We are getting closer to launching our first limited release and beginning to collect decisions and, hopefully, money. So now is a good time for us to finalize our giving program. Many large corporations give, even some startups…it seems like 1% of EBITDA is the gold standard (assuming you have any, of course), and sometimes 1% of equity.
However, I want giving to be a distinctive part of the company, core to our mission, built into our brand, the product and the P&L. I have a radical idea about it, and I’m hoping folks out there will share their thoughts. The basis of the idea is that it’s easier to decide to give something away before it exists, and doing so brings some of the human benefits of giving forward to today while giving strong incentives to grow financial contributions more in the future.
Here is the idea, targeted expressly at pre-money founders:
- 4% of pre-money founders equity, i.e. equity before the company has any outside investors. This would get significantly diluted if there are many funding rounds, but is still meaty. And it is easiest to give something away before it exists and when basically only the founder(s) have to decide.
- 1% of revenue less COGs, aka gross profit. For many startups this can become a large majority of revenue pretty quickly, so they can be giving from the start. Plus, it drives real incentives to make sure the cause is somehow meaningful to the company, and not just a future tax dodge or corporate whitewashing.
- 5% of EBG, meaning net profit before giving but after taxes and financing expenses. In other words, it only kicks in once profitability is pretty high already. For startups this may take a while to add up, but having it built in from the start makes it more meaningful and also gives nifty, tax-advantaged incentives to boost profitability as high as possible.
Hence, Giving 4-1-5. For those in the know, that is also the area code for San Francisco.
Here some pros and cons to start the conversation:
PROS
- Meaningful without being excessively damaging to growing companies, while also providing useful governing incentives.
- Designed for startups and difficult to retrofit into a P&L or equity structure, giving startups yet another competitive advantage, a social responsibility advantage, over incumbent corporations.
- Catchy with a strong regional association with today’s startup mecca…has the possibility of becoming a movement.
- Could become a mark of distinction for profit-driven companies that want to stand out in their commitment to causes beyond themselves.
CONS
- It is hard enough to start a company, why make it harder…when push comes to shove, would you really feel good about giving away money in the face of payroll or competition or investor pressure? Isn’t it just a weird distraction?
- As with anything corporations do, it could be cast as window dressing or moral equivalency trying to hide other sins.
- It can’t possibly scale to a large company, certainly not a public company. And the board could always change it anytime, anyway, so the future promise is not real.
- Why not just follow the herd and go with 1/1/1…
What do you think?