Decision Vision Episode 145:  Should I Start a Foundation? – An Interview with Chris Yadon, The Younique Foundation

Intro: [00:00:02] Welcome to Decision Vision, a podcast series focusing on critical business decisions. Brought to you by Brady Ware & Company. Brady Ware is a regional full-service accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.

Mike Blake: [00:00:21] Welcome to Decision Vision, a podcast giving you the listener clear vision to make great decisions. In each episode, we discuss the process of decision making on a different topic from the business owners or executives perspective. We aren’t necessarily telling you what to do, but we can put you in a position to make an informed decision on your own and understand when you might need help along the way.

Mike Blake: [00:00:43] My name is Mike Blake, and I’m your host for today’s program. I’m a director at Brady Ware & Company, a full-service accounting firm based in Dayton, Ohio, with offices in Dayton; Columbus, Ohio; Richmond, Indiana; and Alpharetta, Georgia. My practice specializes in providing fact based strategic and risk management advice to clients that are buying, selling or growing the value of companies and intellectual property. Brady Ware is sponsoring this podcast, which is being recorded in Atlanta for social distancing protocols.

Mike Blake: [00:01:12] If you would like to engage with me on social media with my Chart of the Day and other content, I’m on LinkedIn as myself and @unblakeable on Facebook, Twitter, Clubhouse, and Instagram. I also recently launched a new LinkedIn group called A Group That Doesn’t Suck, so please join that as well if you would like to engage. If you like this podcast, please subscribe on your favorite podcast aggregator and please consider leaving a review of the podcast as well.

Mike Blake: [00:01:41] Today’s topic is, Should I start a foundation? According to statistics published by Foundation Stats, in 2015 there are 86,000 foundations representing $712 billion dollars in assets. They fund philanthropic projects, scientific research, on real estate, and even make business investments.

Chris Yadon: [00:02:04] And, we haven’t covered foundations at all on this program. And, as we get to episode 140, whatever it is, I think it’s high time we do so because after you hear those statistics, you come to recognize that they represent – foundations represent a significant economic force for good, for change, for social development in our society.

Chris Yadon: [00:02:30] And, I’m confident at least by sheer luck there are at least some individuals that have the wherewithal to either start foundations themselves or significantly fund foundations that are within the sound of the voice of this podcast. And, I think many of us aspire one day to maybe be achieving a level of wealth and success where we can start a foundation. And, we may very well discover during the course of today’s conversation that it isn’t – that you don’t necessarily have to be a gazillionaire to start a foundation, and I think we’re going to learn that today.

Mike Blake: [00:03:11] Authorized by the IRS as a charitable foundation in 2015, The Younique Foundation inspires hope in women who are sexually abused as children or adolescents by providing healing services through retreats, support groups and online resources. They educate and empower parents and caregivers to protect children from sexual abuse through community and online resources. They advocate for open discussions about sexual abuse through community dialogue and social awareness.

Mike Blake: [00:03:38] And, joining us today to talk about Younique, as well as to talk about foundation creation in general, is Chris Yadon, who joined The Younique Foundation as executive director in 2015. Chris is responsible for the executive leadership, effective stewardship of financial resources, planning, fundraising and reporting at The Younique foundation. He has previously held leadership positions in the startup technology and nonprofit industries. He brings a valuable skill set to the organization and is deeply committed to addressing the epidemic of child sexual abuse.

Mike Blake: [00:04:12] Chris plays an important role as a spokesperson for The Younique Foundation. He is a sought after local speaker and has also been invited to present nationally and internationally. And, thanks to being here, you can put podcasts on his on his checklist.

Mike Blake: [00:04:27] His expertise centers on heightening awareness to the epidemic of child sexual abuse, as well as educating the public on best practices for prevention and the healing services available to survivors. Chris has been featured across several media platforms where he is often requested to contribute as an industry thought leader and expert.

Mike Blake: [00:04:45] Chris considers his family as his greatest accomplishment. He is the grateful father of six children, three boys and three girls. He and his wife, Kristy, have been married for 22 years.

Chris Yadon: [00:04:56] Well done, Chris Yadon. Welcome to the program.

Chris Yadon: [00:04:59] It’s so good to be here with you, Mike.

Mike Blake: [00:05:02] So, Chris, let’s start off with a very basic question, but I think it’s important because I’m not sure everybody knows the answer to this question that’s listening to this podcast. I’m not sure that I know the answer to the question correctly if I’m being perfectly honest. And, that is what is a foundation? When we hear the word foundation, what should we be thinking of?

