Posts Tagged ‘foundations’

“L3C” spells “caveat emptor”

March 17, 2011

Here’s something strange: a concept thrown around routinely and casually in conversations among nonprofits and philanthropies is simultaneously the subject of fierce debate and sometime disapproval by the Internal Revenue Service, a committee of the American Bar Association, and other experts. What is going on?

The notion of Low Profit Limited Liability Corporations (L3Cs, for short) is that they’re a vehicle for doing well by doing good and therefore an improvement over the typical nonprofit structure. L3Cs are permitted to earn profits but proponents claim that their praiseworthy intentions—to end hunger or provide clean water or whatever—make those who lend to them eligible for the special tax benefits attached to program-related investments. In other words, this is a legal structure presented as a technique for gaining access to capital (always a struggle for nonprofits) by providing a tax benefit to lenders.

Of course, foundations already get a tax benefit for program-related investments in regular nonprofits, so what, exactly, is the appeal? In theory, foundations might be more interested in program-related investments that generate a reliable flow of capital (in the form of profit) than in program-related investments that generate nothing but additional nonprofit programs and services. Likewise in theory, regular venture capitalists outside of foundations will be more interested in making investments in profit-making entities than in pure nonprofits. This—the notion goes—will increase the amount of capital available to support general good-guy behavior.

However, a number of scholars and lawyers (Daniel Kleinberger of William Mitchell College of Law prominent among them) see the L3C as, at best, redundant and, at worst, an invitation to fraud. They point out that regular limited liability corporations can be organized for any purpose, including public-spirited and low-profit ones. They point out that the IRS has not yet issued (and does not seemed inclined to create) a rule awarding automatic program-related investment status to any investment in an L3C. So anyone who invests in an L3C on the basis that it provides a higher return than a regular nonprofit with the same tax benefits will find out to his/her sorrow that this is not the case.

What strikes the Nonprofiteer as peculiar, though, is that in the many discussions she’s heard and read about L3Cs, only one mention (specifically, Professor Kleinberger’s Nonprofit Quarterly article) has ever surfaced of this opposition from the bar and Federal regulators.  Not until her tax lawyer Stuart Levine asked about the [successful] efforts in Illinois to create L3Cs did she realize there was anything controversial about the phenomenon.  After bringing her up to speed Levine wisely said,

L3C’s don’t work unless there is a change in federal tax law.  In other words, L3C’s are a little like Oreo-Tycin-Myacin—the wonder drug for which there is no known disease.

L3C’s raise difficult issues of fiduciary duty and the inherent conflict between “charitable” purposes and “business” purposes.  At the least, these conflicts cannot be dealt with via a quick-fix state statute.

Doubtless the Nonprofiteer spaces out on frequent occasions and misses aspects of what’s said or done in the sector.  But she suspects there’s also a disconnect between what nonprofit executives and L3C promoters expect and describe and what lawyers and regulators understand.

So if you’re considering investment in an L3C, be the aware buyer of whom you’ve heard.


The 5 Ws of Individual-Gifts Fundraising

November 1, 2010

As all budding journalists know, every story can be told through judicious use of the 5 Ws: Who? What? When? Where? Why?  Here the Nonprofiteer employs this efficient system to tell the story of how reluctant volunteers can become enthusiastic and successful individual-gifts fundraisers.

For most small- and medium-sized organizations, everything about this story is a blank.  So here’s a primer on how to fill in that blank.

WHO to ask?: Only two types of people should be asked individually for gifts: people who’ve given to your group before, and friends of your Board members.  With anyone else, it’s sheer impertinence: “Hi, nice to meet you, open your wallet.”  Ask friends (of the agency and the Board), and ye shall receive.

What to do when your Board members say, “I don’t want to ask my friends for money”?  Reply: “You don’t have to ask your friends.  Just ask each other’s friends!”  So Angela asks John’s friend, and John asks Angela’s.  All they ask of their own friends is to come to a meeting, and all they have to do at that meeting is wax enthusiastic about the group and listen while the other one solicits the gift.

WHAT to ask for?: If they’ve given to the agency before, you’re asking for more.  You have to make the leap of imagination (from $250 last year to $1000 this year) before the prospective donor can think about making it.

