Nonprofit Startups Are Just Like Their Counterparts | Hacker News Reader

Nonprofit Startups Are Just Like Their Counterparts

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59 pointspg22 comments

I understand the perspective that operations and growth challenges for a nonprofit are generally the same, but there are some pretty huge differences too.

My own organization is a nonprofit startup. Our 501(c)(3) application took four and a half years in review. During that time we had no final status so rule out most foundational support and as a nonprofit there's no equity investment either. Essentially we had to scrape for what help we could find little by little without much to offer in return. Luckily we're in a high-profile space (music) so we could return enough PR while building.

The IRS eventually denied our application for status. It's not uncommon, especially in the open-source space, but luckily we now have a major law firm representing us pro bono, we hold credible domestic nonprofit status (at the state level) and we've build up enough of a reputation. We're still cut off from most grant-making, but we're finding ways to be creative.

My point is that the administration of the organization itself is no trivial matter, and it's especially difficult to carve out a space for yourself as a nonprofit if you don't fit a traditional nonprofit mold. (And innovation in the nonprofit space is vital — both in the models and the regulation. Sadly the latter lags behind.)

Not a complaint at all, but I'd definitely argue that the differences are many. And for nonprofit startups without a 501(c)(3) you're going to face a challenge, even if you're supported by a fiscal sponsor. It's similar waters for sure, but a whole different ocean.

> The IRS eventually denied our application for status. It's not uncommon, especially in the open-source space..

Could you elaborate on that?

Sure.

Open source by itself isn't a tax-exempt action, but for many it's an important part of releasing free software for the public benefit. Services for the public benefit that are open to all can generally be framed as tax-exempt activity, but the lawyers at the IRS who review 501(c)(3) applications are tax attorneys, not software/tech specialists so a lot of confusion ensues.

Our review came back arguing that providing open source software is not only non-exempt, but actually provides a competitive advantage in the market because some companies would be paying for the same service, therefore they are at a disadvantage — even though they would have the same access to that free software as anyone.

Talking to other nonprofit directors and experts it seems like the arguments around open source are inconsistent at best. It makes sense because the IRS generally fast-tracks more common arguments and passes off specialty cases (think software) to individual reviewers. As enough case-law builds up they'll provide a more consistent decision based on internal protocols.

Out of the scope of your question, but the end result for us is that we're doing a bunch of legal wrangling, establishing more outreach and education efforts (which were always part of our mission) and getting ready to re-apply by year's end. It's not unrealistic to think a full ten years will pass from the start of the organization to the point where we get 501(c)(3) status.

Having worked at a nonprofit startup, I agree from the perspective of an employee.

Since we were nonprofit, it was easier to justify being open source -- which meant anyone could contribute. Imagine being able to fix that pet bug or feature on your favorite site that the developers just don't have time for.

Same perks, salary, types of coworkers, etc. However, you also get the feeling that you're working for a greater good and not just bottom line of your investors.

What I am particularly curious about is why people tend to believe that NPOs or charities are "especially different" from other businesses. In many cases, there are entrenched non-profits that share many of the same values as their corporate counterparts. There are non-profits and charities that actively support the restriction of access to research and knowledge, almost as strongly as non-practicing entities in court tend to. I exaggerate, but only slightly. Don't even get me started on Komen (the cancer mafia), OCLC (the library mafia), DFA-- any of those.

Watsi certainly offers something unique to the lineup. I remember reading a while back that Science Exchange was trying to get the National Science Foundation to directly sponsor grant money to pay for scientific services "in real time" (as opposed to giving the grant money to the research organizations, which may be better or worse). It would be interesting to see Watsi make up a similar "philanthropic exchange" API where donors can directly cover thousands of campaigns at a time at their convenience and query constraints. Maybe you could next have charities/organizations bid for a contract to solve a campaign problem (like "[offering a cheap but reliable dialysis machine for] dialysis for John"), this way you would be able to incentivize long-term products and solutions as well, instead of just one-time solutions?

I often hear an argument to the effect of "well, charities don't experience a pressure to optimize as much as private ventures do because their incentives are different". But I am not sure how true that is. Some of them seem to be optimizing for convincing philanthropists to make regular, large donations which is a far cry from what you'd think their core mission would be (like "make healthcare cheaper" or "scan and torrent a billion books"). Maybe you can eat their lunch. GiveWell is trying to help this situation a bit.

Non-profits are different in the sense that there are a different set of laws they have to follow, and a core mission that is held to much moreso than in private industry. The laws make non-profits make vastly different decisions than a for-profit would make. Furthermore, non-profits hire people who are passionate about what they work on, which means hiring and culture is different (not based nearly as much on money/payout).

As for a "philanthropic exchange" API, I imagine they are busy just keeping everything running at the moment, let alone trying for something far-sweeping and loosely defined as that.