Chris Yadon: [00:05:22] Yeah. That’s an interesting question because foundation can mean many things. There are public charities that use the word foundation. There are private foundations that use the word foundation. There are corporate foundations that use the word foundation. So, the word foundation in and of itself doesn’t necessarily designate a certain type of entity. For example, we’re called The Younique foundation. We’re actually a public charity. I would say, though, it’s most commonly used to describe a certain type of entity, which is a private foundation.

Mike Blake: [00:06:02] Now, that leads nicely to the next question, which is, as I was researching for this podcast, it seems like there are actually different types of structures of foundations. So, you mentioned that perhaps most of us think of a of a private foundation. But if you’re familiar with them, what are the other types of foundations that fit into this category?

Chris Yadon: [00:06:23] Yeah. So, you’ll – the two biggest type that you’ll see are the private foundations that are often associated with the family and the family’s wealth. So, The Bill and Melinda Gates Foundation is an example.

Chris Yadon: [00:06:38] But you’ll also see foundation often used with corporate foundations. So, Chick-Fil-A would have a corporate foundation.

Chris Yadon: [00:06:47] So, those are the two most common type of private foundations. But, again, kind of like I mentioned at the beginning, even some public charities like ours use the term foundation occasionally in their names.

Mike Blake: [00:07:03] And, interestingly, you know, for good or ill, and I’m sure I certainly don’t want to open a debate on this issue, but, you know, foundations can also be used as or have been used in the past as frankly tax reduction structures. And, again, I’m not going to debate as to whether or not that’s good or bad with the policy should be.

Mike Blake: [00:07:26] But interestingly enough, I learned that when Henry Ford passed away that he gave most of the shares of the Ford Motor Company to a foundation, a family foundation. Or, actually, yes, before you passed away. And then, ultimately one of the Ford family maintained control of that foundation to the board. But then the chairman resigned, I think it was Henry Ford Jr. resigned after some relatively minor dispute with the board but he sort of got as mad as hell and he wouldn’t take it anymore. That sort of thing. And then, in doing so, lost control of the Ford family fortune. They are only worth a fraction of what they’re worth actually have been say in the 1950s until he did that. But, you know, and Henry Ford was known for among other things. He just saw avoiding taxes as a a patriotic duty. It went beyond just financial. It was – he just thought that the government had no right to take his money into discussion. That’s why he created the foundation.

Mike Blake: [00:08:32] But, you know, back in the day, it wasn’t that easy to create a foundation that would effectively be a tax avoidance scheme. And, the second of that loophole was passed through by Ford Jr. The Ford family lost that a lot of that wealth. Now, they’re still holding on to the Detroit Lions. I’m not sure if that’s a good or bad. We’ll let other people decide. Maybe, the second prize is holding on to two Detroit Lions, but kind of interesting how a foundation and the governance of a foundation actually altered the course of the Ford family fortune.

Chris Yadon: [00:09:07] Yeah, you know, and it brings up a really important thing for us to acknowledge around private foundations is they almost always have a dual purpose. Most foundations genuinely want to do good, but it’s not just about doing good. It’s about doing good business as well and protecting their assets and ensuring that those assets can live in some level of perpetuity.

Chris Yadon: [00:09:32] And so, yes, there are tax advantages. They’re highly regulated because of that. As opposed to a public charity, public charities are more scrutinized by the public because of the type of structure that they are, whereas a private foundation has more regulatory requirements and more scrutiny from governing bodies.

Chris Yadon: [00:09:56] So, they both have their purpose. And, when you when you look at a private foundation, anybody should look at that private foundation and understand that they are dual purpose. They’re protecting assets for the family, dealing with the tax implications of those assets while also doing good by giving to public charities like ours.

Mike Blake: [00:10:19] And, you know, if my memory serves you are, if not one of the founders, maybe the founder of The Younique foundation, correct?

Chris Yadon: [00:10:29] Well, I was the first employee. I’ll give the founder credit where it belongs and that’s to our two founding board members that infused a significant amount of wealth into what we did. But me, along with those two, started on day one and and we fundamentally were grappling with some of these decisions on day one. Should we be a corporate foundation? Should we be a private foundation? Should we be a public charity? Ultimately, we landed on public charity for very clear and specific reasons, but all things were on the table when we first considered it.