Don’t worry about being too ambitious in your monetary goal.  Very few prospective donors are offended by being mistaken for rich people.  (Women, though, are more likely to be taken aback than men, so ask for slightly less from women.  They’re more likely to say ‘yes,’ so it all evens out.)

If you’re asking a Board member’s friend, ask for slightly less than the Board member gives him/herself, because the first thing the prospect will do is turn to his Board friend and say, “What do you give?”  If the Board member doesn’t think the agency’s worth $500, the friend is unlikely to think it’s worth anything.

What if your Board member’s friend is a gazillionaire?  (We should all have this problem.)  Then prime the Board member to say, “I give $200, because that’s what I can afford.  We’re hoping you’ll likewise consider a gift based on your capacity.”  Again, few people mind being suspected of success, so if your Board member is prepared to say, “Listen, I know you made a killing last year when you sold your Google stock . . .”  his friend is unlikely to want to correct him!

WHEN to ask: The Nonprofiteer is a prompt—some might say premature—fundraiser.  As a cautionary tale, she offers the story of how her alma mater took her out for coffee repeatedly to soften her up for an ask, despite her saying, “Guys, I’m a fundraiser.  I know what we’re doing here.  Just ask me for the money!”  By the time they were ready to ask her, she’d been reminded that the school’s investment philosophy would have permitted owning shares in slave-ships, and did permit investing in companies propping up genocidal regimes; and therefore she declined to give, though she wouldn’t have reneged on a preexisting pledge.  So don’t delay; get the yes!

“What about cultivation?” you ask.  The Nonprofiteer believes that lots of what passes for “cultivation” in individual-gifts fundraising is nothing more than stalling.  Don’t hold “cultivation” events and plan to ask for money later; if you hold an event, either get contributions through the ticket price or ask forcefully that night.

All you need to do to “cultivate”  people is to demonstrate that you’re thinking about them on a regular basis, and you can do that by forwarding something you think they’d like to read.  Better yet, send them invitations to your activities, whether performances or client graduations or river cleanups.  People give where they feel they belong, so be on the lookout for “belonging” opportunities.  For this purpose, the less special the event, the better.    If you do something special for a donor, make it an ask.

One word of caution about WHEN: don’t ask too soon after the last gift.  May and June may be two separate fiscal years to you, but your donors probably think (and give) on a calendar-year basis.  So they’ll think you bizarre and ungrateful if you respond to their May gift with a June ask.

WHERE?: Over breakfast, lunch or dinner (or possibly bedtime snack).  The Nonprofiteer is a firm believer in the power of food to facilitate fundraising.  In any case, the advantage of a meal is that it requires the prospective donor to sit still for about an hour, during which time you can a) learn about her; b) educate her; and c) ask her.

WHY?: Why bother with individual gifts?  Why not just write some more grants?  (asks your Board.)  Three reasons:

  • Because grants come and go.  Institutional funders have the attention span of fruit-flies: this year they’re interested in AIDS but next year it will be architecture.  If you’re not the fad, you’re out of luck.
  • Because even if they continue to embrace your work, very few foundations or corporate giving offices will give money to support your operations.  They want to support programs, the newer the better, often leading agencies to elaborate their programming beyond what their infrastructure can sustain.  If you need to pay your light bill—or your employees—you need individual gifts.
  • And finally, even if they love you to pieces, most institutional funders want to sustain you while you find broader support.  They’re not interested in being your permanent sugar daddy.

By contrast, most individuals give because they’re asked, and what they’re asked for is support for a cause or an agency (not a single program), and once they’ve agreed they keep giving out of habit.  So you have to actively offend them before they stop.

So that’s the story of successful individual giving.  And if who-what-when-where-why merely piques your interest, you can learn how right here.

An appraising stare down the gift horse’s gullet

August 31, 2010

Jane Mayer’s excellent piece in this past week’s New Yorker about the brothers Koch, oil billionaires who’ve donated hundreds of millions to nonprofits promoting right-wing causes, finally clarified for the Nonprofiteer her unease at Bill Gates’s campaign to persuade billionaires to donate half their estates to charity.  It’s not a question of who has or hasn’t taken the pledge, though that’s an entertaining parlor game.  Nor is it the fact that the generosity of extremely wealthy people may not be what the rest of us have in mind when we hear the word “charity.”  (The Kochs’ “charity,” for instance, is a term of art encompassing donations to all kinds of institutions, predominantly think-tanks churning out rationales for the economic interests of wealthy people and front groups to make it appear that defending those economic interests is the political will of the non-wealthy majority.)

