Universities Should Not Accept Gifts of Startup Stock

Universities should neither seek nor accept gifts of startup stock.

That might be a surprising statement coming from a fundraiser. After all, it’s certainly in my interests to facilitate a high volume of charitable giving to my organization.

The startup sector represents an exciting new frontier for philanthropy. Companies and entrepreneurs want to support their communities, even in the early days. Someone’s liquidity does not determine their desire to support their community.

As we speak, a school out there is probably bending over backwards to figure out how to square these gifts of private shares with their giving systems. But that’s not the hard part. Entities hold illiquid assets all the time. It might take some change to the gift acceptance policies or adding a few fields in your database. Laborious, yes, but technically difficult? No.

Over the years, I’ve watched the rise of some incredible leaders and the companies they’ve built. And most of the time, I just don’t want startup stock. Here’s why.

It’s operationally (and sometimes financially) COSTLY for both donor and University.

The potential value of startup shares, while possibly very large, depends on an extraordinary array of factors — many of them out of university’s control. To some extent, even out of the donor’s control.

But the costs of accepting that gift start accumulating right away. That asset must be held on the institution’s books, often for years. How is it valued, and how will it be valued over the coming years? There are ways to address this, but they create other questions that must be answered, which in turn lead to other issues to solve.

What are the tax ramifications for the donor? Is it advantageous for the donor to give the shares now? Or are they missing out on tax or financial planning flexibility? When was the most recent valuation? Must the donor exercise options? If the donor makes a gift of private shares, is there a buyer for the shares? If the intent is for the university to hold the stock and participate in a huge upside as the startup grows in value, how does that affect the company’s cap table? What are the rights and obligations of the university as a shareholder of the company? Are such transfers allowed by the company?

Beyond the technical issues, what is the ‘goodwill’ cost to the donor-institution relationship if this transaction is burdensome and drawn out? Is there a risk that by accepting shares now, a university anchors the donor’s sights at a suboptimal level? How will you credit and account for these gifts? The list goes on.

All of these issues can be resolved, some quickly, some with more deliberation. But now extend these costs and these questions across dozens of donors. Why? Because of the name of this particular game is ‘scale’ if you adopt a general policy along these lines.

You’ve got to get some winners. in order to justify the effort here. If you think you might just pick and choose the best bets, that opens an entirely new set of issues. How will you do this? Putting aside for the moment whether you will be able to select the right stocks, this question cuts to the core of what we do as advancement teams: What is the relationship cost of declining a gift earnestly offered from an alum who’s building their startup?

So a university finds itself between a rock and a hard place. Take stock early, and incur the costs of accepting many gifts to hedge against the inevitable failures. Or, approach this as a VC might, and try to accept stock only from those companies most likely to succeed — and pay a different cost to assume a different kind of risk.

It’s not often the best gift for either party.

We’ve seen one dimension, above, of potential challenges in accepting startup stock for a university or other organization. Another dimension is the overall philanthropic leverage the gift affords.

The best time to donate an asset is when it’s at its peak value. This is the moment when the gift has the highest buying power for the organization it supports, and (usually) maximizes the donor’s potential tax deduction. When it comes to startup shares, waiting for max value also tends to give the donor a longer runway to define his or her philanthropic priorities and potentially to work with the receiving organization in the meantime. It gives both sides the chance to optimize impact, choices, and overall value.

The earlier the donor gives away startup shares, the lower the value of those shares, the lower the deduction, and the longer an institution must hold and account for that gift. While it may seem convenient and secure to accept startup shares and capture the upside with ‘certainty’ (to the extent that exists in the entrepreneurial world); in the end, there is no better way to maximize the upside than to build thoughtful relationships that rely on meaningful engagement and a solid partnership with the donor.

The exception proves the rule.

As always, exceptions exist, like this school’s win with Snap, and must be carefully considered by the gift acceptance team. Those best positioned to evaluate a gift of private stock might vary (gift planning officer, investors over at the endowment who specialize in the type of asset in question, etc.), but the team should always see a path to liquidity, a reasonably short time-horizon, and an acceptable level of risk relative to the potential return.

Each school must determine the acceptable risk, and this is often a case-by-case evaluation that asks questions like “When is this asset likely to become liquid? What rights and responsibilities do we have as stockholders? What is the likelihood that this stock will decline in value, based on the best information we have? Can we ensure that a decline is easily absorbed, and does not materially impact a given program or outcome?”

In cases where satisfactory answers present themselves, you can pull the trigger, secure in the knowledge that you’ve balanced cost, risk, and reward optimally.

There’s a better way.

Of course, even going through this process of due diligence has some cost. Some exceptions will be obvious, many won’t, some we’ll get wrong on one side or the other. But, when the underlying asset is startup stock, there are ways we can increase the chances of a high-impact outcome for both donor and institution.

A pre-exit philanthropy program reduces the operational (and financial) cost of servicing startup stock. You remove the risk of the asset’s value going to zero, and you allow the donor the maximum flexibility. In addition, you never have to worry about turning away a donor’s earnest offer of private shares, perhaps sending the subtle signal that the university doubts their chances of success.

With pre-exit philanthropy you can say Yes—and you still preserve the option to accept that stock a little further down the road, such as when the stock is on a clear path to an IPO or acquisition in the next year or so.

Have I convinced you? Or do you fervently believe that the potential benefits of taking stock outweigh the costs? I am most definitely open to your thoughts!

“A school out there is probably bending over backwards to figure out how to square these gifts of private shares with their giving systems. But that’s not the hard part.”