Mike Blake: [00:11:03] So, I don’t want to get too much in your business and ask unfair questions, but to the extent that you’re able to disclose it, can you talk a little bit about the calculus of reaching that decision on the structure that you have and what those considerations were and why it was that ultimately led you to your current structure?

Chris Yadon: [00:11:24] Yeah. So, a couple of things. First of all, we knew we wanted to provide direct services to those people that we wanted to serve. Typically, private foundations, most of them do not provide direct services. There’s a particular type of private foundation that does, but most don’t. And so, that that was the first point. But even with that point, we still had an option to stay a private foundation.

Chris Yadon: [00:11:53] But for us, we knew the topic of sexual abuse was so broad and had penetrated so deeply into our country, into our communities and even internationally worldwide that we needed broad-based support from the public. And, you generally don’t get broad-based public support as a private foundation. It’s almost always funded by a small handful of individuals, whereas, we needed combined funding both from high networth individuals, including our founders, as well as the general public pitching in to help address our issue that we wanted to address.

Mike Blake: [00:12:33] Oh, that’s interesting. So, if I can read back to you what I think I heard, foundations tend to be kind of, if you will, kind of more closed entities, like a more closely held entity, perhaps within a single family. They don’t need outside support. They don’t want outside support. They don’t want outside influence, probably. Whereas, a public charity recognizes that it needs resources that can leverage beyond what the founders are able to provide on their own.

Chris Yadon: [00:13:00] That’s correct. You just nailed it. And, those those private foundations hold things closely because most of the money they give away is generated by investment returns from the assets that they’ve placed into the foundation. So, they want to manage those closely as a family or a small group, rather than having the public weigh in on how those should be managed or dealt with.

Mike Blake: [00:13:28] And, those assets might become more commonly thought of as an endowment, I guess.

Chris Yadon: [00:13:33] Yeah. There’s many different vehicles they use, but endowments are certainly one.

Mike Blake: [00:13:39] Okay. So, when you guys started Younique, what made you feel like you had to start your own entity versus throwing your considerable resource and influence behind an existing entity? Because I know you’re not the only foundation that addresses this problem. Don’t get me wrong. I’m glad you’re doing it, and the more the merrier as far as I’m concerned. But clearly, at some point, somebody asked a question why do we have to do this ourselves and have our own infrastructure? Why don’t we find a really good, if there is one, a really good entity and write them, you know, support them financially?

Chris Yadon: [00:14:16] Yeah. It’s a great question, and you might find me speaking out of both sides of my mouth here for a minute. I am a huge advocate of individuals that have wealth of finding existing causes rather than starting their own. There’s way too many nonprofits that exist already and many of those nonprofits are really struggling. But the few that are actually having impact, they always need more resource. So, I’d always recommend to a person of wealth to find a high quality nonprofit that can prove that they’re having impact and shovel their resources into those causes that they feel like they can get behind.

Chris Yadon: [00:15:02] But we didn’t do that. And, here’s the simple reason. The topic of sexual abuse was being addressed by many other nonprofits. But there is a very specific segment of sexual abuse survivors that was not being addressed effectively, and that was adult survivors who were sexually abused as children that were dealing with posttraumatic stress. They don’t really have resources outside of going to an individual therapist.

Chris Yadon: [00:15:28] There’s a lot of non-profits and resources in communities that help children who are being abused. There’s a lot of resources that help women who are currently going through domestic violence, including sexual violence. But there were very few resources for adult women who are sexually abused as children. They didn’t have options, and we felt strongly because of the size of that demographic there need to be a champion in that area. And, we decided we needed to be the one to lead that effort.

Mike Blake: [00:16:00] So, in that regard, it sounds very much like, very much like a business decision. Should I start a business or should I invest in other businesses that already exist?

Chris Yadon: [00:16:12] Yeah, identical thinking. I mean, the nuances are different, but the strategic thinking behind it is identical. I’ve spent much of my career in for profit startups, so I know both sides. I know both the nonprofit and for profit sides when it comes to early stage investing. And, it’s remarkably similar.

Mike Blake: [00:16:36] And, you know, I wonder if that’s why there seemed to be a lot of technology, entrepreneurs that are drawn to foundations, right, and affect it. It’s a startup, but a startup with a different ultimate bottom line.

Chris Yadon: [00:16:50] Yeah. Absolutely. You know, if you go to Maslow’s Hierarchy of Needs, you know, the one that was added after the fact was really based on this principle of when everything in my world has been met and I’ve reached self-actualization, what happens? Well, I turn around and give back.