What’s troubling about the billionaires’ pledge remains so even when the receiving causes are unexceptionable.  Gates, for instance, has very generously underwritten substantial efforts by the Global Fund to Fight AIDS, Tuberculosis and Malaria.  Good for him, and for the world.


Even the best-intentioned best-directed private donations are a way for moneyed people to work their will on the public, while the rest of us have nothing but the vote.  And when the level of contributions is discussed in fractions of $1B, it’s no longer charity within a democracy: it’s benevolent dictatorship.

Maybe our country should be giving less to treat AIDS et al and more to eradicate infant and maternal mortality through the UN Population Fund; maybe not.  That’s a decision to be made by the people of the United States, through our government.  It’s really not a decision for a single person.

Why not?  Well, for starters, the “single person” in question is a billionaire, and thus always a man.  That means almost by definition that the highest levels of charitable giving will overlook women, though we constitute more than a majority of the population.  And if that’s the case—if society’s needs are met by individual whim instead of collective decisions about the greatest good for the greatest number—then what, actually, is left of self-government?

Of course, billionaires have plenty of assistance in the task of allowing economic power to trump political will.  The Supreme Court’s decision in Citizens United, holding that corporations are “persons” with First Amendment rights violated by limits on their campaign spending, already put the nation quite a way down that road.  But somehow it’s worse when something that sounds so benign—“half my estate to charity, because I’ve been so fortunate”—actually translates as “I set the agenda for the future of this country, because I’ve been so fortunate.”

What we really want from billionaires is for them to pay a lot more in income taxes: say, the 87% of taxable income paid in 1954,  or even the 70% paid at the start of the 1980s.  And then we as a group can decide where our group’s money goes.  All contribute, all decide.

And what we really want from billionaires’ heirs is for them to pay the 77% estate tax rate in effect in 1941, or even the 70% estate tax rate in effect in 1976.   (And let’s not hear any nonsense about “death taxes.”  The dead aren’t the ones paying.)  Why shouldn’t people who get money by inheritance have to pay taxes on it, just like people who get it by working?

Merely to ask that question is to answer it: no democratic society decides that people who don’t work should be privileged over those who do.  Societies like that are called “aristocracies,” and all those so-called Constitutional Originalists running around hijacking elections by screaming about excessive taxation should take a moment to remember that our Constitution was designed precisely to interfere with the establishment of a government by inheritance.

The Constitution prohibits not once but twice the granting of any title of nobility; but the Framers didn’t rest there.  They fought to cripple and ultimately abolish entail and primogeniture, the primary devices by which English law kept family fortunes together.  Why?  Because they realized that, if you’re founding a republic, it’s really not a good idea to let money keep piling up generation after generation in the same few pairs of hands.

Self-governing societies can’t operate on noblesse oblige, and societies that do aren’t truly self-governing.  As Dr. Franklin said, “A republic—if you can keep it.”

Dear Nonprofiteer, What to do when foundations slam the door?

July 21, 2010

Dear Nonprofiteer:

We are a small non-profit music school. We have been running into a problem with grants strategy–as in, we aren’t getting any.

I am consistently getting feedback:

1.    “Lovely program but we are only funding projects that can promise to reach 500-1000.”  We are small with 350 students and while I can conceive of a program that would reach a larger audience, I don’t feel I can creditably offer that in a proposal.


2.    “Great ideas but we only fund people who we funded before.”

Previous executive directors in more generous times had decided that grant seeking was not worth the effort. I  think we need to make a big push but I am starting to wonder if they were right.

We have a subsistence existence with only earned income and I feel we are desperately in need of a more diverse income stream if we are ever going to grow or prosper. Operating at less than break-even is not an option with my board.

What’s the small non-profit to do?

