Saturday 1 January 2011

Charity begins at Startup

I usually like to get some reading done over the holiday season. In truth this means I order a stack of books from Amazon and then maybe get through a small fraction. This year, top of the reading pile was Behind the Cloud by Marc Benioff, recounting the early days of CRM startup

It's a worthwhile read if you look past the occasional veneer of self-promotion, and one of the things that caught my attention was the chapter on corporate philanthropy. Charitable giving by corporations can be a tricky topic; while the end goals are usually very worthwhile, it can be hard to avoid the image of a company reaching into shareholder pockets to donate money on their behalf. 

In general, corporate giving (in cash or kind), like any corporate spending, should only be done where it results in a return greater than could be achieved by a shareholder donating the money themselves. There are many cases where this is true and results in value creation. 

The problem with corporate social responsibility programmes is that they can often seem like a bolt-on or afterthought on the part of the company. Salesforce took an interesting approach by insisting that giving back to the community be embedded in the DNA of the company from the outset. In particular, Marc Benioff and his co-founders created a charitable foundation at the same time as incorporating their company, and donated 1% of their equity to the foundation.

I love the simplicity of this idea - it requires no cash outflow and ensures that the foundation's endowment grows alongside the company. 

I'm not necessarily suggesting that all startups follow the foundation-on-foundation idea. In most cases it's probably not worth the paperwork until you're making real money. But it would be a simple thing for startup founders to agree in principle to set aside a small chunk of equity for for a foundation, much as they would with an employee option pool. Alongside agreeing to set aside this equity, it would be prudent for the founders to decide on the guiding goals of the foundation.

In addition to the initial 1% equity, Salesforce also donates 1% of employee time and 1% of profits (in the form of software discounts to charities). They also took the quite unusual step of moving all their education and large NGO customers to the foundation, providing the foundation with a sustainable income stream. 

A big advantage of baking corporate philanthropy into the core of a startup from day one is that all employees and investors know what they're getting into up front. Is this likely to put off some investors? Possibly. But as long as appropriate safeguards are in place (regarding rules on profitability), it may even attract investors that are better aligned with your own goals.

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