Chris Yadon: [00:17:15] And so, for people that are have high networth, have been successful in their careers, where their needs have been met up and down, it’s no wonder they have a desire to give back and they’re intelligent people and they often feel like they can do it better than the next person. And, in some cases that’s true. And, in some cases, it would be better for them to jump in as an investor in these causes that are already doing good.

Mike Blake: [00:17:44] So, how does one – let’s say somebody is now checking off the boxes and they think they found an unmet niche that they need to start something as opposed to backing something that exists. At a high level, can you describe the process of starting a foundation?

Chris Yadon: [00:18:02] Yeah. Step one, and I would strongly discourage anybody from skipping this step, secure top-notch legal counsel and top-notch accounting counsel. Those are the two critical pieces. And, you specifically want to look for practices that specialize in nonprofit work. If you have those and the start of a board, meaning the core of that board of directors that’s going to start this, you have what you need to start having the strategic discussions of what’s next. But I wouldn’t even take a single step without engaging that legal and financial counsel.

Mike Blake: [00:18:49] Now, you make an emphasis on top-notch. Can I infer that there’s a story that you’re aware of where somebody didn’t use top-notch counsel and they got burned by it?

Chris Yadon: [00:19:01] Well, everybody has a friend or an uncle or a college roommate that, you know, is an accountant or an attorney. But their practice may not be in nonprofit.

Mike Blake: [00:19:14] Yeah.

Chris Yadon: [00:19:14] And, they know enough and can do enough to get you registered. But they’re not going to be there to warn you of the problems that are coming if you don’t set up your entity right and start your governance on day one in the right way. And, I’ve seen many nonprofits get into all sorts of trouble when they rely on their uncle that’s a tax accountant for mom and pop stores on main street who has zero experience in nonprofit and they are their tax advice for their nonprofit. It just doesn’t work. It may work if the nonprofit stays small with little to no impact but the moment they start growing, they’ll be in a mess if they don’t do it right on day one.

Mike Blake: [00:20:06] Especially since, and correct me if I’m wrong, I think registering the foundation is the easy part. I mean, that’s the part where almost anybody can kind of look up the rules. And, that’s probably what that tax accountant did was look at the rules and then just set it up, right? It’s about setting up the right way where you don’t create liability for the foundation founders, board of directors and that sort of thing, right?

Chris Yadon: [00:20:30] Yeah. You got it. Yeah. It’s pretty simple to get it through and and approved by the IRS. Even nonprofessionals do it often and people think that that’s enough. And, frankly, it’s not pretty to them to spend money on legal or spend money on accounting, but I can’t emphasize enough how critical it is. They won’t feel the pain of it till two or three, if they do it wrong, but they will feel the pain of it if they get it wrong.

Mike Blake: [00:21:01] So, what are some of those risks when one starts a foundation, and certainly this is something you’ve you’ve given a lot of thought to, I’m sure, and probably is on your mind daily. What are the risks associated with starting a foundation?

Chris Yadon: [00:21:15] Yeah. I’ll just give you one example. Charitable solicitation laws. Every state, there’s variances and differences in how you solicit funds. And, you know, for a small nonprofit that’s invisible, there’s probably not going to be too many regulatory bodies that care. But like I said, if someone’s aspirational in wanting to have a nonprofit that actually has significant impact on growth and influence, those regulatory bodies are going to watch and keep an eye on them.

Chris Yadon: [00:21:51] So, if I don’t have good counsel to help me know that I’ve got to register in in these 50 states if I’m going to solicit funds and to know how to register, I can get in all sorts of hot water with the way I solicit funds from donors, you know, then I’ve spent money that I’m getting, you know getting scrutiny on, and I don’t have recourse and will cause me all sorts of problems. So, there’s one simple example of what I’m talking about.

Mike Blake: [00:22:27] And, donors to foundations really don’t like their money being spent on lawyers to clean up compliance, right?

Chris Yadon: [00:22:35] That’s right.

Mike Blake: [00:22:36] That’s not what they’re in it for.

Chris Yadon: [00:22:37] They want their money to be spent effectively on programs, and they want a high percentage of it to be focused on programs.

Mike Blake: [00:22:46] So, we’ve touched a little bit on how you fund a foundation, so I’d like to switch to the other side now in terms of how foundations grant or give money. Are there any restrictions on the kinds of activities that a foundation can fund or entities that a foundation can give money to?

