Perhaps nothing is more magical than the immediate accretive value-add to equity shareholders that occurs when shares change from a closed private company to a public offering. This accretive addition of value to both the shareholders and the company itself is where true wealth is made. It can also be used as a creative method for providing charity grants of private stock in a pre-public scenario. There is mutual “cross-benefit” to working with charities and non-profits when it comes time to take your company public. Such benefits are often either unknown or overlooked when it comes time to begin offering your shares in any of the various “go public” options.
Building Market Support
If only done for purely selfish motives, granting stock to charities, non-profits or NGOs in a public offering can help to provide a better more viable market for your public securities. For instance, charities that are large enough may have participants and donors that would be willing to purchase the stock if they had the knowledge that a portion of the proceeds were going to the charity they supported. In essence, supporting the stock is both directly and indirectly supporting the charity. Some charities have even used their donor lists to help bolster the value of the stock, knowing that if the stock comes out strong, they can receive more money in the process.
We’ve seen several instances where giving a good portion of stock to a large and reputable charity in the public offering has actually helped to boost the value of the stock well above the amount even given to the charity. The net value result to the company was higher after having given the stock to the charity than it would have been otherwise.
There are always tax write-off benefits to giving to charities, but there is often a greater benefit of giving stock vs. cash, especially when the value of the equities gains value. When the for-profit company provides pre-public shares, the value typically rises when the company takes to the public market. When that value increases, there are tax incentives to both the charity and the company for providing this service.
First, the company benefits because it is cheaper to provide equities rather than cash.If the company decided to sell those same equities themselves, they would take a major tax hit on the value accretion. If they had sold the stock after the offering and then simply given it to the charity, the business would have first been taxed on the difference in basis before the charitable contribution was given. While there would be a write-off on the gifting of the cash after the shares were sold, the write-off would NOT make up for the loss on the amount taxed when the shares were initially sold. WellsFargo has a great example analysis of this. In short, it’s better to give pre-public stock than cash from the proceeds of the sale of stock after the public offering.
Cash is a limited commodity. Stock is often easier to provide from the company’s perspective because you can always create more (with dilution and approval from the shareholders of course).
Second, the charity receives a liquid cash boost to its coffers. In the economic environment of the last decade or so, charities have had a difficult time financing their on-going working capital needs. Giving to charities with liquid stock provides a great way for for-profit companies to help finance the needs of reputable and necessary charities.
As always, giving stock over cash may have tax benefits and also bolster the value of the overall offering, but charitable giving is–in the end–still giving. It still costs more to give, even with tax incentives. However, from our clients’ perspective giving some of their stock to the charity of their choice has been a great way for the business owner to share in the overall success of the enterprise they have spent a great deal of sweat and blood to build.
The cost-benefit analysis of providing pre-IPO shares to the charity of your choice prior to taking your company public often depends on many differing cogs and how well they perform. But, allowing a charity to benefit monetarily from the rise in value of your company’s equities in the public offering is often easier than giving cash, can greatly bolster the market support of your offering and is an excellent way to fund the charity of your choice in a more tax-advantageous way.