Financial Post: Startups see UPSIDE to option donation - Upside Foundation of Canada

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Financial Post: Startups see UPSIDE to option donation
January 14, 2013

From The Financial Post
MARY TERESA BITTI | Jan 14, 2013 8:31 AM ET

This generation of entrepreneurs wants to give back. And this model gets them in their earliest stages without asking for anything they can’t afford. It’s a model that seems to be right for the time.
Software developer and entrepreneur Ben Zifkin started his first tech business in 2004 — a system integration company called Axsium Group. Mr. Zifkin built it to more than 100 people before selling it in 2008 to Knightsbridge.
It’s a classic tech startup trajectory he has embarked on again with his latest venture, Hubba, a data-sharing platform that allows companies to provide consumers with rich product information as they are making their decision to buy. Excited about the possibilities for the business, he is already thinking about how to use future success to give back.
Mr. Zifkin is among the first of eight tech startups that have pledged to donate stock options in their business convertible at exit into a small portion of their equity to the Upside Foundation of Canada, a startup charity launched in November 2012 that is in the process of securing registered charity status with the Canada Revenue Agency. It’s an innovative business model and one co-founders Mark Skapinker, Rob Antoniades and Janie Goldstein hope will introduce corporate social responsibility to early-stage tech businesses across Canada.
Similar programs have already taken hold in Israel and the United States, for example, but the model is new to Canada. “During the first tech boom in 1999 there was talk of setting up similar organizations, but none took off in a meaningful way,” Mr. Skapinker said. “There are smaller organizations that have allowed people to donate equity, but no one has tackled it at a national level.”
The time is right, said Mr. Antoniades. “This generation of entrepreneurs wants to give back. And this model gets them in their earliest stages without asking for anything they can’t afford. It’s a model that seems to be right for the time.”
Two years ago, Mr. Skapinker, a Toronto-based tech entrepreneur turned venture capitalist, began thinking about the role he could play in encouraging some of his portfolio companies to give back. On a trip to Israel he learned about Tmura.
“I’d been looking at the number of different ways people in other countries were running and operating funds. I learned Tmura has been successful in building an entire community of startups donating between 0.5% and 1% of their equity in the form of options to Tmura, which has distributed millions to charity. I did some research and connected with another organization, the Entrepreneurs Foundation in Silicon Valley, which, as it turns out, was scouting out opportunities in Canada.”
At the same time, the Entrepreneurs Foundation had contacted Mr. Antoniades to get his insights on introducing its program to Toronto and it was through the Silicon Valley organization that he met Mr. Skapinker, who was also tapped for the advisory board.
“Mark and I got to talking and realized the right solution for Canada was not to import the Entrepreneurs Foundation but to create our own version. Our goal was to tie the giving back to the community we are building and that is relevant to tech entrepreneurs. We are focused on three causes: poverty, education and technology. We will conduct due diligence on charities registered with the CRA that help address those causes and we will work with the entrepreneur to help them weight the different organizations we sponsor.”
At some point, there will be an exit, an IPO or sale, and the Upside Foundation fits with that model, Mr. Skapinker said. “Having been an entrepreneur and gone through that process a number of times I know you are cash poor but equity rich at the beginning. Giving away 1% when the company is worth nothing is painless. Sharing the upside is what motivates these entrepreneurs to work so hard and capitalizes on the momentum and community of the start up culture and the belief that significant value can be created. If Google had given 1% of the company before its IPO, it would have been terrific.”
Donating equity at the time of a transaction is not uncommon. Donating options, which have to be held until an IPO or sale, is. “While startups can go directly to charities, it would be fairly onerous on the charity to take and hold an option,” Mr. Antoniades said.
“Entrepreneurs like friction-free business models and this is no different. They grant us the option and when they have that huge exit, we exercise the option and the proceeds are distributed to the charities we support with the input of the company and entrepreneur. The charity receives the full amount of the donation.”
Mr. Zifkin said philanthropy has always been a part of his life and he has worked on fundraising campaigns in support of Alzheimer’s research and pediatric oncology to support families dealing with cancer. “I knew I wanted to continue to give back and when I launched Hubba, and the Upside Foundation made sense. From a startup perspective, there is no cash outlay so it is easy from a cash flow perspective. I appreciate it because it’s less donating to charity and more making an investment in the community. A healthy community benefits everyone. In the meantime, I am part of a like-minded community of entrepreneurs. The plan is to create networking events where we can connect.”
He also appreciates it is a VC-led initiative and the founders have focused on getting the support of all aspects of the startup eco system: venture capitalists, incubators, accelerators, angel investors, lawyers, accountants. “The aim is that by engaging the VC community, they will tell the companies in their portfolio and if a company comes to them they will know what we are about and support the entrepreneurs decision to be part of the Upside Foundation,” Mr. Skapinker said.
“That sends a huge message that funders see giving back as important,” Mr. Zifkin said. “It’s not a message we’re used to and hearing it now as we are growing our businesses helps build that commitment to the community early.”

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