Chris Yadon: [00:23:06] Yeah. I mean, generally speaking, private foundations are going to give to 501(c)(3) public charities. That’s going to be the most common. They typically have a requirement to give 5% of whatever their net or their egg is that they’re investing.

Chris Yadon: [00:23:28] So, I have 100 million, you know, I’m going to be required to give 5 million a year. Now, obviously, that 100 million is, we hope growing and grows at a pace that not only meets that 5 million but exceeds it so that the net gets bigger over time. But there is a requirement to give a certain percentage. There are more detailed requirements and how it’s given and documented, but those those are the highest level basics that govern giving.

Mike Blake: [00:24:07] That’s interesting. I did not know about the 5% rule. And so, that has interesting implications for investment policy, right? Generally speaking, I mean, you can’t get in anywhere – you can’t sniff 5% on risk-free assets like you could in the good old days, right? So, you’ve got to be – you’ve got to apply some intellectual horsepower on how are you going to have a portfolio that generates at least 5% a year.

Chris Yadon: [00:24:35] Yeah. For most private foundations, they have an investment practice. It doesn’t necessarily have to be a large one, but obviously depending on the size of the funds that they have, it can dictate how involved that strategy is. But no, it’s not – they’re not just sitting on their hands when it comes to their investment strategy.

Mike Blake: [00:24:59] And, is that 5% measured on a year-to-year basis? Or is there a provision where say, if you have a bad year and you’re trying to preserve capital that you can catch up the next year? How does that work?

Chris Yadon: [00:25:11] Yeah. You’re getting into an area where I’m not as solid in my expertise. As a public charity, we interact with private foundations heavily, so I know a lot of the regulatory areas around them. But that particular question, I don’t want to mislead somebody on because I’m not sure I know the answer to that one.

Mike Blake: [00:25:31] All right. Fair enough. So, our audience can google it. I’m sure it’s out there.

Mike Blake: [00:25:38] So, are there best practices in terms of governance for a foundation to maximize the likelihood that it will be successful?

Chris Yadon: [00:25:52] Yeah, so.

Mike Blake: [00:25:52] What are they?

Chris Yadon: [00:25:53] Yeah. Specific to the giving portion of it, the most important thing that is emerging and growing right now is the role of private foundations in helping charities effectively partner with other community organizations. So, you’re seeing a lot more in private foundations, where they’re funding grants that encourage partnerships across intersectional areas of nonprofits.

Chris Yadon: [00:26:26] I’ll give you a great example of this. We work closely with a group called Stand Together. They work to eradicate poverty and they do so by enlarging and strengthening public charities that they work with. So, they actually apply good business practices in training as well as their giving strategy to encourage these nonprofits to scale and grow effectively, as well as partner with other charities that are working to eradicate poverty. So, you’re seeing – rather than them just kind of sit back and hand out checks, you’re seeing them get more involved strategically with their giving and using their giving to influence public charity strategy. And, I would consider that an emerging best practice.

Chris Yadon: [00:27:15] A couple others at the highest level, obviously good scrutiny and reporting from the charity itself is critical for foundations to ensure that their money is being used effectively. Being clear about what type or what stage a charity is when they invest. If it’s early stage, they know they’re investing and may not get a quote-unquote return on that investment because they’re investing in early stage to get a charity ready to have impact. But later stage charities, they’re looking for actual tangible numbers on, you know, for every dollar they gave, what type of impact did it actually have on the people that they served. So, you know, good, clear direction on when they give to a charity, what the actual strategic goal of that gift is.

Mike Blake: [00:28:10] Now, I’ve served on a few nonprofit boards and in my time. And, one of the things I’ve noticed as an emerging trend is foundations are looking for charities to become a little bit more self-sustainable that they don’t want to sort of be a constant, for lack of a better term, sort of a welfare check forever. But rather they’d like their money to be this something that cedes a program that somehow can at least offset some of its expenses with organic revenue, if not be self-sustaining entirely. Is that something you’re seeing as well? And, if so, why have foundations kind of moved in that direction?

Chris Yadon: [00:28:53] Yeah. It comes in several different flavors. So, there are certain charities based on the people they serve that can actually start businesses within that charity that then return revenue that allows it to perpetuate itself. That is definitely appealing to private foundations.

Chris Yadon: [00:29:15] Where there are charities that don’t have that opportunity or luxury, there’s still a principle here that charities are looking for and that is what else is that public, or sorry, the private foundations are looking for, and that is what is that charity doing to have recurring or stable revenue. So, the emergence of the $5 monthly donor is a great example of that.