Signed, Stymied at Every Turn

Dear Stymied,

The Nonprofiteer suspects, as you’re starting to, that your predecessors were right when they gave up seeking foundation support.  At the best of times, foundations have the attention span of fruit-flies, which means even agencies receiving support spend the whole grant term sweating blood over whether they can get it next time–nonsensical program-officer-speak  to the contrary notwithstanding.  (What kind of response is, “We only fund those we’ve funded before,” anyway?  It’s barely lucid, let alone reasonable–unless it’s just a bald-faced lie.)

And these aren’t the best of times.  (Like you hadn’t noticed.)  Some foundations are stepping up and spending a larger percentage of their income on grant-making to make up for a loss in their portfolios; others can’t, or won’t.  And as aggravating as it is to have a foundation ask you to provide services on a scale beyond your capacity, the Nonprofiteer will defend that point of view: foundations are in the business of trying to have broad impact with narrow means, and your program simply doesn’t meet their needs.

So you have to seek funds from another source.  Earned income is all very well, but of course you’re required to raise one-third of your budget in contributions simply to maintain your 501(c)(3) status.  How?

Well, as the Reverend Mother did not say, “When a foundation closes a door, somewhere an individual donor opens a window.” Stop pounding your head against the foundations’ doors and get thee to an individual gifts program.  This may be your only option; it’s certainly your best one.  Seek small gifts through an annual campaign, and big ones through individual appeals made by you and members of your no-deficit Board.  (They made the rules, now they have to play the game.)

The annual campaign: Ask your students and their families, as well as any alumni you may have, to help you make up the difference between what it costs to provide this first-rate music education and what you charge in tuition.  (If you don’t know that number, figure it out: it’s magic.  Not only does it encourage contributions, it makes future tuition increases easier to swallow.  Why do you think colleges keep repeating, “Tuition covers only a fraction of the cost of educating a student”?  Though at $40,000-plus a year, one might begin to wonder what fraction, exactly.)

Ask at “Back to School” time, and again around Christmas, and again before or during recital/graduation season.  Also, ask at performances.  Don’t be shy: remember that most people say they give because “Someone asked me.”  Your school is just as deserving as any other charity, and with 350 people in the program someone connected to you should be willing to cough up some dough.

Major gifts: Identify anyone who’s already been giving you money and take him/her out to lunch and ask for more.  If your Board members aren’t already giving, conspire with your Board president to get them to do so–and once they’ve given, ask each of them for the name of one person who could be asked.  Remember the Nonprofiteer’s rule: Board members don’t ask their friends for money–they ask each other’s friends for money!

Individual gifts come in smaller chunks than foundation gifts (though not in your case, actually).  Moreover, they’re infinitely renewable and will sustain your school for years to come.  Good luck, and let us know how you do.

Hand-wringing over what Kresge hath wrought

April 22, 2010

If the Kresge Foundation isn’t giving matching grants for brand-new arts buildings anymore–and it’s not–the arts-building bubble is over as surely as the housing and financial-industry bubbles.  Granting funds instead for renovation and repair means the new Kresge posture will benefit the arts groups that got while the getting was good (or, perhaps, have some other basis for grantworthiness, e.g. re-purposing of an historic building).  But arts groups which have been thinking about building from scratch are now stuck contemplating Max Bialystock’s mantra: “He who hesitates is poor!”

The nonprofit equivalent of Razzies

April 21, 2010

Many thanks and kudos to Blue Avocado and the Nonprofit Online News for this glorious skewering of the news coverage and foundations which so dominate the nonprofit sector.

Or, as one of the Nonprofiteer’s pithier colleagues remarked, “Narcissism in philanthropy–really?”

Foundation Friday: Project Streamline

April 24, 2009

Hat tip to our colleagues at PhilanTopic for their report on efforts to reduce redundancy and excess paperwork in the grant application and evaluation process, and a salute to the grantmakers and grantseekers involved in Project Streamline.

The Nonprofiteer believes strongly that most nonprofits’ futures lie with individual donors, but that doesn’t change the fact that institutional support is important in launching and sustaining many agencies.  So anything that makes the process of securing that support simpler and more straightforward is a major contribution to nonprofit health.

