Why I gave away my company to charity | Hacker News Reader

Why I gave away my company to charity

sivers.org

328 pointssivers83 comments

Thank you, Derek. One of my all time favorite hn posts. So many good quotes, I won't cite any of them. Just read the whole thing.

We spend so much time pushing our customers to answer the question, "What's most important to you?" that we tend to forget to ask it to ourselves. OP's answer might not be my answer, but it's an awfully good one. Working hard is so much easier when you're working toward such an important outcome.

Respect.

Do the math. He created a trust that pays 5% of 22 million and avoids ~5 million in taxes. That's 1.1 million a year in income and a 5 million tax break at the cost his capital after he dies. It's less liquid right now, but 1.1 million a year is well past FU money and getting a loan with that sort of income stream is easy. If his annual payout was less than 5% then it would have been a sacrifice, but 5% + inflation means he might be extracting more money in real terms than he is generating. This means over a long enough time scale he basically skims most of his money back, and he leaves the tax break some of it's interest to charity. Granted if he generates significantly more than 5% + inflation he does lose some money but he does get 5% of an ever larger pool so it's not all that much of a loss.

PS: Which is not to say it’s a bad thing, rather it’s more of a tax loophole than you might think. Afterall his other option was to live off of ~4.5% of 17 million. (Assuming he did not want to run out of money if he lived to be 90.)

Eh. I get taxed fully for everything that gets paid to me. (That annual 5%.) That doesn't avoid taxes at all.

Only what will never touch my hands (direct from purchase-event to charity) avoids taxes.

So this was just a way of making sure as much of it as possible never touches my hands.

(As compared to passing-through me: taking it as income then giving it back out again.)

There are 2 tax advantages. You don't pay taxes on the first sale, and the annuity does not pay taxes when it sell's it's assets.

Let's say you are a 30 years old and need to pay taxes on 14 million$ and decide to retire. As you get the money you need to pay taxes for simplicity let's call that 4 million$. You now have 10 million$ if you then buy stocks with a 5% dividend that keep up with inflation your income is 500k /year(which you do pay taxes on). However, if you ever sell those stocks you need to pay tax on how much they appreciated.

If on the other hand you setup an annuity it does not pay that 4 million in taxes. If it then buys those same stocks with a 5% dividend that keep up with inflation it's paying you (10m+4m) *.05 = 700k / year (which you do pay taxes on). And if the annuity manager want's to sell the stock and buy something else it does not need to pay taxes on the sale.

The final question becomes can you buy a life insurance policy for less than 200k/year that pays out the value of the annuity when you die. Expect your family does not pay death taxes on a life insurance policy so even that has tax advantages.

PS: In the real world all those numbers are subject to change, but it was setup by congress as a tax shelter and with proper management it can do that vary well. I only bring this up because it may be a good idea for other people on HN who decide to sell their company and retire when when they are young.

Could you please get rid of the apostrophes in the phrase "sell's it's"?

He wrote several paragraphs of wisdom, and you're here to correct his spelling. Nice. Could you reallt nopt derive his meaning despite his poor spelling?

What's your point? You make it sound as if he's hypocritically passing off his action as an altruistic gesture.

Bottom line is: it was a smart tax move. He created a company worth a lot of money. He wanted to "donate to charity" as efficiently as possible.

What he did ended up benefiting his charity a lot more than if he had made a donation after selling the company first. The fact that he is sitting pretty doesn't change that fact.

What's your point?

I think several people on HN could end up benefiting from doing the same thing. Either because the numbers work out to their advantage, or because they are willing to make a small hit to stiff the tax man, or they just really want to help out some cause such as their school etc.

My issue is in title, sure it will be read more stated that way, but the post still follows that line of pure benevolence.

"I live simply. I hate waste and excess. I have a good apartment, a good laptop, and a few other basics. But the less I own, the happier I am. The lack of possessions gives me the priceless freedom to live anywhere anytime.