Chris Yadon: [00:29:41] So, a small public charity, a private foundation is going to be interested to know, hey, how much money is coming from, you know, Joe public and how many of those are on a recurring basis? How many supporters do you have out there that are giving to your charity $5 a month? It very much becomes a recurring revenue source. And, private foundations are looking at that and whether those charities are growing that particular revenue stream to ensure that that charity is sustainable beyond just the large checks that private foundations tend to write.

Mike Blake: [00:30:20] Now, at the outset of this conversation, you alluded to the fact that foundations are subject to some oversight, which makes sense. Can you talk a little bit, again at a high level, it’s not fair to ask you to be too detailed and you’re not that kind of expert, I don’t think. But at a high level, what kind of oversight are foundations subject to themselves?

Chris Yadon: [00:30:46] Yeah. So, private foundations are subject to specifically dealings with related parties. That’s the biggest one. So, you know, they’re looking to see, “Hey, is this person using the private foundation basically to funnel money into their business interests?” And, that’s going to cause a private foundation a lot of problems.

Chris Yadon: [00:31:20] So, that’s the biggest one, and nothing else is really even close to it. What I would say, are the other ones that may be not as close but pop up or definitely how much are they giving? Who are they giving to? Just making sure all those boxes checked. But the self-dealing aspect of the oversight is by far the most critical piece of it.

Mike Blake: [00:31:48] Now, is anyone allowed to start a foundation? Could I just decide I’m going to start a foundation or are there certain criteria that one has to meet before one is allowed to start one?

Chris Yadon: [00:31:59] Yeah. I mean, technically, yes, Anybody can can start one. Generally speaking, though, the biggest rule of thumb is that there is a $5 million or more that’s put into that private foundation as a starting point. Obviously, many are much larger than that. But that, you know, as you talk to people that define best practices in the space tend to put around 5 million and give or take a little bit as as that starting point.

Mike Blake: [00:32:32] And, do foundations have owners per se, you know, somebody that can say this is my foundation or this foundation belongs to me or to this entity, to this vehicle, whatever? Is there a concept of ownership in a foundation structure?

Chris Yadon: [00:32:49] Not ownership in the business sense. I mean, definitely governance. And, when you’re looking at a private foundation, that governance is more similar to ownership, though it’s still not technically ownership. When you get to a public charity, it is very far away from ownership. It is governed by a board that has a certain number of board members that represent the public and that board provides that governance or decision-making and there’s no ownership power over it.

Chris Yadon: [00:33:22] So, it depends a little bit whether it’s a charity or a private foundation, but neither of them technically would have owners. And, the further away or the closer you get to a public charity, the further away you get from ownership principles.

Mike Blake: [00:33:37] So, how much flexibility or leeway do foundations have in terms of setting their own governance rules? Do they have a lot of latitude in terms of how they structure it? Or are there fairly rigid rules to which most foundations must adhere?

Chris Yadon: [00:33:56] Yeah. When you talk about the public charity side of it, there are pretty significant rules set by the IRS in the code that govern what we do. You know, in terms of governance around strategy or strategic thinking, there’s a lot of flexibility. But when it comes to finance and legal, you’re going to see a lot more structure and regulation. And, though I’m not as familiar with that in private foundations, I believe it’s substantially similar.

Mike Blake: [00:34:36] Now, you mentioned the distinction between a foundation and a public charity. Are there instances in which a foundation decides it would be better off as a public charity? And, if so, are you aware if there’s a mechanism to convert it as opposed to, say, having to shut down the foundation and start all over again with a brand new public charity?

Chris Yadon: [00:34:57] Yeah. So, the in-between between the two is referred to as a private operating foundation and those are private foundations that actually deliver services. That would be the bridge structure in terms of how to go through that transition. It’s not something I have gone through or even heard of someone go through. Typically, once someone starts their one or the other, you very rarely see any shifting from one to the other. It’s an early stage decision that people tend to stick with.

Mike Blake: [00:35:36] I guess that falls into the category of foundations hiring good legal and accounting counsel.

Chris Yadon: [00:35:43] That’s right.

Mike Blake: [00:35:43] They make sure that they’re making the right decisions so they don’t have to change it down the road.

Chris Yadon: [00:35:47] That’s right.

