How private shares can become source of charitable donations THOMAS LEE
Some of the world’s biggest philanthropists hail from tech firms: Mark Zuckerberg of Facebook, Bill Gates and Paul Allen from Microsoft, Marc Benioff from Salesforce, Pierre Omidyar of eBay.
Aside from giving away millions of dollars each year to charities and other social causes, these company founders also share one thing in common: Most of their wealth comes from publicly traded stock.
That’s not a coincidence: They are able to fund their philanthropy precisely because they can sell shares with relative ease on the open markets.
SharesPost now wants to do the same thing for those with large stakes in privately owned tech companies. The San Francisco company will announce Tuesday a partnership with mutual fund Fidelity Investments to allow investors to donate stock in companies like Uber and Airbnb to charities. Along with Coastal Ventures and Red, a large global charity co-founded by U2 frontman Bono, Fidelity and SharesPost are hosting an event Tuesday in San Jose to introduce the program.
Here’s how it works: Investors use SharesPost technology to value the stock, which they later place into special funds managed by Fidelity. The mutual fund company will then distribute the proceeds to foundations and other philanthropic organizations, generating a tax benefit for the donor.
The partnership hopes to accomplish two things: opening a promising new source of funds to charities and legitimizing private tech shares as an asset class investors can eventually convert into cash — just like publicly traded companies.
“There’s a lot of wealth trapped” in private stock, SharesPost CEO Greg Brogger told me. “We are trying to find more ways to unlock that value.”
Over the past few years, investors like venture capital firms, mutual funds and endowments have poured billions of dollars into promising tech firms before they go public. As a result, a new class of companies called “unicorns” has emerged — firms worth at least $1 billion, based on the prices investors have paid for their stakes.
The world’s nearly 200 unicorns are worth approximately $679 billion, according to data compiled by CB Insights research firm in New York. Uber and Airbnb, both based in San Francisco, enjoy a combined valuation approaching $100 billion.
With such eye-popping numbers, you would think the philanthropic industry would be eager to get a piece. But the reality is pretty complicated.
For one thing, unicorn valuations can be pretty dicey. Exchanges like London Stock Exchange, Nasdaq and NYSE determine how much a publicly traded company is worth every day by providing a way for lots of investors to buy or sell the stock. By comparison, the markets for private stock are still very small.
“Our asset class has been so opaque,” Brogger said. “It’s hard to value.”
Without a way to confidently value private shares and thus turn them into cash, charities and other philanthropic organizations might be reluctant to accept such donations, said Marc Lowlicht, a certified financial planner and CEO of Opes Private Wealth Management in East Hampton, N.Y.
Charities tend to “want the money now,” Lowlicht said.
That’s the problem SharesPost and Fidelity hope to solve. SharesPost’s core technology allows people to buy and sell private stock; the company even operates an index fund called SharesPost 100 to help investors determine and track the market value of private tech firms.
“We want to bring transparency” to unicorns and smaller private tech companies, Brogger said.
With Fidelity, investors can place such shares into a donoradvised fund or even generate cash by selling the shares through SharesPost.
Placing shares into a donor-advised fund helps retain more of the stock’s value because donors can enjoy tax advantages, said Karla Valas, managing director of the complex asset group for Fidelity Charitable. “Cash is the most expensive asset to give right now,” Valas said.
SharesPost’s partnership with Fidelity is uniquely suited to Silicon Valley because the two companies can help investors and entrepreneurs fund charitable causes without having to wait for the companies to go public, she said.
But it still might take some time for the program to gain acceptance. Timing is everything, and right now there’s ample evidence to suggest that unicorns are overvalued, said Stuart Blair, director of research for Canterbury Consulting wealth management firm in Newport Beach (Orange County). Charities won’t want to accept the stock of a private firm that might run out of cash and go out of business.
That’s why companies are taking so long to go public, for fear public markets will offer much lower valuations than private investors. Indeed, the stocks of oncepromising companies like Snap and Blue Apron have struggled to gain traction since they went public.
But the prospect of tapping into an enormous pool of wealth might be too tempting for charities to ignore. At least that’s what SharesPost and Fidelity hope.