Having too much money can be harmful. It throws off perspective. "

A better title would have been. "1.1 Million a year until I die THEN the remainder of my money goes to charity," would have been more clear to the situation. Instead the current title just brings a bunch of Kudos and warm fuzzies.

But, beyond the way it was communicated, Derek I give you Kudos. You are definitely disciplined to not cash out with the money upfront and go on a spending spree. That is more than what a lot of people would have done. You had a lot of decisions to make, figuring out what you really wanted, what was best for your 85 employees, what to do with the money? I hope they all turned out well for you. I hope you keep starting and building things and not lose the bug.

"At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, 'Yes, but I have something he will never have enough.'"

Original source of 'enough' quote in Sivers' essay

http://www.tompeters.com/dispatches/010754.php

That quote kind of loses its punch without the ellipsis:

'Yes, but I have something he will never have...enough.'

Argh. Reminds me for some reason of the stand-up comedy formula. You are correct. I forgot the punchline. The ellipsis.

Example from Robin Williams

"Parenting is hard" (Premise)

"Once you become a parent, you have responsibilities" (Statement/setup building on premise)

"For example, you can't go out drinking, come home drunk, go up to Junior's room at 3am and say 'For a change, Daddy's going to throw up on you now just like you do" (Turn around, the twist)

I hope I'm not being an ass but this article annoyed me a bit. This guy came across very arrogant, self righteous and judgmental.

The following statements were just obnoxious: - "Yes, but I have something he'll never have: enough." - "I live simply. I hate waste and excess. I have a good apartment, a good laptop, and a few other basics. But the less I own, the happier I am. The lack of possessions gives me the priceless freedom to live anywhere anytime." - "it throws off perspective. It makes people do stupid things like buy “extra” cars or houses they don't use - or upgrade to first class for “only” $10,000 so they can be a little more comfortable for a few hours."

A) I've never met nor heard of any billionaire who got where they were because they were chasing dollars. All of them started out by LOVING what they did and doing it extremely well. The market rewarded them for the value they created for society. The greater the value, the greater the reward.

B) Why is he implying that because of their success, the rich are incapable of appreciating the simple things in life? Why does doing that require owning just one nice apartment in NYC a nice laptop, a brand new prius

C) What business it is of his how other people live their life and how they choose to spend their money. Everybody needs to be like him in order to be as valiant and noble?

I dunno... maybe i'm being a bit extreme but I just cant stand it when other people go around self righteously preaching about how other ppl should live their lives.

It struck me the same way. He projects a salesman's confidence and glibness, so my knee-jerk reaction is to roll my eyes and wonder what the hell he's selling. Well, it's obvious what. The entire post is plain and simple bragging. He says himself that he didn't do it out of altruism. He did it to maximize his happiness, which includes -- he says this explicitly -- enjoying the fact that he made such a bright decision. And though he doesn't say it, it's obvious that another one of the benefits he gets is the joy of telling everyone about his enlightened, tasteful choice.

Nothing he says is new. Choosing a life of utter freedom, security, and modest luxury over the relentless drive for more wealth and power is probably as old as stable urban societies and has probably been admired for the same reasons just as long. So we're not here to learn; we're just here to gawk at one of our celebrities. If HN had channels, this would be E!

Admire the man for what he's done, but for God's sake, have the sense to roll your eyes and stop admiring for a second when he tastelessly brags about it. Resume admiring when this little faux pas passes out of consciousness.

I agree!

I did all this over a year ago, and didn't plan on telling anyone. I knew it would sound like smug bragging.

But in a few entrepreneur-focused interviews since then, (VentureVoice, etc) - the interviewers seemed particularly interested in the details on how and why I set up the trust.

Yesterday I did another one of those interviews, and he pushed for details again - so today I thought I should just write it down once and for all, so I don't have to keep re-telling it.