Chris Yadon: [00:35:48] Although, frankly, I’ve not heard of an operating foundation. So, that’s a useful piece of information because it sounds like technically you actually can sort of have your cake and eat it too. If you want to be both on the funding side and the operational side, there is a vehicle available with which to do that.

Chris Yadon: [00:36:06] Yeah. What you give up is public charities have less government scrutiny and regulation because the government relies on the public to provide that. So, your exchange there is you get some of the control you want of a private foundation but what you give up is you have someone looking over your shoulder more so than you would as a public charity.

Mike Blake: [00:36:33] Now, what about an unhappy scenario in which a foundation is not, for whatever reason not working out and the founders, I guess I’m not sure what the term of art would be, but I guess the people in charge decide that it’s time to just dissolve it or close it or whatever. Again, this certainly reflects my ignorance. I don’t even know what the term of art is. But, you know, is there a way to, in effect, terminate a foundation?

Chris Yadon: [00:37:00] There is, and it’s much more complex than I could effectively describe. But what I – the general principle is the funds of that entity are distributed into like entities or entities that are public charities. So, that’s the process that it would go through as it dissolves is – I don’t know of any process, and there may be an expert that knows more than me on this, where those assets end up in an individual’s hands. I think that’s counter to everything about the donation process and the donation structure would be ripe for abuse. And so, those funds will then get distributed to other private foundations or public charities if there was a dissolution.

Mike Blake: [00:37:58] Yeah. And, I would have to imagine if there were a way, if there were some legal mechanism by which funds might be returned to the initial guarantors that there would probably be significant tax penalties, as well as very unpleasant conversations with the IRS itself. Pleasant, expensive and – sorry, unpleasant and expensive and protracted conversations with the IRS.

Chris Yadon: [00:38:25] No doubt about it.

Mike Blake: [00:38:29] Can a foundation be transferred, and I guess this kind of gets into what you’re talking about a little bit, but I want to be clear. As an alternative to terminating a foundation, could you simply find another foundation, for example, that wants to take on that mission, take over the governance, et cetera? Is that an avenue that’s available?

Chris Yadon: [00:38:54] Yeah. Definitely. On the public charity side, it is. I wouldn’t say mergers are super common, but they are common enough that they happen, you know, happen on a regular basis. On the private foundation, I’m not sure if that’s a merger process or how that dissolution would occur. That’s an area I don’t know as much about.

Mike Blake: [00:39:19] Okay. We’re talking with Chris Yadon of The Younique Foundation and the topic is, should I start a foundation? A lot is made about how much principles of foundations and charities are paid, right? That’s a common, I guess, an easy target in some respects for the press. You know, CEO of Charity X makes Y number of dollars. Are there restrictions on how much foundations can pay, can compensate their employees, their board, et cetera?

Chris Yadon: [00:39:54] There are, but it’s very loose and is subject to a lot of loopholes. Here’s what I would take, you know, as a takeaway for people that hear things like that. A well-run nonprofit, whether it’s a private foundation or charity, is a business. And, it has to be run like a business. And, you’re competing, whoever you’re going to have as your executive, you’re competing with every other business that’s out there. Because running a charity is very similar, if it’s done right, to running any other business. Ninety-five percent of it is the same.

Chris Yadon: [00:40:44] So, charities, if they want top-notch leadership, they have to pay, not market rate, but they can’t be a tenth of a market. So, if you have an extremely large charity, that’s a multibillion-dollar charity, if they want the type of person that can run that charity, it’s the same type of person that can run a multibillion-dollar corporation and you’re not going to get that person for $100,000.

Mike Blake: [00:41:15] Right.

Chris Yadon: [00:41:15] You’re just not. And so, sometimes there’s an education that needs to happen of the public of what’s acceptable and that the market does govern it. And, you know, what donors should be concerned about is when it’s excessive. You know, when you see a brand new startup paying a million dollar salary to a CEO, something else is going on there.

Mike Blake: [00:41:43] Yeah, you know, and I think that public education is a really good point because, again, you’re the expert, you actually run and have been involved in these organizations much more than I have. But my own experience is that either a foundation or a charitable organization for that matter of any level of competence is run very much like a business. And, frankly, I think they often have to do more with less.

Mike Blake: [00:42:12] But there’s a notion out there that I’m not sure where it came with, but there’s this assumption that that if you work for a nonprofit, then they sort of have their own romper room and everybody sort of sits on cushy, bouncy chairs and everything else, and they have six-hour workdays and 28-hour work weeks and so forth. But, you know, most charities that I’m aware of, certainly anyone with which I’ve been associated, they work as hard and are under as much stress and strain as any startup and maybe more because the revenue models are so much more restricted.

