Equity Donation for Early-Stage Startups

[Jan_DAlessandro]

Question

I’m an early-stage startup, but I want to take the equity pledge now. How do I pledge equity from day 1?

Answer

I always love this question — pledging equity early is one of the best ways to incorporate the idea of giving back into the foundation of your company. One of our founding members, Atlassian, took the equity pledge back when they were very small. As Scott Farquahar says, “it’s very easy to pledge 1% of zero.” Now their foundation has donated over $40 million to nonprofit causes.

Even more exciting, more and more venture capitalists are encouraging startups to take the equity pledge. Here's a list of Boardroom Allies from major firms who publicly support startups taking this action. 

At the end of this article, you’ll see additional resources including a general equity donation article, a deeper dive playbook, and a compilation of legal templates plus FAQs for a CFO and legal team. You will definitely need a lawyer to review any legal documents or decisions that you make.

*Please note: these are general thoughts and are not intended for legal counsel. You must consult your legal and tax advisors before formalizing an equity pledge as every company’s situation may be different.*

Here are some questions to ask yourself as a startup hoping to set aside equity early:

1. The Equity Source: Founder, Company, or Both?

You will also want to decide if you are donating company or founder equity. Many early startups donate company equity. One of the benefits of pledging equity at this stage is that you have more control than ever over company equity as you likely have only a handful of investors with voting rights and maintain much control yourself! This strategy also cements that this is a company cultural decision vs. an individual one. Company equity, if formally transferred via a warrant or stock transfer,  will also keep your gift intact in case of major changes, such as acquisitions or leadership changes. 

Founder equity can be useful if you encounter resistance from investors or are interested in the potential personal tax  benefits. You can even do a combination (ex. 0.5% founder, 0.5% company) of both! 

2. The Mechanism: Warrants or Shares?

Equity can be transferred as warrants or shares. Warrants are legally binding mechanisms issued to a specific recipient. Shares can be reserved for issuance or pledged in a manner non- legally binding manner, or transferred in a binding agreement. 

One of the best ways to decide the model that's best for your company is based on whether or not you have a nonprofit partner in mind.

Have a Nonprofit Partner? Consider a Warrant Agreement

If you do, a Warrant Agreement might be the best way to pledge equity as it is legally binding. This protects your gift as your company grows. For example, if you are acquired, have a leadership change, or are negotiating with investors, a warrant 1% pledge will remain intact throughout any organization changes.

To issue a Warrant Agreement, you will need to determine a warrant holder. This title refers to an organization that will receive your donation, or your social impact partner. This partner can be a nonprofit organization that you want to donate directly to, or a donor-advised fund (DAF) that can make the donation on your behalf. We work mostly with Tides.org, but there are many DAFs that you can choose from. 

Haven't Decided on a  Nonprofit Partner? Consider the Shares Model

If you do not have a nonprofit partner in mind yet, that makes sense! Everything is still very early. You can still donate equity though. In this case, you will want to use the shares model. This model entails issuing a Board Resolution to reserve 1% of shares for future issuance for social impact. You may transfer the shares in a legally binding share transfer agreement, but this will cause you to lose the tax benefits of transferring later when the shares will be worth more. A share reservation via board resolution is e not legally binding, but a board resolution is still a strong commitment. In order to ensure that you donate a full 1%, you will need to continue to reserve shares at major stages (ex. funding rounds). This process is called topping off. 

Template Legal Docs

As a Pledge 1% member, you can find template legal documents (ex. a Warrant Agreement or sample Board Resolution) in The Companion Guide to the Equity Playbook for GCs and CFOs. You can also read more about donating equity in general in our CEO Equity Playbook. If you have not yet taken the free pledge, do so now to access these resources!

You will want to review any legal documents with your lawyer. 

Additional Resources

• Equity Donation General Overview - This article provides a high-level overview of equity donation and relevant questions to consider.
  
  
• The CEO Equity Playbook (Members-only access) - This playbook dives deeper into equity donation and features case studies from large enterprises (ex. Atlassian, SendGrid). It also includes strategies for discussing equity donation with your board. This asset is more designed for late-stage enterprises, but may be helpful for context.
  
  
• The CFO/General Counsel Playbook (Members-only access) - This document provides template legal documents for the models listed above and FAQs for your CFO and legal team.
  
  
• Case Studies and Other News -Subscribe to the equity tag on the resources page to get live updates of equity articles as they are published!