Sorry if it sounds like bragging. Perhaps it is, a bit, but I hope that someone somewhere in the future selling their company might be aware that this is an option and read someone else's experience with how to structure it.

Most people aren't willing to talk about financial details at all. I find it fascinating myself. Thanks a lot for sharing.

Well, I say brag. You created a great company that did good things for people. It sold because it was good to a company who was going to use it to keep doing that good. You made a bunch of money that you rightfully deserved and then decided that you didn't need it all. So instead of building yet another monument to ridiculous excess, you made a smart plan to do even more good. Yes, friends, he gets a million bucks a year now. Even after all that. I bet he uses it for good stuff too. Brag Mr. Sivers. You've damn well earned it.

Being proud, egotistical, or a braggart are all human characteristics. I mention this for two reasons. First, without the benefit of direct contact, you really have no idea what kind of person sivers is, or what his intention was when posting. Second, even if he is an egotistical bastard, so what?

Few people are in a position to donate $20 M to charity. Fewer still who are willing to give up what they worked so hard to make. This puts sivers in the top (some small number) percent of human population in important objectively measurable criteria.

Personally, I enjoy learning more about people I admire, flaws and all.

I read it a bit like that but most of what I got out of it was an interesting way to structure a deal that I might consider should I find myself in a similar circumstance. I would like a private jet though.

"Why does doing that require owning just one nice apartment in NYC a nice laptop, a brand new prius"

Partly because owning a lot of crap tends to distract you and create a kind of gravitational pull that keeps you near the crap you own.

I thought he made it pretty clear that not owning much stuff made sense even for purely selfish reasons.

Altruism aside, it is a very smart move. I grew up in India and am sparse in my living standards and am at times amazed at the kind of affluence that exists in America even amongst those who consider themselves less privileged.

As long as the trust grows at greater than 5% of its values you receive the mandated annual disbursement which is this case is a fair chunk of change and add monies to be disbursed at the end. However factoring in the rate of inflation and "money's real value over time", the trust probably needs to be invested wisely to grow at 5% + rate of inflation to retain its original value over the years.

Occurs to me that setting up the trust is only half the battle, having it deliver on its original promise is the greater half.

When you reach that magnitude (many 10s of millions of dollars) getting 5% + inflation (inflation is on average pretty low in industrialized countries) amortized over many years is not hard.

Wow, talk about a classy move.

Major props to Derek.

"The best things in life aren't things"

status is a thing >_> isn't derek signaling high status by giving away something valuable? <_<

sort of. but everything humans do can be argued as a status move, so it's unwise to get super hung up on it. (me, i just marvel at the 1337 tax-evasion skillz. :-)

Let's do Sivers the favor of precision in our language: he engaged in rational tax avoidance for a good cause. When you say 'tax evasion', it generally means the steps taken were illegal.

Or at least focused on avoiding taxes for personal profit if not outright illegal.

Polysemy -- "thing" is an overloaded term.

Yup, he is. Now all the ladies will be after him.

I don't think that is what they mean by "things." Derek is signaling generosity by being generous.

Wow, this really rang true with me:

"It's not that I'm altruistic. I'm sacrificing nothing. I've just learned what makes me happy. And doing it this way made me the happiest."

I often think about how this mentality equates to business. For example, we generally think about business profit growth as healthy, but what if a business is sustainable, does not grow in profits but can somehow grow "happiness" with customers, investors, employees, etc. In a sense the business is not necessarily being altruistic, it's just recognizing what makes people more dedicated to the business. When thinking about Zappos I generally wonder if this wasn't their strategy for many years.

He's getting 5% of $22 million each year to cover living expenses ($1.1million)?

Doesn't exactly sound like "living simply" to me.

Just having money doesn't mean he has to blow it.

Fair point. However, if that's the case, why not leave more of it in the trust - he's automatically "blowing" 35% of that 5% (350k+) in taxes every year.

