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Learning Paths

 

What is an equity pledge?


An equity donation allocates a portion of your company’s outstanding shares to be used to fund social impact causes. You may donate the shares to a philanthropic partner, such as a Donor Advised Fund (DAF), create your own foundation, or simply reserve the shares for future issuance. When your company experiences a liquidity event, such as an acquisition or IPO, the shares that have been set aside become liquid and may be  sold to fund grant-making activity. Rather than solely focusing on philanthropic donations or CSR programs, this strategy integrates social responsibility into the company's core structure and can
solidify your company’s commitment to social impact in a lasting way. 

 

There are more than a few ways to approach an equity pledge and you can customize your pledge to meet your unique business and impact needs.

 

4 questions that will determine how best to execute your equity pledge

 

  1. What will be the source of equity?

  2. What will be the timing for execution of your shares?

  3. What will be your equity vehicle?

  4. Who will be your philanthropic partner and receive, manage and distribute your funds?

 

*Please note that you must consult your legal and tax advisors before formalizing an equity pledge as every company’s situation may be different.*

Now lets dig into each of these questions:

1. What will be the source of equity? 

 

Do you want the equity to come from the company, from the founders/CEO, or a combination? The answers will likely depend on your company’s stage of funding, your founder/CEO’s personal equity stake & convictions, and Board support levels. 

 

Corporate

Founder

Corporate equity (the most common approach) visibly demonstrates total shareholder commitment to social impact. This has internal and external brand benefits; however, it requires more of a team effort to get it done, especially since dilution is shared across all shareholders. Board and shareholder approval is required to authorize the social impact shares or warrant for issuance. A Board resolution is required to issue the shares and transfer them to your philanthropic partner.  

Founder equity visibly demonstrates a leader’s convictions and values. It is most commonly leveraged by early-stage co-founders who have a sizable equity stake in the company. This commitment to personally set aside a piece of the company’s future success to address social challenges and/or support the communities where employees live and work can be a powerful motivator for teams.  

 

Since the co-founders are personally donating the equity, they are in control. Typically, no Board Resolution is required since none of the other shareholders are diluted, although it is often still disclosed in the S-1. This approach is sometimes leveraged by mid-to-late-stage founders/CEOs when the Board is less supportive of the corporate equity approach. 

 

Founders may donate their personal shares to create a corporate social impact program at any stage. At the time of corporate formation or at an early stage of financing, a founder may choose to  simply transfer the shares directly to a philanthropic partner or operating foundation. However, in order to maximize tax benefits, founders may want to pledge to donate shares after a liquidity event (but always consult your personal tax advisor).

Examples: Braze, Crunchbase, DocuSign, Gainsight, Okta, Olo, PagerDuty, Puppet, Reddit, Remitly, Salesforce, Slack, Toast, Twilio,  SendGrid, Uipath, Unity, Zuora

Examples: Atlassian, Code42, Descript, RightRice, SuperSocial, Shipshape.ai, Vlocity

 

Noteworthy Risk:  If a change of leadership occurs and/or the Founder(s) is no longer on good terms with the company at the time of exit, this could potentially create an awkward situation, especially if the arrangement was not legally binding and the company has publicly promoted its equity commitment.  

Hybrid
Equity can also be sourced from a combination of the co-founders’ (and/or the CEO’s) equity as well as the company’s equity. This approach demonstrates both the founders’ convictions AND total shareholder support. 
Examples:  Airbnb, Appfire, Lookout, Remitly, UiPath

 

 

 

2. What will be the timing of the execution of your shares?

You can choose to formalize the equity immediately all at once (upfront), or over a period of years afterwards (distributed). One example of a distributed model is making a commitment to issue and transfer  0.1% annually over ten years, or 0.2% annually over five years.  

Upfront

Distributed

The upfront model guarantees that your gift will be donated in full right away. Investor dilution is felt entirely upfront. You may instruct your philanthropic partner to sell the shares over a period of time via a scheduled sale, allowing you to ride the hopeful upside of your shares.   The distributed model spreads out investor dilution over a period of time, and may increase your gift if the value of your equity increases. However, factors like a change in leadership, market volatility, or general company stability, may endanger the likelihood of your gift being executed. 

 

 

3. What will be your equity vehicle?


Next, you will need to decide the equity vehicle. You can donate warrants or shares. 

Warrants

Shares

Warrant commitments are legally binding at the time that the warrant agreement is entered into and the warrant holder shows up on the cap table, diluting all existing investors equally at that time, but the company’s ability to take a tax deduction occurs when the warrant is exercised after the liquidity event. 

Warrants require a legally binding Warrant Agreement that defines the recipient of the funds, or warrant holder. Companies can choose to give to their own foundation, to a nonprofit directly, or to a donor-advised fund (DAF) that will distribute the gift on the company’s behalf. Many choose a DAF for simplicity’s sake, as the philanthropic partner provides tax, accounting, and advice on grant making.
With a share transfer, the company’s ability to take a tax deduction occurs when  the shares are transferred to the philanthropic partner. The board may pass a board resolution reserving shares for future issuance, but the pledge does not become binding until the shares are actually issued and transferred.  

Shares entail issuing a Board Resolution to reserve 1% of shares for future issuance for social impact and then a transfer of shares. While the Board resolution is not legally binding, a Board Resolution is still a strong public-facing commitment to giving back. 

 

Consider whether your organization has identified a philanthropic partner and is able to make a binding commitment via a warrant agreement or wishes to maintain flexibility by reserving the shares and formalizing the transfer down the road. 

