Altruistic equity allocationpost by Paul_Christiano · 2019-10-16T05:54:49.426Z · score: 79 (30 votes) · EA · GW · 5 comments
Issuing altruistic equity How is valuation determined? Where does this matter? Equity in what? What could this actually look like? None 5 comments
Charities implicitly allocate credit between their employees, founders, and funders. For example, a charity might describe itself as “funding constrained” or “recruiting constrained,” letting donors or hires know that their contributions are particularly valuable right now.
I think there is room to do better, so I’m interested in experiments with more explicit mechanisms. In this post I’ll suggest one alternative that mirrors for-profit equity allocation. This mechanism is similar to and complementary with certificates of impact [EA · GW], but they can be adopted independently.
Several people have considered adapting this kind of mechanism to non-profit credit allocation, and I’m not trying to claim priority here (just trying to start a more concrete discussion). In particular, thanks to Carl Shulman, Jacob Trefethen, and especially Holden Karnofsky for discussing similar ideas and criticizing past versions (not to say anyone endorses this version).
Issuing altruistic equity
Suppose that I’m a charity looking to raise funds for 2020. I’d like to raise these funds by issuing new “shares” in my impact, explicitly diluting all of my other supporters and employees. How would that work?
Imagine assigning the total impact my charity will ever have to a collection of shares; let’s arbitrarily say 100 shares. A bunch of people have made this impact possible---employees, founders, funders, and other supporters. We could imagine doing a really extensive credit assignment exercise where we assign shares to each person based on the importance of their contribution. I’m not going to advocate actually figuring out who owns how many shares, but I’ll talk about all of these people as the “shareholders.”
If I issue a new share, then the amount of impact assigned to each existing share is reduced: it’s now spread across 101 shares instead of 100 shares. If I give the new share to a donor in exchange for some money, then hopefully the money increases my impact by more than 1%, so that existing shareholders end up with more total impact despite the dilution.
The proposal is: when I raise money for 2020 I also announce a (pre-funding) valuation, the sales price I’m willing to offer per share times the number of outstanding shares. Then I give donors an appropriate number of new shares, and dilute existing shareholders. Charities choose these valuations to maximize the after-dilution impact of existing shareholders, while donors decide whether to donate based on whether they are OK with the total impact they’d be assigned.
For example, if my valuation is $100M and a donor donates $500k, then they receive 0.5/100.5 of the total impact (0.5/100.5), and existing shareholders are diluted 0.5%. (None of these numbers depend on the absolute number of existing shares, 100 really was arbitrary and has no consequences.)
No one has an external incentive to behave honestly. The system is intended as an aid for generally-aligned donors and employees to actually understand how much they are contributing. That said, if the dilution numbers are published then at least “be cooperative by communicating honestly” is aligned with “make my total contribution look as large as possible.” And to the extent people are good at maximizing numbers, it seems good to tie the numbers to a plausible estimate for their real impact.
How is valuation determined?
If I raise at a low valuation, then I’m telling donors they get a large share of the credit for my future activities, which should make it easier to raise money but will dilute current shareholders. If I raise at a high valuation, then I’m telling donors they get a small share of the credit, so it’s harder to raise money but existing shareholders retain their impact. My choice is a balance between these considerations.
If I have a fixed target amount to raise for 2020, and a maximum amount of time I’m willing to spend fundraising, then there is a maximum price I can charge while meeting my fundraising goal, and so that’s where I want to end up:
If I’m interacting with large donors who all have a fixed threshold for “cost effective enough,” then the donor demand curve is nearly vertical. So I want to set my valuation to be exactly at their threshold (though if the number of charities and donors is small we have a bargaining problem). In practice most donors won’t have a totally vertical demand curve, though for very large and internally coherent donors, it might be nearly vertical. If there is a distribution of donors with different bars and different assessments, then I’ll end up with a smooth demand curve.
I can’t really predict this price in advance, and so it will be determined by some combination of talking with donors, revising prices over the course of a fundraiser, and adjusting across fundraisers to maintain a desired level of runway. For example, before the fundraiser I may talk to large donors about what valuations they think are appropriate and try to find a price that makes sense. If I raise more money than I’m able to easily spend, then I’ll increase my valuation for fundraising during the coming year.
In reality the amount of money I need to raise for 2020 is not fixed in advance. I can maintain a larger runway, offer better salaries, hire more people, and so on. How much I should raise depends on the opportunity cost of funds: is it worth spending an extra $1M to increase my total impact by 1%? This information is communicated to me via the price that donors are willing to pay. If I have a better valuation, raising $1 causes less dilution and so I raise more money.
In this case, discussion and gradual iteration are even more important to discovering an appropriate price---and figuring out how aggressively I should spend money to improve my productivity or expand existing programs.
Where does this matter?
