Philanthropy 101
The Basics of Giving
The world of philanthropy has grown in myriad ways over the past few years. The opportunities to invest in the betterment of the world have grown beyond the typical means, and thereby opened up new ways of increasing impact for every dollar given. Given the complexities of the philanthropic world, it’s important to understand its nuances. In this post, I’ll lay out many of the traditional manners of giving, along with some of the recent developments that make RTV’s work particularly relevant today.
Types of philanthropic organizations:
Individual: Let’s start with the easy one - you and your checkbook (or mobile payment app) can provide necessary capital to charities or social enterprises.
Foundation: Typically started by an individual, family, or a business, a foundation requires a major upfront investment via an endowment. Foundations are required to invest this endowment in a fiscally responsible way, and pay out 5% of it annually. They are required to share annual reports publicly.
Charity: A charity relies on publicly raised funds (more specifically, charities are legally required to raise a third of their money from the public). These funds then directly support its major initiatives. They are similarly required to share results publicly.
Donor-advised fund: A donor-advised fund (DAF) is similar to a private foundation, with some key differences (we discussed many of them in this post). The TLDR on them is that DAFs are not required to pay out 5% annually. Instead, an individual with a DAF can gift money and receive the immediate tax benefit, but hold on allocating the funds to a particular organization. There are also fewer barriers to entry when compared to a private foundation; there isn’t a necessary base endowment, funders and their contributions remain private, and the set-up and management fees are relatively low.
Types of giving:
Non-profit grants: Funds are awarded to charitable (501(c)3) organizations for mission-driven programs.
For-profit grants (our favorite flavor): Contrary to popular belief, charities and foundations are able to grant non-dilutive capital to for-profit companies. As part of IRS code 68-489, tax-exempt organizations can make direct grants in for-profit companies. In order to meet the IRS standards of approval, the charity must ensure that the investment exclusively goes towards its own mission or purpose, i.e. an education-focused nonprofit gives to an e-learning company’s program to expand its offerings to undereducated communities.
Program-related investments (PRIs): These are similar to charitable grants from a foundation. They are required to meet a charitable standard, but don’t necessarily need to be good financial investments. They are part of the required 5% payout.
Mission-related investments (MRIs): These investments from a foundation have both a financial and social return. This is where a foundation focuses the “other 95%” of its endowment, as these investments should satisfy financial standards of return.
Social impact bonds (SIBs): These are relatively new instruments harnessing the public, private, and non-profit sectors. The government creates a performance-based contract to create improved social results with an external organization, who then relies on private investors for the working capital to complete the project. If it succeeds and generates public value (or public cost savings), the investors are paid back with a return for their upfront risk. If it fails, the investments are considered to be grants and no return is given.
Note that the above this list is by no means comprehensive of all opportunities that exist in the philanthropic world. We hope it provides a starting point to consider potential financial vehicles for positive change.
And, because we here at RTV love innovation, we would be remiss to not speak to the innovation around giving. With individual giving significantly increasing (both the millennial and Gen Z generations gave more than any other generation during the pandemic), and with technology continuing to advance as an integral part of how giving decisions are executed, we wanted to point out three of our favorite tech-focused solutions that make giving easier:
Classy offers a mobile fundraising platform to connect donors to nonprofits and social enterprises based on their interests.
GetRibbon is a platform that allows individuals or companies to start a nonprofit more quickly and cheaply through fiscal sponsorship.
Hedado allows donors to determine a monthly donation amount, then allocate it by percentage to the organizations they support (and offer recommendations if they’re not sure).
GiveButter is a fundraising platform for nonprofits to collect donations, run fundraising campaigns, and sell tickets for fundraising events, among other tools.
At RTV, we continue to consider innovative means of accelerating companies that are committed to both profit and purpose.
Written by our wonderful intern, Georgia Hoagland.