EDIT: Here's the real answer - http://news.ycombinator.com/item?id=976759

He's required to receive at least 5% of the trust's value as his annuity each year.

http://en.wikipedia.org/wiki/Charitable_remainder_unitrust

Ahhh, that makes a lot more sense. Thanks!

Does the benefactor have to pay tax on that 5%? If not, this is an amazing deal for the benefactor!

If I am reading the Wikipedia article correctly (and if the article itself is correct), the benefactor does pay tax on that 5%.

However, if the OP had kept his startup in his own name, then at the time he sold it, he would have had to pay capital-gains tax on all of his profit, that year. (And then he would have been able to spend the remainder on whatever he wanted, that year.)

It's certainly very altruistic, but not entirely, since he has saved himself a whole lot in taxes and guaranteed himself an income for life.

That was my first thought as well, but in reality, there's more available for whatever charity eventually gets the money. Granted, he could have donated it all outright, but there's something to be said for having some income so you can work on things you love, including giving back. I'm guessing that for someone like Derek, his time and expertise is more valuable than his money :)

It's not about altruism or lack of it. Nor ultimately even saving money in taxes. It's about having enough, so there's no point in owning more than you need.

He obviously has to live somewhere and eat, so it's only pragmatic to arrange that he will get what he needs but, I assume, not really much more.

$1.1 million/year sounds like a lot, but he is living in an apartment in New York city.

edit: Oh, -4 on the mods. I'll make a note to put flashing lights around it the next time I use irony to comment on a man who thinks a $1.1m/yr income is "living simply".

Dude, the highest mean income in the most titsy of NY neighborhoods is only about $150K/year. $1.1 mil is a shit ton of money each year.

Not countering your central point really but I'd note that the distribution is pretty skewed[1], i.e. the 300k+ group is a plurality in some neighborhoods.

[1] http://envisioningdevelopment.net/map

I used the same source as you. Irregardless of the data my point was that 1.1 mil in income is a lot, no matter where you live in the world.

Upvoted you for a reasonable point.

But I want to subtract half a karma vote for the use of Irregardless. Shame!

$1.1 million a year tax free is alot - he could live lavish in Monaco with that!

it's not tax-free to him, check his post above.

Derek, you did great work in creating that wealth and everyone here is happy to see you enjoying some of it. But please consider re-writing this to something more truthful - fewer words emphasizing your altruism and spartan lifestyle (?) and more words talking about the tax advantages and forced spending discipline that this smart plan gives you.

The title, for example, shouldn't be "Why I gave away my company to charity". You didn't do that. (Which is good! That would be crazy.) How about, "Why I willed my estate to charity."

I was thinking of a similar configuration for an investment vehicle. Make a charity whose goal is investing in good startups. Feed the returns back into investing. The goal is clout and influence rather than cashed out returns. I think this would better align incentives of investors and companies. It could also be used for "human capital" investments which are uncommon today except for student loans.

It wouldn't need to be relinquished upon death - but the trustees would be transferred over time.

Can we assume it actually makes more than 5% interest every year? Otherwise he's slowly draining it of its value, and if he lives long enough may empty it. It probably does, but it's a thought.

Yeah, asset managers generally advise withdrawing no more than 4% annually to preserve wealth. However, I'm guessing that this is classified similar to a foundation, which must pay out 5% of its assets each year.

EDIT: Just read the wikipedia article he links to, and as the value of the trust is recalculated each year, and his annuity is based on the recalculated value (as opposed to the original value) it's effectively impossible to deplete the value.

Also, you can setup a net-income CRUT that pays out the lesser of the annuity income percentage, or the trust's net income for the year, thus ensuring that your annuity doesn't reduce the value of the trust from year to year.

Exactly. I'm required to pay out 5% per year to myself, but then I don't have to spend the whole 5%. I can reinvest it or whatever.

Can you re-invest it in the non-profit that you created? i.e., accept the 5% and then just give most of it right back?

but it's possible that the value at the end would be just a small fraction of the original sum.