Mike Blake: [00:42:47] It’s easier – it’s a lot easier to raise money when your goal is to make profit than to raise money when your goal is not to make profit. And, I guess that’s just a long winded way of agreeing with you.

Mike Blake: [00:42:57] But again, having served as a board member, this image of executive directors and board members just sort of taking money in and then living off of their largesse. You know, that’s very much the exception rather than the rule.

Chris Yadon: [00:43:15] Yeah. You’re spot on. And, I couldn’t have said it any better.

Mike Blake: [00:43:22] Chris, we’re running out of time, and I want to let you get back to kind of the rest of your day. But I do have two more questions I want to get to if we can. And, one is as a foundation, are there restrictions on funding sources?

Mike Blake: [00:43:38] For example, let’s say there’s a foreign funding source and you’re not entirely familiar with it, but they want to write you a $50 million check. As as a foundation manager or foundation board, do you have any obligation to kind of verify what the nature of that funding is, where that money came from and so forth, to make sure it’s not from a criminal source or a foreign terrorist agency or something like that or some form of money laundering, for example?

Chris Yadon: [00:44:08] Yeah. Great question. So,the governance here is more governed by ethics, business ethics. So, is there – can I accept a $50 million gift from an anonymous source that I’ve never met? The technical answer is yes. But I do have a responsibility, an ethical responsibility to scrutinize where my funding has come from, just like you would any business partnership with an investor. You know, when someone invests with you, they become part of your family, whether that’s a for profit or a nonprofit. And, you want to make sure that your family is ethical and healthy and helpful. So, yes, there is an ethical responsibility.

Chris Yadon: [00:45:00] Depending on the type of gift it is, there are some regulations that govern giving. For example, as a public charity, if someone gives you more than 2% two of your five-year operating expenses, that only up to 2% can be counted as a public gift and the other goes into a different calculation that you have to keep balanced as a public charity. So, I use that as a as a quick example. It’s referred to as the one-third test, to give you a sense of what types of regulations there are. So, balance and where funds come in is part of regulation.

Chris Yadon: [00:45:47] But in terms of who you do business with, it’s important that any charity, just like any business, scrutinize their partners from an ethical perspective.

Mike Blake: [00:45:58] Right. Just as we have a client acceptance process in our accounting firm, it’s probably a good idea to have a funding acceptance process of some kind within. Just because if nothing else, I mean, even if you put ethics aside for a second, even though I wouldn’t advise that, if you accept money from someplace and then it turns out to come from a very bad source, that can be a foundation-ending event.

Chris Yadon: [00:46:27] Yes. And, you know, the fact that you brought up a process is perfect. We have two, we have our grant making process where we do that scrutiny on any grants we receive and then we have a partnership process for any significant partnerships that we ask and answer certain types of ethics questions.

Mike Blake: [00:46:49] Chris, this has been a neat conversation. Again, I want to be respectful of your time and you’ve been so generous with your time today. If there are topics that we didn’t cover in as much depth as one of our listeners would have liked or other questions I didn’t think of to ask you but they would have wished I’d asked, can they contact you to extend this conversation or expand the conversation? And, if so, what’s the best way to do so?

Chris Yadon: [00:47:12] Sure. I’d be happy to visit with them. Best way to get a hold of me is through my email. I’m imagining you put them in the show notes, but it’s C Yadon spelled Y-A as an apple -D-O-N, @youniquefoundation.org.

Mike Blake: [00:47:30] And that’s Y-O-U-N-I-Q-U-E.

Chris Yadon: [00:47:35] Correct.

Mike Blake: [00:47:35] That’s going to wrap it up for today’s program, and I’d like to thank Chris Yadon so much for sharing his expertise with us.

Mike Blake: [00:47:41] We’ll be exploring a new topic each week, so please tune in so that when you’re faced with your next business decision, you have clear vision when making it. If you enjoy these podcasts, please consider leaving a review with your favorite podcast aggregator. It helps people find us that we can help them. If you’d like to engage with me on social media with my Chart of the Day and other content, I’m on LinkedIn as myself and @unblackeable on Facebook, Twitter, Clubhouse, and Instagram. Also, check out my new LinkedIn group called A Group That Doesn’t Suck. Once again, this is Mike Blake. Our sponsor is Brady Ware & Company. And, this has been the Decision Vision podcast.