I think being more explicit about altruistic equity allocation could potentially improve decisions, and maybe even decrease total time and angst. This section describes some of the areas I think could be improved. It’s not at all exhaustive.
(I do think that this experiment, like most experiments, would probably be a failure. So you should think of this more as a list of possible advantages rather than strong predictions, with the main upside of an experiment being value of information.)
Donor coordination. There are often multiple donors interested in funding the same charities. I think the current de facto approach, a mix of “splitting” or “funging,” is pretty unsatisfying. Instead, we can adjust the valuation until supply equals demand and each donor gives as much as they think is reasonable at the given valuation (without having to think about other donors).
This results in the most excited donors supporting each charity rather than everyone chipping in. I think this is locally efficient, but one concern is that more concentrated donor bases are less robust. A charity can try to mitigate this risk by understanding how much they would need to reduce their valuation to get additional donors interested.
Spending decisions. Charities have a lot of information about how they can spend money to improve their impact, the relative promise of new program areas, how useful they think runway would be, and so on. Right now decisions are essentially made jointly by charities and donors, based on a discussion that is relatively low bandwidth and not incentive aligned. I’d prefer the situation where donors communicate the opportunity cost of funds, and then charities make decisions about how to spend the money given that cost. I don’t think we could eliminate the need for donors to understand marginal decisions, but I think we could make things a lot more modular than the status quo.
Communicating about RFMF. EA donation decisions often depend on assessing “room for more funding,” while the effects of funding are often to displace other donors and/or reduce the attention an organization has to spend fundraising. I think we are pretty bad at thinking and talking about this, and that the equity model produces basically reasonable decisions at equilibrium. Donors can evaluate RFMF by looking at valuations rather than guesstimating, and charities can make a local greedy decision about whether to spend more time fundraising based on how much it will allow them to reduce their valuation.
Employees and donors. The EA community has sometimes been inconsistent in how it talks and thinks about the relative impact of donations and direct work. Issuing equity helps quantify the impact of marginal donations, which I think would improve thinking and discussion on this topic. You’d get more mileage if you also quantified how much altruistic equity you were giving to employees as part of their compensation, but just seeing valuations is already a lot better than the status quo.
Thinking about leverage. Some speculative projects may mostly be proving an idea or facilitating a big scale-up in the future, which would require raising more money and hiring more people. I think that the equity model is a reasonable way to think about this kind of impact---once the idea is proven, later donors invest at a much higher valuation, and early donors retain a reasonable share of the subsequent impact. If you can’t raise at that higher valuation, then the story about leverage may be overcounting. (In some cases you would need to explicitly separate “tranches” of impact in order to really make the leverage case work, if different donors care about different parts of the impact, which would be more of a pain.)
Equity in what?
In addition to choosing what fraction of equity they sell to donors, a charity needs to choose exactly what impact they are selling---if a donor is buying 1% of my impact for $1M, what exactly are they buying 1% of?
I think the most natural options are “all of this charity’s impact” or “all of this charity’s future impact.” Each of these have issues:
- Selling future impact is tricky, because often past activities facilitate future activities and drawing the line is really unclear (i.e. it depends on its own credit allocation problem).
- Selling past impact can be tricky, because sometimes past activities are very different from current activities, the people who supported past activities might be less excited about future activities, or the lines might become blurry between inside and outside the charity.
In some cases there will be an intermediate that makes sense. For example, I might sell the impact of “all of my research, all of my future activities, and all of the past work that facilitated those future activities,” if it’s easier to draw lines around that then around either “all my future impact” or “all my impact.”
The most important thing is for charities and donors to be on the same page about what is being included.
What could this actually look like?
Here’s how I’d imagine an experiment right now:
- A non-profit decides they want to try this kind of experiment in a future fundraiser.
- They have preliminary discussions with past and present supporters, especially current employees and big donors, trying to find a valuation that could make both donors and past donors/employees happy. If they can’t find such a valuation, then it’s an interesting opportunity for some reflection.
- They decide on a fundraiser to roll it out and a preliminary valuation to offer; they have some more discussions with big future donors (who might be giving outside of the fundraiser proper) confirming they feel OK about it.
- As part of the fundraiser, they publicly state a pre-funding valuation. This need not be emphasized or in-your-face, but it should be clear to anyone who is looking for it.
- Publish the total dilution in a public log. E.g. if they raise $2M at a $50M valuation, announce that previous stakeholders were diluted by ~4%.
To make this useful, it would be good for a first experiment to also include some exposition. For example, it would be great for an early implementer to:
- Explain roughly how they arrived at their valuation and how they feel about it.
- Document any lessons from the process and overall how smoothly it went.
- Get someone external to engage seriously with the proposed valuation and process, and think about ways in which it makes sense or doesn’t make sense.
I think an initial experiment could give information on how people feel about this kind of arrangement, iron out details, provide public baselines so that the next person doesn’t feel so in the dark, and verifying that nothing terrible happens.
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