Unwise to passively assume. It's my responsibility to make sure it grows by at least 5% or that defeats the whole purpose! :-)

http://sivers.org/book/SmartestInvestmentBook

http://sivers.org/book/InvestorsManifesto

http://sivers.org/book/FourPillarsOfInvesting

Good links, and I'm not at all surprised that you've put a lot of thought into it. Of all the writers that appear here on a regular basis, you have the highest signal/bullshit ratio I've seen. When you say you're giving back, I believe you.

That's what I was thinking. 5% is the upper limit of the fraction of his wealth that a rich person could safely spend each year anyway. So his income is no different than if he'd kept the money. The only thing he has lost is the ability to change his mind about where the principal goes when he dies.

Intentionally lost my ability to do something stupid with more than 5% the principal while I'm alive. :-)

That kind of salary still lets him build substantial personal wealth, so if he manages it wisely there will likely still be quite a large sum to pass to his heirs.

He should live so long. :-D As pointed out elsewhere, this is an exponential decay so it will never go to zero.

Bashing numbers helps me visualize this...

Looking at (nearly) the worst case, if the trust earns zero interest, he will be draining it by 5% per year, so the principle will be

  0.95^y * 22e6

where y is the number of years. If he lives for 40 more years...

  0.95^40 * 22e6 = 2.8e6

(13% of the original sum is left).

A less drastic case would be earning 4% but paying out 5%, i.e. losing 1% per year.

  0.99^40 * 22e6 = 15e6

(67% of the original sum is left).

OK, the absolute worst case is he invests the whole amount in subprime mortgages and loses it all. We won't bash those numbers, obviously he is a lot smarter than that.

I have to admit, I hate anyone who says something like:

"That means $5 million more going to music education instead of another tank in Iraq or a banker's bailout bonus."

Because that is where all tax money goes. I'd say >90% of tax dollars go to something way more important than music education, though I guess if I had cashed out of a music startup I might be selfish enough to convince myself that is untrue.

Music education was important to him. For other people maybe other things are more important. They can donate to other cause, or pay voluntary taxes.

What paid for the roads he took on his way to music classes? What funded the internet he made money off of? What paid for the tanks that kept his country in such a state that people could spend time studying music rather than fighting civil wars and subsistence farming? I'm sure I'm no more a fan of the Iraq War than he is, but I'm glad we have tanks and nukes, if for no other reason than their very existence reduces the likelihood we will need them.

If everyone gave their money to helping other people with their hobbies, rather than paying taxes, would you want to live here?

He still pays for that from his personal income, and pays a lot more than most of others do.

This is a strange argument. He isn't dodging taxes - the same tax code that pays for roads and tanks also specifically encourages people to give money to charities, by providing legal deductions. That's all he's doing.

The government has a mandate, and the power, to fund itself. The same isn't true of charities.

It's not the action I object to, it's the dismissal of what taxes do.

Why not use the money for music education now and be actively involved (or not) instead of in x number of years (40?) from now?

Because then you couldn't live off the interest in the mean time.

just wanted to make a point that others seem to have missed. to the extent that this is avoiding taxes so that more money can be given to a particular charity, isn't it "robbing peter to pay paul"?

this might not make much sense to the american mindset, which seems to be virulently anti-government, but taxes don't just vanish - they pay for vital services. more than that, reducing how much tax someone with many millions pays implies that others, with less money, either pay more or receive lower quality services.

i realise this is a minor detailed compared to giving to charity or keeping it all, and i don't mean to detract from that. i just find the "it's cool to avoid taxes" (and instead give more to charity) assumption a bit odd.

The US government spends most of its money (roughly in order) on:

-Wall Street Bailout

-Military Spending (which, in large part, means pre-emptively attacking sovereign nations we don't like)

-Inefficient entitlement programs

-Interest on our existing debt

If memory serves, only about ~5% of our money goes to what I would consider really worthwhile programs like NASA and education. You can up that to about 20% if you include things like roads, infrastructure maintenance, 'vital services', and so on.