Early-stage companies may prefer to enter into a warrant agreement with a philanthropic partner in order to formalize the set aside of the social impact shares, but have the ability to take advantage of a tax deduction down the road. Warrants are legally binding instruments that lock in the warrant holder on your cap table. However, companies have the ability to take a tax deduction when the warrant is exercised at the time of the liquidity event (and for 5 years thereafter) when the company may be in a better position to take advantage of a tax deduction. Companies may want to wait until they raise a Series A to issue a warrant due to the legal costs involved in having attorneys review the docs, etc. 

 

Making the equity commitment early in a company’s life cycle is wonderful as it sends a message to the world that your company cares about giving back, but the social impact shares will be diluted with additional funding rounds , so you might consider adding a “topping off” clause to your Board Resolution to set additional equity pre exit. This clause ensures that your social impact commitment equals 1% fully diluted shares. 


4. Who will be your philanthropic partner and receive, manage and distribute your funds?

 

Companies can choose to give to their own foundation, to a nonprofit directly, or to a donor-advised fund (DAF) that will distribute the gift on the company’s behalf. Many choose a DAF for simplicity’s sake, as the philanthropic partner provides tax, accounting, and advice on grant making.





Side-by-side examples of common equity models

 

Corporate Equity



 

1% Upfront Model

1% Distributed Model

Pros

Social impact legacy: 100% protects and preserves social impact commitment even in the event of a change of control or leadership. This is a legally binding agreement which is especially important if the company is an acquisition target or if it’s likely that a new CEO will be in place at the time of IPO.


Simpler execution: Does not require annual Board vote post liquidity.

Minimal shareholder dilution: Spreads investor dilution over 10+ years. Investors are only diluted 0.1% upfront.  This model tends to be appealing for late-stage companies very close to an exit. 

Ongoing Board engagement: Annual Board vote enables social impact commitment and results to stay top of mind.

Cons

Shareholder dilution: Investors are impacted by the full 1% dilution upfront. 

Potential for reduced social impact:  If the company changes ownership, leadership, or Board, anything beyond the upfront equity is at risk. This risk is even more relevant if the company is an acquisition target. There is the potential to minimize this risk with M&A parameters in a Board Resolution.


Ongoing Board management:  An annual board vote is typically required to issue shares each year.

Directional Examples

Crunchbase, Upwork, Rally, Puppet

Twilio,  SendGrid, Okta

Typical Stage

Primarily early and growth stages ( >12 months from IPO; preferred model if acquisition likely).

Primarily growth and late stage ( <12 months from IPO).

Investor Dilution

All at one time 

Over 10 years

Variation: 5 years or TBD number of years.

Upfront

1% 

Full amount is on the cap table.  

Shares or warrants can still be sold over a number of years post liquidity. The full 1% is exercisable at liquidity.

0.1% 


Variation: Could be 0.2% or a higher percentage.

Per Year/# of Years

N/A

0.1% per year for 9 years post IPO (plus 0.1% upfront).

Variation: Transfer could occur each year pre IPO beginning with timing of Board Resolution.

Vehicle

Penny warrants (can also be shares).

Held by corporate donor-advised fund/ philanthropic partner.  Scheduled sale determined in advance and included in warrant agreement and MOU.

Predetermined percentage or number of shares issued each year (requires annual Board vote). 

Variation: Number of shares each year is flexible.


Shares transferred annually to corporate donor-advised fund/philanthropic partner.

Upon Liquidity

IPO or M&A: Sold based on scheduled sale.

IPO: Shares typically net exercised after lock up expires (usually 6 months after IPO).

Upon M&A, the team and the Board may determine best way to manage, etc.

Next installment of 0.1% equity triggered and transferred to DAF (Often second installment of 0.1%).  

Upon M&A, the team and the Board may determine best way to manage. Potential for acceleration, reduction of shares, and/or special “care out” based on circumstances.



Founder Equity

 

 

1% Pre-Exit Model

1% Post-Exit Model

Pros

Social impact legacy: 100% protects and preserves social impact commitment even in the event of a change of control or leadership. 


Potential for pre-exit liquidity:  Nonprofit (and/or corporate DAF) could potentially sell a portion of the shares pre-exit (pending company approval) to fund impact. 

Founder tax benefits: In most cases, founders will receive greater tax benefits if shares are transferred post exit or during a secondary if the founder is selling shares. Founders should always consult a tax advisor, but pledging today to donate shares post-exit allows founders to benefit from the goodwill created by formalizing the commitment and tax benefits of transferring the shares after liquidity event.


Potential to avoid social impact dilution: If the founder commits to a number of shares equal to 1% at the time of exit ( vs. 1% at the time of commitment), he/she can avoid dilution to the social impact commitment.  

Cons

Likely reduction in founder tax benefits:  In most cases, founders will receive greater tax benefits if shares are transferred post exit or during another time when these offsets could be helpful (i.e. secondary).  Founders should always consult a tax advisor.

Social impact legacy risk:  Possible risk if founders are no longer at the company at the time of exit and/or founders are no longer on good terms with the company.  This scenario could be especially awkward if the company has publicly promoted the equity commitment.  This risk is mitigated if the founder agreement is legally binding.

Directional Examples

Atlassian, Vlocity, RightRice, Code42

Pluralsight

Investor Dilution

N/A - Only impacts founders (and/or CEO)

N/A - Only impacts founders (and/or CEO)

Upfront

1% (Same time as commitment)

None (All equity transferred post exit) 

Vehicle

Shares transferred to philanthropic entity (i.e. Corporate donor-advised fund) or nonprofit


Variations:

  •  Transfer of shares and/or cash could be made around time of a secondary offering (possible tax benefits) 
  •  Can also have additional value component (i.e. coupled with CEO commitment transferred post exit)

Legally binding agreement committing X shares to philanthropic entity or nonprofit post exit.


Variations:

  •  Transfer of shares can be spread over a number of years
  •  Agreement can be non legally binding (not recommended)