Most venture capitalists are quite generous when it comes to donating and giving back to communities, causes and charities. But while it’s well known that venture capitalists are very charitable, less understood is how venture capitalists donate and what complexities they have to manage when making philanthropic contributions.
To help answer those questions, we sat down with Amy Grossman, Vice President Complex Assets Group, from Fidelity Charitable to get a better understanding of how venture capital donates, what types of assets venture capitalists can give, and how Fidelity Charitable works with NVCA helps venture capitalists donate more.
How are venture capital investors making charitable donations?
Venture capital investors and fund managers are extremely philanthropic and tend to donate appreciated publicly traded securities and restricted stock. However, they tend to overlook private portfolio company stock because most charities only accept cash and publicly traded securities.
Are there any consistent trends in how venture capitalists donate? Or are their donation patterns quite diverse?
With companies staying private longer, we are seeing more opportunities for liquidity in the secondary markets, which presents an ideal opportunity for charitable giving.
You could describe this philanthropic strategy also as a venture capital exit or diversification strategy. Oftentimes the investor is on the board of the portfolio company and may be prohibited from selling because of the optics of the transaction; however, they may be able to donate without sending a negative signal, and ultimately the charity may be able to sell in the secondary market or in a future funding round, during sale of the company, or after an IPO.
What is the most common mistake you see venture capital investors making when it comes to their charitable giving?
Donating cash to charity is the most common mistake we see investors making. Cash is typically the least efficient asset to donate. If the investor can access the private portfolio company stock and donate prior to a sale or funding round, this can be an ideal opportunity because donors may be eligible for a fair market value tax deduction and may potentially eliminate capital gains on the appreciation of those assets. For charitable gifts of highly appreciated assets, like most VC and private equity investments, the tax savings can be substantial and result in more proceeds available to the charity to fund their philanthropic mission. We’ve seen investors give up to 20-30% more in donations by contributing long-term appreciated/non-publicly traded assets.
Could you describe the relationship between Fidelity Charitable and NVCA?
With the NVCA – Fidelity Charitable relationship, NVCA members have access to Fidelity Charitable’s national network of charitable planning specialists, including a highly experienced expert team with many years of facilitating contributions of these types of assets. In addition, the special arrangement provides a reduced administration fee, saving members thousands of dollars annually. Through this cost-effective arrangement, NVCA members can dedicate much more of their donation to the charitable causes about which they are most passionate.
How are NVCA members taking advantage of this relationship?
By taking advantage of the opportunity to contribute non-publicly traded assets, as well as public securities and cash, NVCA members have contributed over $400M since the inception of the relationship a few years ago. This has enabled them to contribute millions of additional dollars to charity vs utilizing only after-tax proceeds.
What kind of assets can people donate to get the tax benefits?
While there are tax benefits associated with cash donations and publicly traded assets, Fidelity Charitable also works with venture capital investors to facilitate donations of several types of non-publicly traded assets, including privately held portfolio company stock, limited partnership interests in the fund itself, special purpose vehicles formed to capture the carried interest, or other co-invest vehicles.
How much advanced planning is required, and who needs to be involved to achieve these tax-efficient charitable donations?
Some planning is required at the Fund level in order to get the portfolio company stock distributed to the partner. Once this occurs, the charity will need to review the governing documents and work with company counsel to assist in preparing transfer documentation and getting any required consents and waivers. Depending on the applicable restrictions, this could take anywhere from several days to a few weeks. An investor who is considering charitable giving as an exit strategy should consult their legal and tax advisors to evaluate their unique circumstances.
How complicated is it to donate non-publicly traded assets?
The transfer process is relatively simple but donors need to understand that they will be required to get an independent third party appraisal to substantiate the value of their charitable income tax deduction. The good news is that the appraisal is not required prior to the contribution but is due at the time of the taxpayer’s filing deadline, with extensions.
It is critical to work with a sophisticated charitable organization with experts in donations of non-publicly traded assets, like Fidelity Charitable®. If handled incorrectly, the impact and tax benefits of the donation could be minimized. But by working with a team with the right knowledge and technical expertise, the donation process can be simple, effective and accessible.
Amy Grossman brings significant knowledge and technical expertise to donors who wish to contribute sophisticated assets to charity. Her strength is in providing strategic guidance on the full spectrum of monetization, hedging and diversification strategies, as well as estate and gift tax planning for pre- and post- liquidity events. Prior to Fidelity Charitable, Amy was a managing director at Credit Suisse and was a practicing attorney in San Francisco.