Give Before You Sell: Why Entrepreneurs Should Donate Before Liquidity Events

Imagine this: You're a founder who, after years of toil, hard work, high risk, and grinding on nights and weekends, finally sees the light at the end of the tunnel: an acquisition. You're in talks with a multinational firm to acquire your startup, the fruit of years of labor. The acquisition would put a huge sum of money in your pocket, more than you've ever had in your life. And because you're a good person, you want to pay it forward. There are at least a few charities in the state that have personal meaning to you. Maybe it’s the The Road Home helping the homeless with food and shelter, or Spy Hop helping disadvantaged youth learn creativity, or maybe it’s Wasatch Community Gardens helping everybody grow healthy local food. You'd like to cut these groups a check from your newfound fortune. After the company sells, you contact each to let them know of your intentions. They're understandably thrilled, but mention one regret that almost goes under your radar: if you'd done this all a month ago, before the acquisition, the charitable donation could have been 25% more impactful, without costing you a penny more.

It’s happened before, but Ian Shelledy wants to prevent it from happening again.

Shelledy is the Director for the Community Foundation of Utah, a charity that coordinates and supports thousands of other nonprofits throughout the state. They gather resources to help these smaller organizations continue their mission to serve the community. This is no small task as Utah has over 10,000 public charities and ranks as the most charitable state in the nation. According to their site, they’ve granted over $66 million dollars to nonprofits since their founding in 2008. They also work to guide the donation process so donors can make the desired impact and be as tax efficient as possible.

When it comes to working with entrepreneurs facing a liquidity event, Shelledy’s advice is simple.

“Give before you sell! It’s the four word mantra we’re trying to just shout from the rooftops everywhere, because it still seems like it's not very well known,” says Shelledy. “We get a lot of folks [that say] after a transaction ‘I’ll give to charity!’ That's great, but just two months ago you would have had a lot more money to give to charity.”

Alex Eaton, CEO of The Community Foundation of Utah, explained it this way:

“Entrepreneurs often hold private stock with incredibly low-basis, because they’ve taken an idea and made it real,” Eaton said. “Well then, how do you avoid paying a very large tax bill on the significant gain associated with the growth of your company? Easy. If you donate highly-appreciated stock in advance of a liquidity event, you can avoid the capital gains tax [up to 20%, depending on your tax bracket] for the amount donated on the highly appreciated asset, while still claiming a tax deduction for the full amount of the gift. A double benefit.”

Shelledy said very few entrepreneurs actually take advantage or are aware of this donation tactic. Many only become aware if they happen to have an advisor who knows and understands the process, but not all do. Then the sale passes and the opportunity is lost. 

“If you're starting the merger and acquisition process, talk to your advisor, your attorney, or your accountant, about how to contribute charitably, if that's something that's important to you,” Shelledy said. “And they should then give you some things to consider and steps to take. If they don't, then you should call us directly, because we know what your advisors should know.”

Venture investors are also in a position to deploy this tax-advantaged philanthropy. Because they’re often vested in multiple ventures, Seed, Angel, or VC investors will encounter more liquidity events than sole investors are ever likely to.

Greg Warnock, Managing Director of Mercato Partners, was instrumental in bringing the Community Foundation to Utah in 2008. He says charitable giving is part of the discussion with any liquidity event at Mercato.

“At Mercato, we help our entrepreneurs prepare themselves and their companies for exit,” he says. “Part of this process involves understanding an entrepreneur's charitable goals, and ensuring they make the best decisions to accomplish those goals. Often, gifts of private stock pre-sale are the way to go."

Brent Thomson is on the Board at the Community Foundation of Utah. He’s also a seasoned entrepreneur. Before founding Blip Billboards in 2016, Thomson cofounded Jive Communications in 2006. LogMeIn bought Jive in 2018 for $357 million.

"Before the sale of my last company, I donated some of my private stock into a donor-advised fund at the Community Foundation of Utah,” says Thomson. “This not only was a smart tax move, it ultimately left me with more charitable dollars to deploy. I would encourage every entrepreneur to consider this strategy." 

“Charitable giving is just great,” adds Shelledy. “You just get to help people support things that they believe in and care about. Giving is such a primal piece of what it means to be human. We were a giving culture long before we were a commerce-based culture. It's so deep in who we are — the process of gift giving. I think it's just a beautiful thing when it's done right.”