I didn't claim that they were working on an API, and I don't see how you could have read that from what I wrote. Maybe you were skipping ahead.

  > and a core mission that is held to much moreso than in private industry

Is there any law on the books about being held directly responsible to a core mission? e.g. are there organizations that are losing their tax status because they suck at their mission ?

There are such laws on the books in at least some U.S. jurisdictions, but it doesn't really cause anybody to lose their tax status because there are legal workarounds. It is very common for a nonprofit organization's Articles of Incorporation (and any other legally-binding statements of purpose) to be written like this:

"This benevolent, charitable and eleemosynary institution has been organized [...under the appropriate state law for a charitable organization...] and shall be operated exclusively for charitable, religious, educational, literary, or scientific purposes within the meaning of §501(c)(3) of the U.S. Internal Revenue Code of 1986 as the same may be amended from time to time. Within the foregoing purposes and not by way of limitation, [the organization shall perform its core mission]."

I've volunteered at a large scale NPO for a number of years now holding exec positions at national and local boards. The one thing people don't understand about NPO is that non-profit doesn't mean no profit. The real difference is where the income comes from, where it goes, and how it's taxed. That's more or less it. The lash out from those who do not understand this point when you're trying to create a successful business without having to exploit sweat equity is completely frustrating.

I think GiveWell could accelerate their plans the best if they would try to make your point extremely well heard. Someone must have done a really brilliant marketing campaign somewhere along the line to convince everyone of that ideal philanthropic image of a NPO.

I must wonder, pg, if this is one of the submarine articles like the one you wrote? http://www.paulgraham.com/submarine.html

either way, well placed PR for Watsi.

No, a submarine article pretends to be about something else (usually a "wider trend"). This is a pretty straightforward article about Watsi, because Watsi is interesting enough all by itself.

ah right. thanks for the correction then

I thought that some of the discussion in this thread would be better served by drawing attention to an often missed distinction: nonprofits =/= charities.

In many countries including the United States, it is perfectly possible to operate a non-profit corporation without registering as a 501(c) charity. You just need to find a revenue stream that doesn't consist of donations for the most part, because only charities can accept tax-deductible donations. For some non-profits, of course, this is a non-starter. For others, it can be very natural. You sell products or offer services like any other company, but you charge fees that cover the cost and not much more. You also structure your corporation so that the people who run it are "members" rather than shareholders and any surplus income is always reinvested. (That's why YC didn't get any equity from Watsi in return for their investment/donation. A non-profit corporation doesn't have the concept of equity to begin with.)

Previous (recent) Watsi HN discussion: http://news.ycombinator.com/item?id=5117385

I looked for the previous discussion to find out about the exit prospects for this investment. I found out that pg considers his investment and advice to be a charitable contribution: http://news.ycombinator.com/item?id=5117432

I myself am developing a nonprofit startup. Right now it seems like the biggest hurdle will be all the paperwork and compliance work.

It'd be awesome if somebody started some sort of umbrella organization to file the paperwork, deal with the IRS, and maintain a board for "member" charities in exchange for a small cut of donations.

Such umbrella organizations exist -- they're called fiscal sponsors (http://en.wikipedia.org/wiki/Fiscal_sponsorship)

I worked at a non-profit fiscally sponsored by the Trust for Conservation Innovation (http://trustforconservationinnovation.org/), which is focused on environmental projects and takes 8% of project revenue.

I definitely recommend non-profit startups consider starting with a fiscal sponsor instead of trying to register as an independent 501(c)(3). You can always spin off later if necessary.

I considered getting a fiscal sponsorship when I launched my tech-driven nonprofit organization, but I ultimately decided that that was not the best course for us. Getting a fiscal sponsor can save you some paperwork and headache in the beginning, but the biggest drawback (other than that they take anywhere between 7-15% of your revenue) is the issue of control. Technically, your fiscal sponsorship has control of your program, operations, and hiring. While you can find and work with a fairly hands-off fiscal sponsor, if you want full control of your startup organization, then file for the 501(c)3. It's more upfront work, but will save you the headache of spinoff and potential conflicts.

Also, get a pro-bono lawyer or accountant to file for your tax exempt status. Most law firms actively look for nonprofit pro-bono work to do, and you can also look for pro-bono work at law schools. I had an accountant do ours pro-bono, and in the end the actual application did not take that much time.

Would love a detailed pg article on what ventures should be nonprofit vs forprofit. If this is a viable model, presumably some startups could go either way. (Open source software?) I think it would help to have more of a community consensus about what belongs - and can thrive - as a nonprofit.

I wonder if Watsi will apply the crowdfunding nonprofit model to other sectors besides medical treatments...such as perhaps sponsoring the education of specific children showing great promise, or to micro-loans in a Grameenesque fashion...

Why not Kiva for that? I love Watsi, but they are solving a different problem, and the problem you mention, we are already attempting to solve (as are many others).

Good call

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