I imagine that Derek prefers to have more control over where his hard earned money goes.

Recently at work, I wondered if some acronym we were using was incorrect. I wrote my boss an email saying, basically, I think we have this wrong and got the reply "I googled it and it comes up so it's right." Um, yeah, I googled both terms before sending the email and both versions bring up this form. So I got curious and spent about 40 minutes searching for information to verify which acronym is actually correct. Ultimately, I found we were using the correct acronym. Curiously, most of the sites that were using the correct acronym were for-profit business sites and most of those using the incorrect acronym were government sites.

My point: Maybe if the American government were more competent, Americans wouldn't be so anti-tax.

hey derek - you mentioned that you wrote this article after being prompted to do so and I thought I'd take the opportunity to try and prompt you to write another one!

You briefly commented on living the (relatively) simple life - having fairly few possessions etc. I try and live somewhat like this myself and have found it very liberating.

If you're interested I'd much like to read an essay with your expanded thoughts on this lifestyle decision.

cheers, david

Here's one of his past essays that's relevant: http://sivers.org/freedom

5% * 22 million = 1.1 million

Not bad.

I once heard the word "Charitable Remainder Trust" - it was by a guy who wanted to make sure his money could never be taken from him...

http://www.investorwords.com/830/charitable_remainder_trust....

So no cap gains + a tax deduction for making money? Doesn't seem so charitable to me...

(someone, please correct me if I am wrong)

There's absolutely nothing charitable about paying taxes.

Sorry - my point was that the title connotes he's already completed some charitable action, when, in actuality, he's just taken steps to preserve his wealth until he passes - at which point a charitable action will be taken (on his behalf).

edit: no one here likes the truth, I guess.

IOW, he's paying Tuesday for a hamburger he is enjoying today.

http://en.wikipedia.org/wiki/J._Wellington_Wimpy

(Posted as humor, not a cheap dig. If you down-vote me, do it for the cheap humor.)

He does say explicitly that he's not being altruistic.

My take is that this is a tip for startup owners who are planning to give some of their wealth to charitable causes after their death. He suggests a way to do this (financial hack, if you will) that improves the efficiency of the operation, maximizing both the money that goes to the charitable cause and to the donor.

Regarding the payout, see http://news.ycombinator.com/item?id=976759.

wouldn't it make more sense to invest that money into a few hundred startups instead?

At $50K a pop, that's 340 startups that he could invest in.

Then 5 years later, when that 17 mil becomes 200 mil, he could setup that music trust.

I mean sure, he can still invest with whatever is left over from that 1 mil yearly cash out, but it's not going to be a game changer compared to backing 340 new startups.

Reread the statement about "enough".

Plus if we assume that he does recieve 1.1 mil $ per year (at least for first couple of years).

And if he is that ascetic as he claims.

Then we can safely assume that from 660k that remain (after taxes) - he can probably live pretty lavishly on 160k per year (for an ascet !) - especially since this amount doesn't need to be spent on making money (transport,...).

So now we can see that he can clearly invest into 10 startups per year - and even afford to be actually involved in them. Which would probably far increase possibility of success over just blindly dumping money in 340 startups with total disregard for anything. And in 10 years he would be involved in 100 of possibly pretty good startups of which I believe at least one could repeat his success (due to selection and nurturing).

To me its clear how this "non-greedy" strategy is clearly better over long term.

I'm really amazed how some people who claim (or act) greedy are really not THAT greedy - solely because they act on short-term ("BIG" bonus this year! or - steal from thy shareholders, etc, etc) over long-term. I don't call them greedy - I just call them stupid :)

Because a true greedy person should be focused on an mid or long-term goal (how to maximize my profit in 20 or 40 years).

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