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Virtuous cycle of start-up funding

‘Cashless giving’ allows start-ups to donate stock to school

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Finding ways to fund university technologies and start-ups is one of a TTO’s biggest challenges that increasingly requires creative solutions. Here’s one from the University of California, Los Angeles (UCLA), which is using a novel concept in funding that creates a sort of circular giving.

The UCLA Venture Capital Fund invests in university start-ups and provides mentoring, and the start-ups that participate must donate stock in the companies back to the university. This approach is different from the more common practice of universities simply taking equity in a start-up, explains Michael Silton, executive director of the fund and the developer of this strategy he calls “cashless giving.”

“This model is an interesting way to fund a capital fund and also create a virtuous cycle of giving back to the next generation,” he says. “Unlike traditional venture capital funds that are started by someone giving you millions of dollars of cash that you go out and invest for a return, we have said that we want to catch people as they are starting companies and have them donate part of that company back to the university at a time when it is still just the promise of something more.”

A key aspect of the strategy is that the start-up actually is only pledging the company shares of common or preferred stock and promising to make the actual transfer when shares are distributed at a later date — for example, when the company has a merger or IPO. Looking forward to that date, the UCLA community is motivated to help the start-up and turn that donation into liquidity, Silton says. The company shares are pledged while they have a lower valuation, and then UCLA benefits from the appreciation of the shares. The liquidity is then used to help the next generation of start-ups.

Youth movement

The model is in contrast to the typical fund raising by universities, Silton notes. Most fund raising is targeted to older alumni and other individuals who have already achieved financial success, but the cashless giving model is aimed at younger people who haven’t yet made it.

“Getting cash from them is contrary to how an entrepreneur thinks. They are spending every dollar they have either funding their company or buying ramen noodles for dinner,” Silton says. “But they do have a desire to give back to the university that helped them get started.”

UCLA started using the cashless giving model in 2007, and some of its earliest start-ups are now going public or being acquired by others, which creates cash for UCLA.

“We’ve had 10 liquidity events in the past 24 months from those early investments, and we expect to see more soon,” Silton says.

The size of the donations varies, but UCLA has a minimum of $10,000, computed on the value of the company while it is small and private. The initial donations tend to be in the range of $10,000 to $100,000, Silton says. The school recently benefited from shares donated by an early investor in Twitter, which are worth 20 times more than the original donation now that the company is public.

“Those are the kind of shares that a company often would give to an adviser,” he says. “So in the entrepreneur’s mind, they are giving the university a donation that they hope will turn into much more, and they can see it as similar to what they would give a well-connected and helpful adviser. In exchange they get access to the UCLA Venture Capital Fund, which [offers] many people who can help with connections, networking, and advice.”

Outreach efforts

To find the start-ups that might participate in the cashless giving, the UCLA Capital Venture Fund has an outreach program that’s spread the word about the fund to alumni, faculty, and parents to let them know the fund is available to assist them if they are starting up a new company. The fund is staffed by experienced entrepreneurs who can assist with all stages of a start-up.

“The key challenge was to find those companies that had a UCLA connection and wanted to fund a new generation of UCLA entrepreneurship, and we had to find that early, pre-liquid stage,” Silton says. “We used all the usual marketing mechanisms to reach out and find those companies, and once we found them we concentrated on showing them how they could do so much for the school without parting with any cash, and what the UCLA Venture Capital Fund could do for them.”

An interested start-up applies to participate in the fund, and Silton’s team confirms that the company is legitimate and appropriately valued. The company then joins the fund by making the cashless donation, after which it has access to the fund’s advisers and other resources.

The first companies to join the fund were mostly venture capitalists, Silton says, because their business model jibed easily with that of the UCLA Venture Capital Fund. But now the participants are 80% entrepreneurs.

“The entrepreneurs have really embraced this concept. They know that UCLA, their education, and their networking played important roles in getting them to this early stage and will be important in them moving on,”Silton says.

Donations to the UCLA Venture Capital Fund are tax deductible, and most importantly, the deduction is computed on the appreciated value of the stock when the shares are actually transferred to the school, Silton explains. If the shares were transferred from the start, the companies might feel they were losing out on the tax benefit from what eventually became a much larger donation than the original sum.

Success story

One success story from the fund is SmartestK12, an educational start-up developed by UCLA students that focuses on transforming K-12 classroom interactions by utilizing technology to improve student achievements. In November 2013, the UCLA Venture Capital Fund announced that the fund was investing in SmartestK12 and named it the “Most Promising UCLA Start-up Company.” CEO Craig Jones said the “the fund members have been great mentors that we will continue to leverage as we accelerate into the commercialization and growth phase of our business.”

“SmartestK12 has been getting mentoring from several of our members, which includes introductions, advice, and coaching on how to start growing the company,” Silton says. “Now that they are members of the fund, they will be in a position to give that advice to others later on, which helps continue this cycle of contributions.”

The administration of the fund is not complex, Silton says. The investing portion of the fund operates like any venture capital fund, and the donations from the start-ups are established with a simple agreement, he says.

“For the start-ups in the early stages of their company development, it is important that they be able to do it as simply as possible,” Silton says. “They’re focused on their company development, which is where we want them focused, and they don’t want to wade through a lot of paperwork.”

Contact Silton at 310-794-9045 or siltonnews@gmail.com.


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