Equitybee is partnering with UI Charitable, a Donor-Advised Fund sponsor built for the way startup employees and founders actually hold wealth. The two companies solve different ends of the same problem. Equitybee helps you unlock the value of startup equity. UI Charitable helps you give from illiquid and private assets. This post is about the second one, and why it matters most in the year your equity pays off.
The Venture Capital paradigm of “hitting a few winners and many misses” is wrong. Top-quartile US Venture Capital firms have outperformed the NASDAQ by ~2x in IRR since 2007.
The traditional Venture Capital investment paradigm relies on The Power Law. It assumes a handful of winners generate the bulk of the returns. That paradigm, coupled with the operational friction associated with sourcing, evaluating, and managing private-market deals, incentivizes VCs to build more concentrated portfolios.
Venture capital is hard. Unlike in the public markets, where investors can pick any company to invest in whenever they want, and all the data is available. In the private market VCs need to:
Building and managing a venture portfolio is extremely time consuming, which in turn leads VCs to create highly concentrated portfolios. The Power Law paradigm is a result of that reality.
However, the data is clear: companies are staying private longer, averaging ~14 years from inception to IPO vs. ~4 years during the early 2000s, while generating the majority of their appreciation in share price while private, driving the returns of the US venture asset class up into the right.
Specifically, from 2010 to 2020 the average IRR for the NASDAQ was 13.4% vs 27% for top quartile US VCs.
Outperforming the public markets is a well known challenge. Hence, the famous wager placed by Warren Buffet (arguably one of the best active investors to have ever lived) in 2007 says it all: he bet $1 million that a low-cost S&P 500 index fund would outperform a group of hedge funds over a 10-year period; and he won. The common truth is that the best investment from a risk-reward perspective is simply buying indexes such as the S&P 500 or the NASDAQ.
The data shows that this is also true for venture investments. Adding the fact the “top quartile Venture Fund” is a volatile definition. Having a fund at the top quartile doesn't guarantee that subsequent vintage funds will follow suit.
Thus, from a risk-reward perspective, investors are better off investing in an index that aims to mirror the performance of top quartile US VC managers. Since this theoretical index does not exist, we must look for a verifiable, diversified proxy that has overcome the friction associated with private investing at scale. Specifically, historical investments made through the Equitybee platform support this argument. Notably, more than 850+ funded companies within the Equitybee portfolio have generated a net realized IRR of ~28%+ while also outperforming top-decile US VCs in DPI across 6 of the last 7 vintage years. We could not identify a single US VC manager with such consistent returns; I would argue that this is the best proxy to indexing the late-stage US Venture / Growth market.
Equitybee provides investment access to almost any startup company with a significant discount at scale, by providing startup employees with the funding they need to exercise their stock options.
If you are still chasing unicorns, you might actually be betting more than investing. You are ignoring two decades of data.
What a Donor-Advised Fund actually is
A Donor-Advised Fund is a charitable account held by a sponsoring 501(c)(3), in this case UI Charitable. Once you contribute assets, you no longer legally own them, which is what makes the deduction work. What you keep is advisory privilege. You advise how the funds are invested, when assets are sold, and which charities receive grants over time. The deduction happens in the year you contribute. The giving to actual charities happens on the timeline you advise, with no required distributions in any given year.
Stage two: this is where UI Charitable is different, and where it fits startup employees
Here is the part that matters for the way you specifically hold wealth.
UI Charitable allows you to donate long-term appreciated assets such as public stock, private stock, cryptocurrency, etc. to a Donor-Advised Fund, and receive a tax deduction equal to the fair market value of those assets. Startup employees are exactly the people whose appreciated wealth sits in private and illiquid form. UI Charitable can serve the asset class most of the giving world cannot.
One important boundary
To be clear about what does and does not apply. You cannot donate shares that are covered securities by the Equitybee agreement and received by using Equitybee stock option funding. You can, however, donate other appreciated assets to UI Charitable.
*This is not tax advice. Consult a qualified tax professional regarding your specific financial situation.
Case Study: A startup employee in California
How does it actually work? A side-by-side comparison of a startup employee in California.
This same example would work for any appreciated asset donated in-kind.
Startup employee in California
Salary: $350K • Private share value: $1M • Shares donated to a Donor-Advised Fund: $300K (30%)
Getting started
get started with UI Charitable by visiting https://www.uicharitable.org/equitybee
