(Screenshot; image via OnlineMBA.com)
Hello! My name is Tivoni Devor. I’ve written about nonprofits here before, but this column, called “Getting Good Done,” is going to focus on just that: being smarter about enacting your mission.
Since the start of this century we’ve seen more and more blurring of lines between what nonprofits and for-profits do and how they do it. More nonprofits are being run like for-profits and more for-profits are incorporating social good in their work like nonprofits. There are hybrid models, too.
Getting good done now requires less and less industrial-era operations and corporate structure. Some funders don’t care if you are a nonprofit, a for-profit or just an individual with a cool idea — they just care about your impact.
I want to use this space to explore all these new models and help people get good done with the smallest amount of corporate structure required, because more often than not, building and maintaining such structures is unnecessary, costly and pulls you away from following through with your mission.
In my work at the Urban Affairs Coalition, I help people who are looking to launch their first nonprofit develop their business plans and get up and running. Increasingly, these social entrepreneurs are unsure if they want to launch as a for-profit or a nonprofit. Sometimes they already are operating with an LLC and want to convert to a nonprofit, or they want to launch both a for-profit or a nonprofit. This is the very first decision I help people make.
Before you start a venture, what is your exit strategy?
Is the venture you want to start what you want to do for your entire life? Do you want to be able to sell the business in five to 10 years and get rich? Do you just care about getting good done and accomplishing the mission?
These are core questions, because if you choose to launch a nonprofit, you can’t sell it and retire. You can build it up and earn a good living — many executive directors and CEOs of major nonprofits are earning wages in the high six figures or even cross the $1M mark, and they can receive bonuses and severance packages like for-profit CEOs. But they will never own “equity” in the nonprofit.
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For example, say you start a nonprofit and that nonprofit builds an app. That app is an asset of the nonprofit. Now, let’s say that — for some magic reason — Facebook wants to buy the app for $1B. The staff, the board members, the coders — nobody gets to retire rich. Federal law requires that proceeds from the sale of assets of tax-exempt entities be directed toward charitable purposes.
Those launching a nonprofit can build it up and earn a good living. But they will never own 'equity' in the nonprofit.
One result of this type of conversion has been the creation of a foundation. This happens all the time in the healthcare field: A for-profit health system “buys” a nonprofit health system, and the proceeds of that sale are converted into a foundation.
If your desire to own the intellectual property (IP) you create is greater than the societal benefit of it being out in the world, you should not start a nonprofit. There are ways to mitigate this. You can maintain ownership of your IP and license it to a nonprofit, sell the distribution rights of the product to a nonprofit, etc., but this gets complicated quickly. IKEA is actually designed this way — the multi-billion-dollar business is technically a nonprofit, but a related for-profit licenses the trademark and receives those profits directly. It’s complicated.
If you just want to get good done, and what you develop will probably never be bought by a Facebook, then you should start a nonprofit. Many nonprofit founders with smart and sustainable business models can keep their position as CEO for 20-plus years, or as long as they want, and make a decent living.
Your exit strategy will not be the only factor you have to consider when deciding whether to launch as a for-profit or nonprofit — where your funding comes from and what those funders’ expectations are will also play a key role. But it’s incredibly important to fully understand what ownership means in the nonprofit sector if you are developing content of value.-30-
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