In one of her previous lives the Nonprofiteer was an admissions officer, in which context she was made aware of the enormous waste of applicants’ time and money involved in having a different application form for every single school.  But each school insisted it was impossible to get its unique needs met through a common application form–and it was impossible, right up to the point at which it got done.

In philanthropy, we’re still in the “impossible” stage; but maybe that’s just the last stage before “Voila!”  Here’s hoping, anyway.

Foundation Friday: “Astroturfing” and foundations

April 10, 2009

A bit of fine reporting, and thoughtful skepticism, from the Community Media Workshop about the relationship between community groups and the philanthropies who fund them.  And another example of the same phenom, from the same dogged source. When foundations fund community groups, whose voice really gets heard: the community’s, or the foundation’s?

This is something we ought to be wary of, as we begin to hear calls for foundations to take over funding newspapers.  If those same foundations are funding a particular approach to school reform, can we expect to see that approach critically appraised in the pages of its captive newspaper?

An epidemic of Munchausen by Charity?

April 1, 2009

This is a public health alert provided for our friends in the funding community: please be aware of a sudden uptick in cases of what can only be called Munchausen by Charity.  Though the Nonprofiteer makes her living through funded consultancies, and therefore stands to profit from outbreaks of the disease, she nonetheless feels compelled to bring this most recent epidemic to the attention of those whose funds are being consumed in fruitless treatment of its symptoms.

Munchausen Syndrome,  as readers may know from exposure to medical dramas, is a mental illness which expresses itself in faking ailments to secure the psychic benefits of being the center of attention.  In Munchausen by Charity, an agency finds itself perpetually inadequate to its tasks, and therefore perpetually in need of consulting services.

While Munchausen by Charity presents in many guises, the version with which the Nonprofiteer is most familiar goes something like this:

The  Board of Directors couldn’t possibly govern the institution without a strategic plan, so it hires a strategic planning consultant, who discovers that the Board is weak.  The Board couldn’t possibly repair that weakness without hiring a Board development consultant, who attempts to shore up the Board with a clearer description of its tasks as well as a group of new members.  The expanded Board couldn’t possibly take on its newly-clarified tasks without hiring a Board trainer, who provides the group with sessions of role-playing in which they can practice those tasks (e.g. asking for money) without ever actually leaving the safe confines of the group.  The trained Board couldn’t possibly go out and ask people for money without hiring a development consultant, who draws pyramid diagrams showing that the biggest gift goes at the top and convenes meetings at which members of the Board try to remember if they’ve ever met anyone with any personal wealth.  And so it goes–on, and on, and on.

What the Munchausen by Charity sufferer is experiencing, of course, is the euphoria of personalized attention divorced from the need to actually do anything oneself.  If this diagnosis sounds harsh, consider that before discovering the Syndrome the Nonprofiteer believed serial consultancies were nothing more than a stalling tactic to delay fundraising, or a futile search for an expert who’d say it could be avoided altogether.  But now she realizes what we’re dealing with is not a trick or a device but an illness, about which we should all be understanding.

If, however, the Nonprofiteer had the financial reins at foundations that give technical assistance grants, she might suggest a limit on the number of funded consultancies–something along the lines of “Three Strikes, You’re Out.”  It only takes two hands to find your ass; it certainly shouldn’t take more than three consultants.

Or perhaps the epidemic will subside by itself–say, by next April Fool’s Day.

h/t Jan Stempel

Foundation Friday: Case study from Detroit

March 27, 2009

This account from Sunday’s New York Times gives the flavor of life in a community where the supports are all crumbling at once.  N.B. the emphasis on the possibility that agencies will have to merge or collaborate to secure support from strapped philanthropies.

Historically, mergers and collaborations driven by funders (the United Way was an early champion of the technique) have been less successful than those initiated by the relevant agencies.  But it’s understandable at a time of crisis that philanthropists can’t wait for agency executives to get their egos out of the way, and must press for quick action.

The article also makes a point it may not have intended: that charities reliant on organized philanthropy are at the mercy of same.  Only an agency’s own individual donors–who are persuaded of the essential irreplaceability of its particular approach to issues, whether social-service, arts, advocacy or environmental–can sustain it through these tough times.

So if you’re not already raising money from individuals, time to start.