When is the right time for a tech founder to set up a foundation?

by Antonia Ruffell

These are uncertain times for startups. After 18 months of depressed valuations and smaller, infrequent raisings, founders are understandably cautious about putting money aside for philanthropy. 

At the same time, the need for giving has arguably never been greater. In Australia, the cost-of-living crisis is hitting hard, with leading welfare charities the Salvation Army and Mission Australia reporting that over 3.3 million Australians, including over 700,000 children, are currently living in poverty. Across the world, wars and natural disasters are taking their toll, with the UN reporting that the need for humanitarian assistance is at record levels.

And yet there are some signs for startup founders to be optimistic. Australia recently saw a $263 million funding round in human resources technology firm Employment Hero, the biggest capital raising of the year for a local privately held software business. This came hot on the heels of Skykraft announcing a $120 million round for its satellite-based air traffic management system – and Pet Circle, Secure Code Warrior, and Silicon Quantum Computing all raising upwards of $50 million.

As a founder or successful exec interested in giving, should you set up your own foundation and when is the right time to do it?

Founder philanthropy

A founder’s philanthropy journey can look quite different at each stage of the company’s growth. However, startup founders are wired for social impact – indeed the Startup Muster 2023 report states that 21% of startup decisions are driven by impact, with 56% from impact and profit equally. Philanthropy falls squarely in this mindset.

In the early days, a founder’s charitable giving is likely done through their startup – from running a company with social impact at its core to corporate initiatives like Pledge 1% where companies gift 1% of product, employee time, profits, and equity to the community.

For founders who have already seen the benefits of corporate philanthropy and social impact within their startup, there comes a time when you’re likely to want to leverage their success to make an even greater community impact personally. If this sounds like you, it is worth thinking about the option of setting up your own foundation.

Of course, anyone can donate to charity whenever they have spare cash to give away. But setting up a structure takes giving to the next level by providing a framework and enabling a longer-term and more strategic approach.

The benefits of a giving structure

Founders typically set up a personal foundation or giving structure when they have experienced some financial success with their business and realise that serious wealth is coming their way. This wealth can raise feelings of discomfort and a fear that they may squander it too early. Setting up a foundation provides a way of locking down good intentions before getting used to an increasingly affluent life.  

Canva co-founder and COO, Cliff Obrecht, talks about his and wife and Canva CEO Melanie Perkin’s decision to commit most of their wealth to charity on a recent StartGiving podcast. Cliff reflects:  

“When Canva started to do well as the company, we’d done a bunch of things – we were already doing some giving through Canva and the 1% pledge – but as our paper wealth started to grow, we started to think a lot more about how we need to do something about this now. We can’t be seen to be billionaires in the paper, yadda yadda, and not be doing something proactively. The weight of the resources we had at our disposal really prompted us to take that action. And even though it was all tied up in paper money, we said, hey, we actually need to start liquidating some of this stuff because the title of a billionaire doesn’t sit well with us, and we need to start distributing that. And that led us to experiment with giving.” 

What’s the right time to set up a giving structure?

There are two common times in a founder’s startup journey when thinking seriously about personal charitable giving makes sense. Being a billionaire is not a prerequisite.

1. Anyone approaching a transaction, at any level

An exit, major secondaries, funding round, or IPO (Initial Public Offering) is the ideal time to think seriously about structuring your giving.

Take the opportunity of a philanthropic tax deduction in a high-tax year and maximise your impact.

If you have cash to donate, there are two easy options:

  • You can set up a sub-fund in a public ancillary fund (PuAF) with a recommended starting donation as low as $20,000.
  • You can establish a private ancillary fund (PAF) with a recommended starting donation of upwards of $1 million

With either option:

  • All donations are fully tax-deductible. The tax deduction can also be spread over five years to help offset capital gains tax and income tax, allowing you to commit a larger sum to philanthropy.
  • You can choose the charities you wish to support. Charities must be a deductible gift recipient type 1 (DGR 1), of which there over 25,000 registered in Australia.

Setting up a PAF or sub-fund can also be an impactful and tax-effective solution for employees, especially those with a high annual income or around the time of a major secondaries or IPO.

2. Founders who have $20 million in unlisted equity

You don’t have to wait for a liquidity event. It is possible to set up a PAF using unlisted equity, or a mix of unlisted equity and cash.

The easiest time to move unlisted shares to your PAF is when there is a funding round which drives a valuation of the company. The ATO has provided guidance about valuations of philanthropic gifts of unlisted equity (contact StartGiving to request a copy).

The initial donation to set up your foundation should be a meaningful amount but at a level that won’t compromise your financial security. As a rule, if someone has $20m of on-paper wealth, you could consider putting 5% into a PAF. You receive an upfront tax deduction – and with $1m invested, have $50k to give away in year one. $1 million is about the minimum required to make a PAF viable.

By moving a portion of your on-paper wealth to a giving structure, you can start making a real difference in the world sooner –  even if you are cash-poor.  As your company grows, so does the value of their PAF, allowing you to scale your impact year on year.

The best time to start is now

Whether the time is now or sometime in the future, it always worthwhile to reflect on the important questions of how much is enough, what wealth means for you and your family, and how you could give back. Philanthropy is a powerful, joyous, and satisfying experience and, done well, can have an enormous impact on the community.