VC funding fills entrepreneurial resource gap

VC funding fills entrepreneurial resource gap

How to fund university-born technologies and startups through cashless giving
Michael Silton is the executive director of the UCLA Venture Capital Fund.

Over the last 30 years, the number of college courses teaching entrepreneurship has increased by 95 percent, reflecting an intense demand by U.S. college students.

However, in a survey by Entrepreneur magazine, half of students polled reported that lack of resources was their main reason for not creating startups. And the Young Entrepreneur Council found that nearly three-fourths of college students claim they have no access to on-campus entrepreneurial resources.

That’s a gap the UCLA Venture Capital Fund hopes to fill for our entrepreneurial community. Our members mentor faculty and students, nurturing the growth of UCLA companies, giving back to the university and its community, and connecting entrepreneurs and venture capitalists who are interested in UCLA. We are creating this entrepreneurial environment largely through “cashless giving.”

Illiquid shares

Cashless giving allows investors and entrepreneurs to donate illiquid shares of a company—shares donated before a company has a “liquidity” event—to the startups the UCLA community is producing.

Members pledge stock worth at least $10,000 at the time of donation; when that stock becomes liquid, the donating member pays the fund with proceeds.

For example, if we were to receive 10,000 shares of a company priced at $1 and these shares were to then increase to $10 through a later round of financing or a liquidity event (sale or IPO), our investment would be worth $100,000.

The fund benefitted greatly with the recent IPO of Twitter because shares of the social media site were donated by an early investor and are now worth 20 times more than the original gift.

Since the cashless donation model debuted in 2007, the sizes of the donations have ranged from $10,000 to $100,000. DogVacay and Cloudera are two examples of shares to join the fund in 2013.

Larger tax benefit

Eighty percent of all new members are entrepreneurs, and cashless giving represents 97 percent of all donations to the fund. A huge benefit for our members is that the cashless donations are tax deductible and computed on the appreciated value of the stock when the share is actually transferred to the school.

By computing the shares when they are actually transferred, the donating company realizes a much larger tax benefit than it would have if the shares had been computed when the donation first occurred.

This model can be adopted by other colleges and universities with the following steps:

  • Create a supportive environment at the top. In our case, UCLA Chancellor Gene Block made entrepreneurship one of his top campuswide priorities.
  • Identify a group of venture capitalists and entrepreneurs to lead the endeavor. It takes work and endurance to create a sustainable program. A core group of dedicated volunteers supporting each other is an essential ingredient. Volunteers, especially when they are recognized members of the business community, are key to not only inspire members to participate fully in the group but to also reassure contributors that their financial resources are for the benefit of their campus and entrepreneurship.
  • Gain alumni entrepreneurial involvement. Cashless giving is simply the innovative mechanism that lets entrepreneurs and other friends and families of your college contribute early in their careers before they really have the resources to do so.
  • Keep the administration of the fund you create simple. The UCLA VC Fund’s investing portion operates like any venture capital fund. The donations we make to startups are made with a simple agreement, free of unnecessary paperwork. A startup’s focus should be on building and developing their company.
  • Publicize to potential investors that cashless donations are tax deductible, and, most importantly, that the deduction is computed on the appreciated value of the stock when the shares are actually transferred to the school.

Michael Silton is the executive director of the UCLA Venture Capital Fund. He is also a successful Silicon Valley entrepreneur having created, developed and sold several thriving technology companies.


Advertisement