How to De-Risk Your Private Equity Investments With Charitable Contributions

If you could go back 20 years and change just one financial decision, what would it be? For me, it would be simple. I would take every penny I had and buy a company like Nvidia, Apple, or Netflix.

That is the dream, right? Invest early in a scrappy startup with a wild idea, one that eventually makes renting DVDs obsolete, and become a multi-millionaire while sitting back and watching your money work for you.

The problem, of course, is that identifying the next Netflix among today’s startups is like finding a very specific needle in a very flashy haystack.

There are countless startups with compelling missions, brilliant founders, and impressive technology. Yet roughly 90 percent will fail (1). Of the 10 percent that survive, only a small fraction will ever become unicorns like Netflix or Apple. Private equity investing is challenging for this very reason. You spend years sifting through opportunities, and when you finally identify a company worth backing, the stage of the business often determines how complicated the investment becomes, complete with a growing cast of board members, investor dynamics, and long holding periods. Then comes the five to eight year ride, hoping the outcome justifies the risk.

High risk. High reward.

But what if there were a way to take some of that risk off the table? If you already make annual charitable contributions, there is a powerful way to combine your philanthropy with your private equity strategy.

It starts with a Donor Advised Fund, or DAF. You make your usual charitable contribution and receive the tax deduction in the year the DAF is funded. From there, the assets inside the DAF can be invested and allowed to grow for the benefit of the charities you ultimately choose. At firms like Schwab or Fidelity, those investment options are typically limited to mutual funds or similar vehicles, often with built-in management fees. However, certain DAF sponsors allow you to hold illiquid securities, including private placements and equity in startups.

This is where it gets interesting.

You can make a charitable contribution, receive the tax deduction, and invest those dollars into a startup that could become the next Netflix.

On its own, that strategy benefits the charitable organization designated as the DAF’s beneficiary. But when paired with your personal investment in the same company, the impact multiplies. The startup receives stronger funding with fewer outside investors, which can reduce dilution and, in some cases, limit the need for additional board members. All of this can be accomplished without changing the overall balance of your estate between private equity and charitable giving.

There is another layer of impact to consider. While investing in a high growth company is compelling on its own, the opportunity becomes even more powerful when you select a company with a strong philanthropic or mission driven focus. Many startups today are working to address social, environmental, health, economic, and financial challenges. By investing in companies that are actively solving real world problems, your capital creates impact in two ways.

First, your investment supports a company making a meaningful difference today. Then, upon a successful exit, the proceeds flow back to the nonprofit organizations you care about through your DAF. That is the real cherry on top. Netflix is great, but what if the start up you picked was solving some of today’s biggest issues and making you a high rate of return? Win-win.

You can step back knowing that your dollars worked harder and reached further, often delivering far greater impact than a direct donation alone, where a percent of your contribution will be consumed by administrative costs. This is how thoughtful investing and intentional philanthropy can work together, without sacrificing returns, values, or long-term goals.

(1)Forbes (2015, January 15) 90% Of Startups Fail: Here’s What You Need To Know About The 10% https://www.forbes.com/sites/neilpatel/2015/01/16/90-of-startups-will-fail-heres what-you-need-to-know-about-the-10/

Past performance is never indicative of future performance. This is not advice, but educational. Please consult a financial advisor before implementing any investment strategy to ensure it’s aligned with your financial plan. Nightingale Wealth Solutions is a f inancial services firm and does not provide tax or legal advice. Please consult your professional accounting or legal advisors prior to acting on any information provided by us that may have an effect in these areas. Securities and advisory services offered through Packerland Brokerage Services Inc., an unaffiliated entity – Member FINRA & SIPC.