why not use a piece of equity--the same resource that I already used to reward employees, consultants and investors--to help another, equally important team player: the city of Austin?
Founding a Foundation
The model was simple: Utilize stock to fund future nonprofit contributions. Dazel, in collaboration with the Austin Community foundation, granted a stock option to a donor-advised fund for the purpose of community giving. Then, when Dazel was acquired by Hewlett-Packard last year, proceeds from the value created from building the company became immediately available. Investors, entrepreneurs and the community all benefited, without adversely affecting Dazel or HP earnings.
Our next move was to replicate the process across multiple companies. Austin's high-tech community had a terrific example in the philanthropy of Susan and Michael Dell and was searching for a way to get involved. About that time, entrepreneur Ingrid Vanderveldt donated shares in her start-up, Dryken Technologies, to several local charities. Her attorney, Paul Hurdlow, of the Austin branch of Gray, Cary, Ware and Freidenrich, was intrigued by the concept and began meeting regularly with others in the community to advance the concept of early-stage company equity contributions.
When John Thornton and Lynne Skinner of Austin Ventures agreed to chair a campaign to provide the new foundation with operating capital, Austin Entrepreneurs Foundation was born. Dazel's initial gift, from the appreciation of its earlier stock-option donation, was matched by Austin Ventures, and many other companies followed our lead with gifts of all sizes.
The Process of Contributing Equity
The process is amazingly simple. Board approval of equity contributions is generally required. The AEF provides a form, a standard board resolution, which companies can use to approve an equity contribution. The number of shares recommended as a benchmark is that typically granted by the company to a senior technical employee, such as a software engineer. The exercise price of the option should be the fair market value of the common stock on the date of grant.
Today in Austin more than 30 companies have committed equity contributions to the foundation, and the list is growing at the rate of one new company nearly every week. Austin has an estimated 800 young companies and sets records in new venture capital investments every quarter. The numbers in Silicon Valley are even larger.
Both the AEF and the Entrepreneurs Foundation in Silicon Valley rely on equity contributions from start-up companies to fuel nonprofit activities. Another goal is to develop a culture of community involvement for both the companies and their employees.
What's In It for the Entrepreneur?
If you are not in Austin, where you can participate with us, or the San Francisco Bay Area, where you can participate with Entrepreneurs' Foundation, you don't need to establish a foundation to donate stock options to nonprofits. However, by doing so you create a diversified portfolio--which lowers your risk--and a pool of expertise on the mechanisms of making gifts of equity. You also create a community that, together, can make decisions on strategic, meaningful gifts.
Another advantage of a foundation funded by equity gifts is relieving nonprofit service providers of administrative burdens unrelated to program delivery. All the nonprofit has to do is administer grants from the foundation. The foundation takes care of managing the stock portfolio.
You can also follow Ingrid's example and make an equity gift directly to the nonprofit of your choice, or enlist the assistance of your local community foundation. An equity gift strengthens your employee base and is a great PR vehicle. It sets a strong leadership example for other companies and clients, and it generates positive momentum for the future. The important aspect is planning for the role your company will continue to play in the community long after your IPO.
Entrepreneurs and their companies get to say yes when they share wealth by giving shares. The donor-advised nature of the gift means they can defer decisions about how to apply the funds until their companies are successful and the equity has realized significant market value. They avoid a future hit to earnings by funding charity programs today. The foundation gives them advice on how to be active in the community and establish the right culture within their companies. Both the company and the community benefit.